Investors Have a Question About SEC’s Policy Shift on Arbitration: Cui Bono?

Core Viewpoint - The US Securities and Exchange Commission (SEC) is shifting its policy to allow corporations to require shareholders to resolve legal claims through arbitration, which is intended to reduce legal expenses for companies and potentially enhance the attractiveness of Initial Public Offerings (IPOs) [1][4]. Summary by Sections Corporate Benefits - The new policy enables companies to insert mandatory arbitration clauses in registration statements, which can help them avoid costly legal battles and negative publicity [2][4]. - This policy marks a reversal from the SEC's previous stance, which had deterred companies from including arbitration clauses in their registration statements since the early 2010s [4][5]. Shareholder Implications - Shareholders may face significant disadvantages as forced arbitration could prevent them from participating in class-action lawsuits, which are essential for holding companies accountable for securities fraud [3][4]. - The California Public Employees Retirement System (CalPERS) highlighted that class-action securities settlements totaled approximately $3.7 billion in 2024, contrasting sharply with only $345 million returned to investors through SEC enforcement during the same period [3]. Regulatory Context - The SEC's new position acknowledges current Supreme Court precedent, indicating that the agency will no longer consider arbitration clauses as a factor in approving stock sales to the public [6]. - The SEC's previous concerns regarding the compatibility of 1930s securities laws with the Federal Arbitration Act of 1925 have been resolved, allowing for this policy shift [5][6].