SEC Commissioner suggests that SEC will allow corporations to put mandatory arbitration clauses into their charters to avoid shareholder securities fraud class actions

Posted on: August 29th, 2017 by Steve Larson

A brief remark from SEC Commissioner Michael Piwowar during a July 17, 2017, Q&A suggests that he believes the U.S. Securities and Exchange Commission might soon allow companies to introduce mandatory arbitration clauses into their corporate charters. If the SEC were to allow such an action, required arbitration would have a fundamental, adverse effect on the ability of investors to protect themselves against wrongdoing by corporations and their directors and officers. If mandatory arbitration were to be widely adopted, investors could be prohibited from asserting claims in federal court under the federal securities laws, which would effectively result in the loss of the very protections that these laws were designed to provide.

Forcing investors to pursue binding arbitration, individually or on behalf of a class, ignores Congress’ intent in enacting the Private Securities Litigation Reform Act, which has governed federal securities litigation since 1995. It also ignores the fact that the class action mechanism is uniquely suited to addressing allegations of securities fraud. Finally, it ignores a fundamental weakness in arbitrations: addressing disputes where there is a substantial imbalance between the parties regarding information underlying the claims.

It would also deny shareholders the right to a jury trial, and the right to appeal. Investors should push back against any such actions if the SEC attempts to do any rule-making in this regard.