On September 17, 2025, the U.S. Securities and Exchange Commission took a significant step to reverse course on a decades-old policy disallowing public companies from using mandatory arbitration clauses in organizational documents with their investors. Such mandatory arbitration provisions, if adopted by companies, would require shareholder claims for violations of federal securities laws to be heard before arbitral panels rather than in federal court.
The reversal, albeit one packaged in votes on a policy statement (the “Policy Statement”)[1] and internal agency governance (“Rules of Practice”),[2] removes a significant roadblock to public companies –including, companies preparing to go public – placing such provisions in their organizational documents. Other significant considerations remain, including uncertainty about how the issue would be handled under state corporate law, whether state limitations would be preempted by the Federal Arbitration Act, and how markets and investors would react to companies with these provisions. Given such lingering uncertainty and concerns, many public companies and companies preparing for an IPO may opt to take a wait-and-see approach. In contrast, more risk-tolerant companies may begin seriously exploring whether to place mandatory arbitration clauses into their governing documents in order to potentially reduce exposure to private securities litigation based on the Commission’s position reversal in a long running debate.
How would mandatory arbitration affect claims under the federal securities laws?
U.S. Supreme Court precedent has established that class action waivers in arbitration agreements are enforceable, and arbitration generally is not public, is not subject to the federal rules of civil procedure or evidence, and does not create binding precedent. These and other features, and the incentives involved in class actions, could significantly alter the calculus of investors and plaintiff firms in deciding whether or not to bring a claim against a company for violations of the federal securities laws.
Where did this come from?
Providing a Commission greenlight to mandatory arbitration has long been a priority for some Republican SEC Commissioners.[3] During his tenure as SEC Chair, Jay Clayton demurred from bringing mandatory arbitration provisions to a Commission vote in response to pressure on the Commission after a handful of companies received shareholder proposals to adopt mandatory arbitration provisions in their bylaws and the staff granted no-action relief to the companies on the basis of Rule 14a-8(i)(2), that the proposal, if implemented, would result in violation of state law.[4]
How does the SEC get to weigh in on mandatory arbitration? A refresher on Securities Act Section 8 and Commission review of registration statements.
The SEC’s role in reviewing mandatory arbitration provisions in a company’s organizational documents flows from its review of company registration statements, particularly when a company seeks to conduct an IPO. Under Section 8 of the Securities Act of 1933, the Commission takes registration statements effective but must make a finding that doing so is in the public interest. Yet, as SEC Commissioners will often say, the federal securities laws and the Commission’s review of registration statements revolve around disclosure, not merit regulation. Even so, questions have previously been raised, including by SEC Commissioner Crenshaw in her dissent in the Commission’s September 17 vote,[5] concerning charter provisions mandating arbitration of federal securities claims, including whether changing how investors may seek remedies is consistent with the anti-waiver provisions of the Securities Act[6] and the Securities Exchange Act of 1934, as amended.[7]
SEC internal governance and why it matters for companies.
On September 17, 2025 the Commission announced that SEC staff could not refuse to make a public interest finding – and thus hold up the effectiveness of a registration statement and the consummation of an IPO – because a company had provisions mandating arbitration in its charter. The emphasis here on staff is significant. The Policy Statement removed the authority delegated from the Commission to staff to refuse to accelerate a registration statement on account of a company having mandatory arbitration provisions in its charter. Here is a step-by-step explanation of what that means:
- Statutorily and constitutionally, the “SEC” means the five-member Commission. Those Commissioners have ultimate statutory and constitutional authority to make decisions for the agency.
- However, Commissioners do not have the time to review the thousands of registration statements and other securities filings that the Commission reviews under law. So, the Commissioners have passed internal governance rules “delegating authority” to the Commission staff to review these filings (in addition to many other tasks the agency has).
- The policy statement removed the delegated authority of staff to not take a registration statement effective if the company’s organizational documents mandated the use of arbitration in connection with alleged securities law violations.
