In a 1995 speech, former chairman of the U.S. Securities and Exchange Commission (SEC) Arthur Levitt acknowledged that private securities fraud class actions help hold corporate America to account because the SEC simply cannot police every public company. As he put it, “private rights of action are not only fundamental to the success of our securities markets, they are an essential complement to the SEC’s own enforcement program…. The Commission was not intended to be the KGB of Capitalism — we’re not equipped to operate as an all- pervasive agency.”[1]
On September 17, 2025, the SEC issued a Policy Statement clarifying that mandatory arbitration provisions in the charters and bylaws of companies going public will not, by itself, affect the staff’s decision whether to accelerate the effectiveness of a registration statement; instead, the staff will focus on the adequacy of disclosure about any such provision. This Policy Statement does not resolve whether these provisions are ultimately enforceable under federal or state law, so challenges are likely to continue.[2]
This development presents both potential benefits and challenges that warrant careful consideration.
Efficiency. Although arbitration may involve a faster resolution process than traditional court proceedings, one of the primary concerns with mandatory arbitration is the potential limitation on investors’ ability to pursue class actions. Class actions have been a powerful tool for investors, particularly smaller ones, to pool resources and challenge corporate misconduct. The shift to individual arbitration could disproportionately affect these investors by increasing the cost and complexity of pursuing claims, thereby deterring investors from pursuing valid claims, and thus weakening investor protection, all while increasing the costs for companies forced to defend numerous individual arbitrations.
Transparency. Arbitration proceedings are confidential and lack a public record, reducing corporate transparency and preventing other investors from learning about misconduct. While the confidential nature of arbitration may reduce public exposure of sensitive financial information, the securities laws are focused on ensuring the adequacy of disclosure in registration statements so that investors are well-informed. This transparency can empower investors to make informed decisions about their investments.
Limited oversight. Unlike court proceedings, arbitration has less judicial oversight, and arbitrators are not bound by legal precedent, potentially leading to inconsistent outcomes. Companies may gain more control over the dispute resolution process, including the selection of arbitrators. Finally, the grounds for appealing an arbitration award are extremely narrow, making it difficult to overturn a decision even if it is based on errors of law or fact.
Enforceability. The enforceability of mandatory arbitration provisions may vary depending on state law. For example, Delaware’s recent amendments to its General Corporation Law could pose challenges to the adoption of such provisions, creating uncertainty for investors and companies alike. This legal ambiguity may lead to inconsistent application and enforcement of arbitration agreements across different jurisdictions. Some investors may avoid companies with these provisions, potentially impacting a company’s stock price or access to investment funds.
The SEC’s new policy on mandatory arbitration provisions presents a complex array of implications for investors. While it offers potential benefits, it also raises significant concerns about access to justice and the potential financial burden on individual investors. As companies and investors navigate this new terrain, it will be crucial to monitor how these changes impact the broader securities market and investor rights. Ultimately, the success of this policy will depend on its implementation and the continued ability of investors to challenge corporate misconduct.
[1] See https://www.sec.gov/news/speech/speecharchive/1995/spch023.txt
[2] See https://www.sec.gov/newsroom/press-releases/2025-120-sec-issues-policy-statement-clarifying-mandatory-arbitration-provisions-will-not-affect
