SEC Shifts Stance on Mandatory Arbitration in Securities Registration

In a recent policy statement, the Securities and Exchange Commission (SEC) reversed its longstanding approach to mandatory arbitration provisions between issuers and investors. As described by Mark J. Levin and Alan S. Kaplinsky on the Ballard Spahr blog, the SEC will no longer deny acceleration of a registration statement simply because an issuer’s governing documents include mandatory arbitration clauses covering federal securities law disputes. Instead, the agency will evaluate whether disclosures in the registration are adequate, leaving enforceability questions to the courts.

This decision follows a series of Supreme Court rulings interpreting the Federal Arbitration Act (FAA), including Epic Systems Corp. v. Lewis and CompuCredit Corp. v. Greenwood. The Court emphasized that unless Congress explicitly displaces the FAA, arbitration agreements remain enforceable. Applying that reasoning, the SEC stated there is no clear congressional intent in securities statutes to override the FAA in the context of issuer-investor disputes.

The policy statement also addresses class action waivers, referencing American Express Co. v. Italian Colors Restaurant. The SEC noted that federal securities laws do not guarantee class action rights, and the potential reduction of economic incentives for investors to bring claims is not enough to override arbitration mandates.

However, the change has sparked criticism. Commissioner Caroline Crenshaw dissented, warning that mandatory arbitration could stack the deck against investors. Consumer advocates argue that the policy erodes shareholder protections and are urging Congress to amend the FAA, though similar efforts have failed in the past.

For compliance professionals, the key takeaway is the SEC’s focus on full and transparent disclosure. Firms considering arbitration clauses must ensure registration statements clearly outline such provisions, while monitoring unresolved questions around state law conflicts, broader arbitration coverage, and FINRA’s restrictions.