SEC Changes Its Policy on Mandatory Arbitration Clauses: Considerations for Issuers and Others

In a development of significant interest to both issuers and investors, on September 17, 2025, the U.S. Securities and Exchange Commission (SEC) issued a policy statement clarifying how it approaches requests to accelerate the effective date of registration statements for issuers that have adopted mandatory arbitration clauses (the Policy Statement). The Policy Statement confirms that mandatory arbitration provisions will not, by themselves, affect the staff’s willingness to accelerate the effectiveness of a registration statement. Instead, the staff’s determination will focus solely on the adequacy of the registration statement’s disclosures, including disclosure regarding any mandatory arbitration provision. 

The change in approach to acceleration requests was not mandated by Regulation S-K or the Securities Act. Rather, the Policy Statement expresses the SEC’s view that, in light of Supreme Court precedent, the federal securities laws do not override the Federal Arbitration Act’s policy favoring enforcement of arbitration agreements, nor do the federal securities laws require that shareholders be able to proceed with their claims through a class action.

Mandatory arbitration provisions have long been of interest to issuers as a means of requiring shareholders to arbitrate individual securities claims rather than litigate costly securities class action cases in court. In the past, the SEC has implicitly expressed its hostility to such provisions by denying accelerated effective dates for the registration statements of issuers that attempted to go public with a mandatory arbitration provision. An accelerated effective date is often crucial to an issuer’s effort to control the timing for marketing and pricing an initial public offering (IPO), and the SEC’s prior position on this issue effectively banned mandatory arbitration clauses.

In recommending the adoption of the Policy Statement, which is not a formal rule and was not subject to public comment, SEC Chairman Paul S. Atkins remarked that the Policy Statement is “among the first steps of [his] goal to make IPOs great again” and “eliminat[e] compliance requirements that yield no meaningful investor protections, minimiz[e] regulatory uncertainty, and reduc[e] legal complexities throughout the SEC’s rulebook.” Commissioner Caroline A. Crenshaw (the sole Democratic commissioner) offered a dissenting view regarding the new policy, contending that it will “supercharge our descent into a world where investors are unable to effectively vindicate the rights Congress promised them in our nation’s securities laws.”

While the Policy Statement brings immediate clarity to the registration statement acceleration process, its longer-term implications are broader and uncertain. Most critically, the SEC’s action provides the opportunity, but does not ultimately answer the question, of whether companies can or should adopt mandatory arbitration provisions alongside class action bans to effectively shut down securities class action lawsuits. Here we discuss some of the questions and considerations flowing from the SEC’s change, whose answers will undoubtedly be the subject of additional debate and litigation.

Does the SEC’s statement clear the way for mandatory arbitration provisions in corporate bylaws? Not yet, as there are several additional considerations for issuers. A mandatory arbitration clause in a corporate certificate or bylaw implicates state law where the issuer is incorporated.¹ Notably, Delaware, where many companies considering an IPO are incorporated, recently enacted changes to its corporations law that may prohibit the adoption of mandatory arbitration clauses. Such a prohibition may now become the subject of greater litigation in light of the Policy Statement.

Federal law takes a friendlier view of arbitration, however. The Federal Arbitration Act (FAA) reflects a “liberal federal policy favoring arbitration,”² and the Supreme Court has, for decades, emphasized the enforceability of arbitration agreements as a matter of federal law and held that the FAA “preempts any state rule discriminating on its face against arbitration.”³ How this interacts with the laws of Delaware and other states will be for the courts to address.

Aside from strictly legal considerations, issuers face pragmatic considerations, including taking into account the views of other important constituencies such as ISS and Glass Lewis or key institutional investors.

Ultimately, issuers should expect litigation related to these issues, including on whether mandatory arbitration is fair to shareholders. The importance of the issuer’s state of incorporation will likely also feed into the ongoing competition among the states to attract corporations.

Would an arbitration provision with a class ban mean securities class actions for future IPOs go away? It’s too soon to tell. The Supreme Court has approved class action waivers in arbitration clauses⁴ but has never considered one in the context of the federal securities laws.

And, as a practical matter, claims of IPO retail investors are likely too small to make individual arbitration worthwhile; at the same time, institutional investors may be dissuaded from suing for various other practical reasons. Issuers should expect that the plaintiffs’ bar will pursue challenges to mandatory arbitration clauses or any provision that seeks to limit or prohibit class actions, however.

