The SEC’s Policy Statement on Mandatory Arbitration Provisions – What Does It Mean For You?

Key Takeaways

• The SEC’s change in a longstanding position potentially opens the door to adoption of mandatory arbitration provisions in a company’s governing documents.
• One potential upside of this development could be a decrease in expensive and time-consuming securities class action lawsuits.
• State corporate laws may still limit the availability of such provisions.
• Arbitration of securities claims may not always be preferable.

On September 17, 2025, the U.S. Securities and Exchange Commission (the “SEC”) issued a policy statement (the “Policy Statement”) announcing that the presence of a provision in a company’s governing documents requiring arbitration of investor claims arising under the Federal securities laws would not affect its decision to accelerate the effectiveness of a registration statement. This represents a dramatic change in the SEC’s longstanding position, which was historically informed by the idea that the “anti-waiver” provision under Section 14 of the Securities Act of 1933 (the “Securities Act”) would prohibit issuer-investor mandatory arbitration provisions. This development may be seen by some companies as opening the door to the adoption of such arbitration provisions in corporate charters and bylaws. Some commentators have suggested that the adoption of mandatory arbitration provisions could lead to a decrease in securities class action lawsuits. While this result is certainly possible, as we discuss below, the enforceability of such provisions is not clear, and there are countervailing considerations that may make the adoption of mandatory arbitration provisions undesirable in certain circumstances. Companies will need to consider these issues in deciding whether a mandatory arbitration provision makes sense for them.

The Policy Statement is very narrow: it directly affects only how the SEC will manage its own processes for accelerating the effectiveness of a registration statement. Under its new policy, the SEC will focus only on the adequacy of an issuer’s disclosures regarding any charter or bylaws provision requiring arbitration of investor claims under the Federal securities laws. The Policy Statement does not “approve” of the validity of issuer-investor mandatory arbitration provisions; it simply removes a procedural impediment in its own processing of registration statements. Likewise, the Policy Statement does not clarify how federal and state laws intersect on the question of mandatory arbitration provisions.

Issuers contemplating action in response to the Policy Statement should be mindful of several key considerations.

Questions Under State and Federal Law

• Delaware law may not provide for mandatory arbitration of Federal securities law claims.
  • On August 1, 2025, new amendments to Section 115 of the Delaware General Corporations Law (the “DGCL”) became effective.
  • The amendments permit a certificate of incorporation or a company’s bylaws to designate a forum or venue for claims referred to as “intra-corporate claims” (“claims relat[ing] to the business of the corporation, the conduct of its affairs, or the rights or powers of the corporation or its stockholders, directors or officers”), so long as the stockholder may bring the claims in at least one court in Delaware.
  • Although there has been no definitive ruling on this issue, a court may interpret the DGCL amendments to prohibit forum provisions that do not allow securities claims to be brought in at least one Delaware court.

     

• Delaware’s protection of judicial forums for intra-corporate claims could be subject to challenge on pre-emption grounds.
  • The Policy Statement hinted at this possibility but did not opine on whether the Federal Arbitration Act (the “FAA”) would pre-empt the DGCL amendments. As discussed in the Policy Statement, the FAA provides that an arbitration provision in a contract “shall be valid, irrevocable, and enforceable”; however, whether the agreement to arbitrate itself is enforceable depends on state law.

• Companies incorporated – or considering redomesticating - in states other than Delaware would need to consider whether the arbitration of Federal securities law claims is permissible under their state’s corporate law. For example, under Nevada’s corporation law, a company’s certificate of incorporation and bylaws “may” require “concurrent jurisdiction actions” or “internal actions” to be brought in a court, if not inconsistent with U.S. Federal law, and these requirements “must not be interpreted as prohibiting any corporation from consenting, or requiring any corporation to consent, to any alternative forum in any instance.” As such, Nevada’s corporate law suggests that issuer-investor mandatory arbitration provisions may be permissible.

   

• In the Policy Statement, the SEC expressed its view that issuer-investor mandatory arbitration provisions would not violate the anti-waiver provisions of the Federal securities statutes. However, this question has not been definitively addressed by the Supreme Court and thus it is not certain how a court would rule on this issue.

