Mandatory Arbitration Clause Policy

Action: In a major policy shift, the Securities and Exchange Commission (SEC) has announced that the presence of mandatory arbitration clauses in an issuer’s registration statement—the disclosure document a company must file before it can offer securities to the public—will  no longer prevent the agency from accelerating the statement’s effectiveness under Rule 461 of the Securities Act of 1933.

Trusted Insights for What's Ahead^®

• The SEC had previously viewed mandatory arbitration clauses as limiting investor protections under Federal securities laws and declined to grant acceleration requests for registration statements that contained them.
• As a result of the policy change, companies may now proceed with offerings that require investors to resolve Federal securities law claims through arbitration rather than in court, provided the clauses are clearly and adequately disclosed.
• The timing of the approval of registration statements is important for publicly traded companies because firms often want to time their offering precisely (e.g., to coincide with market windows or pricing decisions). Under Federal securities law, a company’s registration statement normally becomes effective 20 days after it is filed with the SEC unless the agency intervenes.
• However, during that 20-day window, the company cannot sell securities and if the company amends its filing, the clock restarts. As a result, companies typically file a “request for acceleration,” which, if the SEC approves, allows the issuer to choose the effective date of the registration statement.
• In its announcement of the policy change, the SEC notes that its decision comes following a number of developments including US Supreme Court decisions involving the Federal Arbitration Act and changes to Delaware General Corporation Law. The SEC stated that the change would provide securities issuers with greater certainty.
• SEC Commissioner Caroline Crenshaw opposed the change, expressing concern that it weakens investor protections and could erode investor confidence.
• What this means for business: Firms that choose to include mandatory arbitration clauses in their registration statements may see fewer class action lawsuits related to securities disclosures but potentially more coordinated arbitration claims. Firms should also be aware that state law—particularly in Delaware—may still restrict mandatory arbitration clauses.