On September 17, 2025, the United States Securities and Exchange Commission (the “SEC”) issued a new policy statement allowing companies to include mandatory arbitration provisions in company registration statements. The SEC’s commissioners voted 3-1, along party lines, in favor of the new policy statement.
Prior to the new policy statement—which was issued without any opportunity for public comment—the SEC operated under an unofficial policy of blocking initial public offerings for companies that included mandatory arbitration provisions in their registration documents. This informal policy implicitly recognized the importance of shareholder litigation to the effective operation of financial markets. Now, in contrast, the SEC will allow companies conducting initial or secondary public offerings of securities to include provisions forcing shareholders into arbitration, thereby avoiding shareholder lawsuits, including class action litigation.
While SEC Chairman Paul S. Atkins has stated that the policy statement’s intent is simply to “provide clarity that [mandatory arbitration] provisions are not inconsistent with the federal securities laws,” SEC Commissioner Caroline A. Crenshaw and other critics have warned that the policy change may prevent many shareholders—particularly those with relatively small holdings—from recouping losses resulting from securities fraud. In many instances, shareholders’ losses would not outweigh the costs of pursuing arbitration, and shareholders who otherwise could have recovered as class members in a class action lawsuit could be left with no viable recourse.
Additionally, a shift away from litigation toward private (and potentially confidential) arbitration may have deleterious effects on the market as a whole. The Unites States Supreme Court has repeatedly recognized civil shareholder litigation as a critical market enforcement mechanism that works alongside government regulators. Private actions promote deterrence of fraudulent behavior, market transparency and consistency, and other highly valuable market elements. Limiting shareholder litigation would force markets to increasingly rely on government enforcement to retain their integrity—a risky proposition, given the shrinking workforce and limited resources of the SEC.
However, the full impact of the SEC’s new policy statement is far from certain. Companies’ ability to rely on forced arbitration may turn on factors outside of the SEC’s control, such as issues of state and federal law that are likely to be litigated in the coming years. For example, mandatory arbitration provisions were recently prohibited in Delaware, where more than half of all U.S.-based publicly traded companies are incorporated. If Delaware’s prohibition is upheld by courts, it may deter many companies from attempting to use or enforce mandatory arbitration provisions. Likewise, courts may yet determine that the anti-waiver provisions of the federal securities laws prohibit companies from forcing shareholders to give up their right to securities litigation, regardless of the SEC’s own position as to mandatory arbitration.
Additionally, while the SEC’s new policy is expected to restrict investors’ options and rights, investor behavior may still affect the results of this policy change. For example, if large institutional investors refuse to invest in new companies (or companies conducting secondary offerings) that employ mandatory arbitration provisions to shield themselves from shareholder litigation, other companies may be dissuaded from using such provisions. Similarly, pressure from investor proxy advisor firms may also deter the use of mandatory arbitration provisions.
KTMC will continue to monitor developments surrounding the SEC’s new policy and advise investors regarding their options for pursuing shareholder litigation and other methods of vindicating their rights.