   

• Given the uncertain status of these state and federal questions, companies electing to adopt a mandatory arbitration provision could find it challenging to draft complete and accurate disclosure regarding such provision – as the Policy Statement notes.

Practical Considerations Regarding Mandatory Arbitration Provisions

Even if mandatory arbitration provisions are permissible under state law, companies will need to consider the practical implications that could flow from adopting these provisions. Companies will also need to consider potential negative reactions of retail shareholders, institutional investors and proxy advisors.

Potential Cost Savings and Reduced Reputational Risk from Mandatory Arbitration Provisions

• An arbitration provision, if accompanied with a class action waiver, may serve as a disincentive to the filing of securities claims, because many investors will lack a sufficient economic interest to justify incurring the fees and costs necessary to prosecute a claim individually, and plaintiffs’ law firms will have less economic incentive to take individual claims on a contingency fee basis.
• Discovery is more limited in arbitration, potentially reducing the costs and burdens of defending a claim.
• Arbitration proceedings are presumptively confidential, reducing the public relations risk that can accompany litigation in court.

Potential Procedural Downsides to Mandatory Arbitration Provisions

• The Private Securities Litigation Reform Act (the “PSLRA”) contains a number of procedural protections that apply to actions filed in Federal court, including a stay of discovery pending the outcome of a motion to dismiss. It is not clear whether this protection would apply in arbitration.
• The PSLRA also has a lead plaintiff appointment process that avoids duplicative litigation by providing for a single lead plaintiff to prosecute claims on behalf of a class of investors. This mechanism would not be available if a company were to adopt a mandatory arbitration provision with a class action waiver.
• Dispositive motions are generally not available under most arbitration rules. As a result, unless expressly contemplated in the relevant arbitration agreement, a defendant is much less likely to obtain a ruling dismissing a Federal securities claim on the pleadings, which could lead to substantial additional expense and delay and provide settlement leverage to a claimant.
• Arbitral awards are subject to limited and narrow judicial review. As a result, a decision that is not well grounded on the law or the facts is more likely to survive in arbitration than in court.
• Historically, companies that have adopted arbitration provisions have sometimes faced mass arbitrations – coordinated filings of numerous substantially similar claims, all filed in an effort to impose large filing fees on the company and obtain settlement leverage on that basis. This risk may be mitigated by incorporating appropriate arbitral rules designed to address this issue in an arbitration provision.

While the SEC’s new position diverges from its historical views, the immediate impact of the Policy Statement remains to be seen. There are numerous issues of state and federal law that must be resolved before companies can gain clarity on the legality of issuer-investor mandatory arbitration provisions. Developments in state law and any related pre-emption claims which arise in this context should be closely monitored. In the meantime, companies may wish to consider the practical advantages and disadvantages of mandatory arbitration provisions and whether these provisions are advisable in the event that their legality becomes clearer.

What is a Policy Statement?

A “policy statement” is a form of formal agency action contemplated by the Administrative Procedure Act (the “APA”). Policy statements are issued to explain how an agency plans to implement a statute it administers. Although a “policy statement” is technically a “rule” under the APA, because it cannot bind the public, it can be issued without prior notice or an opportunity for the public to comment. A policy statement becomes effective when it is published in the Federal Register, in this instance, on September 19, 2025.

What does it mean to “Accelerate the Effectiveness” of a Registration Statement?

Before an issuer may sell a security, Section 5 of the Securities Act requires that a registration statement must be in effect as to the security. While a registration statement becomes automatically effective 20 calendar days after filing, issuers usually include a “delaying amendment” which extends the effective date to (1) 20 calendar days after the issuer complies with Rule 473(b) under the Securities Act or (2) an indefinite period that will end when the SEC grants the issuer’s request to accelerate the effective date of the registration statement. The staff of the SEC will accelerate the effective date of a registration statement if it meets the criteria under section 8(a) and Rule 461 under the Securities Act.

When making decisions whether to accelerate the effective date of a registration statement, the SEC staff will focus on the adequacy of the registration statement’s disclosures, including disclosure regarding any arbitration provisions included in the issuer’s governing documents. The SEC indicated that its response would be the same if changes were made to governing documents disclosed in registration statements under the Securities Exchange Act of 1934.

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If you have any questions concerning the material discussed in this client alert, please contact the members of our Securities & Capital Markets practice.