Would an arbitration clause apply to other usual parties to IPO-related suits, such as underwriters, auditors, or pre-IPO investment funds? When investors sue over an IPO, they almost always name the IPO underwriters as defendants and sometimes also sue others such as auditors or the venture capital and private equity funds that are often pre-IPO investors and hold board seats of the issuer. For mandatory arbitration clauses to have a practical impact, the claims against these additional parties will also need to be subject to those clauses. Arbitration is a creature of contract, and whether an agreement to arbitrate covers third parties to a contract will often depend on the language of clause. Notably, courts have recognized third-party beneficiaries to arbitration provisions. But whether underwriters, auditors, or investment funds qualify is also a question that will be challenged and litigated if companies adopt mandatory arbitration provisions.

What about securities class actions related to trading after a company has gone public? The Policy Statement is framed in terms of suits about IPOs, which typically arise under the Securities Act. But its discussion is equally applicable to suits related to after-market trading under the Exchange Act. The Supreme Court blessed arbitration of Exchange Act cases nearly 40 years ago,⁵ and arbitration of such claims is widespread in certain contexts, such as the use of FINRA arbitration clauses in brokerage contracts. An already-public company interested in adopting a mandatory arbitration bylaw would face the hurdles associated with state law and other constituencies described above.

Should companies even want to arbitrate these claims, or is it better to be in court? There are pros and cons to being in court versus arbitrating. Arbitration is typically confidential, may involve more limited discovery, and, perhaps most important, includes the possibility of avoiding class claims. But arbitration rules often limit dispositive motion practice, and appeal rights are highly circumscribed. In federal court, companies have the full panoply of Private Securities Litigation Reform Act protections (including a heightened pleading standard and a discovery stay pending a motion to dismiss).⁶ The federal judiciary generally has substantial experience adjudicating these cases, while the quality of decision-making of an arbitration panels can be more varied. Parties often select arbitration based on a belief that it avoids the risk of a runaway jury verdict, but arbitrators are also known to award substantial penalties, including attorneys’ fees and punitive damages.

Ultimately, the real value of arbitration is likely to be avoiding class actions altogether because there may be no securities claim an individual could bring that is economically viable absent the class action vehicle.

The bottom line: The SEC Policy Statement removes one hurdle to issuers including mandatory arbitration clauses when they go public. But other significant hurdles remain. Issuers that are early adopters will likely face significant litigation that challenges the use and scope of these clauses.

¹The Policy Statement observes that

[s]ome issuers may choose not to include such provisions due to potential state law considerations or concern about potential negative reactions from shareholders and other investors. Actions or potential actions by others, including proxy voting advice businesses, stock exchanges, and institutional investors, can be expected to influence the number of issuers who adopt arbitration of issuer-investor claims arising under the Federal securities laws.

²AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011) (citation omitted). In 1989, the Supreme Court held that Securities Act claims are arbitrable. Rodriguez de Quijas v. Shearson/Am. Exp., Inc., 490 U.S. 477, 477 (1989).

³Kindred Nursing Centers Ltd. Partnership v. Clark, 581 U.S. 246, 251 (2017) (“And not only that: The [FAA] also displaces any rule that covertly accomplishes the same objective by disfavoring contracts that (oh so coincidentally) have the defining features of arbitration agreements.”); Concepcion, 563 U.S. at 341 (“When state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA.”).

⁴American Express Co. v. Italian Colors Rest., 570 U.S. 228, 231, 233 (2013) (waiver of class arbitration valid even when individualized litigation of small dollar claims is impractical in light of cost of litigation; parties’ arbitration agreement provided that “[t]here shall be no right or authority for any [c]laims to be arbitrated on a class action basis”); Concepcion, 563 U.S. at 336, 352 (arbitration agreement that required claims in “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding” was enforceable); see also id. at 350 (“Arbitration is poorly suited to the higher stakes of class litigation.”). Financial Industry Regulatory Authority (FINRA) arbitration rules also preclude class claims. FINRA Rule 12204(a) (“Class action claims may not be arbitrated under the Code.”).

⁵Shearson/Am. Exp., Inc. v. McMahon, 482 U.S. 220, 227-28, 238 (1987) (concluding that neither Section 29 (the Exchange Act’s antiwaiver provision) nor Section 27 (the exclusive federal jurisdiction provision) precludes arbitration of 10b-5 claims).

⁶Securities Act claims — the typical vehicle for investors bringing IPO-related suits — can also be litigated in state court if a company does not have a federal forum selection clause for such claims.