Of course, the Commissioners themselves still could refuse to take a registration statement effective based on a finding that mandatory arbitration provisions are not in the public interest. But would this ever happen? In the meeting on September 17, 2025, the three Republican Commissioners signaled strong support for mandatory arbitration. And there are also practical limitations to a Commissioner challenging a registration statement, including consideration regarding the volume of filings that flow through the Commission.
Moreover, a Commissioner looking to review and stop a registration statement from going effective would have to do so in a compressed time frame. This is because of the convoluted mechanics of how registration statements “go effective.” Consider the following:
- If one were to merely read Securities Action Section 8(a), it would appear that registration statements become effective automatically 20 days after filing.
- But of course, the SEC wields real power in its review of registration statements.
- A number of factors impede issuers from having their registration statements automatically go effective in 20 days, including that:
- Automatic effectiveness would require a company to include a price for its securities in its registration statement/prospectus and then wait 20 days, risking having markets move against it.
- The Commission may also use powers enumerated elsewhere in Section 8 to issue a stop order (Section 8(d)) or open an examination of the registration statement (Section 8(e)).
So, issuers filing a registration statement, including in an IPO context, almost always include what is called a “delaying amendment” that stops the 20-day clock under Section 8(a) pending Commission review of the disclosure. This then starts the process of Commission review and comment on the issuer’s disclosure and the issuer’s responses to any comments from the Commission. When the issuer believes the review process is close to over, it can request that the Commission “accelerate” the effectiveness of its registration statement and name the date on which it wants effectiveness to occur, which in turn sets the time when the securities price and ultimately when an offering closes. If the SEC concurs that its review is complete, it will accede to the acceleration request. The issuer can also place pressure on the SEC by indicating it will “pull” its delaying amendment and restart the 20-day clock.
An individual Commissioner would normally have the benefit of one particular Commission rule of internal governance – namely the “mandatory stay.” Under the mandatory stay, which is found in the Commission’s Rule 431,[8] the Commissioners agree as a collective not to take a registration statement effective should an individual Commissioner or an aggrieved person challenge a registration statement until those challenges can be considered. This is why the other vote the Commission took on September 17 becomes important. The Commission also voted to amend its Rules of Practice to remove the mandatory stay in cases of challenges to a registration statement going effective based on an issuer having mandatory arbitration provisions in its charter. This means that a single Commissioner would not be able to use the customary mandatory stay procedure to block the effectiveness of a registration statement which discloses that the issuer requires mandatory arbitration for securities law violations.
Will the Commission’s actions survive?
Although a company looking to IPO with a mandatory arbitration provision would not face a realistic challenge to its registration statement from this current Commission given the rule change, a future Commission could choose to review and stop registration statements from going effective because of mandatory arbitration provisions. However, any such future reconsideration could have to take place against a precedential backdrop of companies with mandatory arbitration provisions having had registration statements go effective before that time.
The Commission chose to act on without notice-and-comment rulemaking (this is in keeping with a trend; the current SEC leadership has chosen to use Commission or staff guidance rather than formal rulemaking in multiple contexts over this calendar year). This means that a future Commission might also reverse the actions also without notice-and comment. But inertia and arguable precedent might impose practical impediments to a future Commission reversing course.
Important considerations remain concerning mandatory arbitration.
Despite the Commission’s smoothing the road to mandatory arbitration, potential challenges remain to be considered regarding including mandatory arbitration in organizational documents.
First, the Commission might face legal challenges to its actions. Any lawsuits would face potential hurdles, however, including that the agency acted via changes to internal governance. Technically, the Commission did not commit to any particular public interest finding for or against mandatory arbitration even if the practical effects and preferences of the Republican Commissioners are clear.
Second, investors may seek to have federal courts hold that mandatory arbitration of federal securities claims runs contrary to federal securities statutes. It remains to be seen how courts would rule on such arguments.
Further, what is permitted in a company’s organizational documents is also a question of state corporate law. As the SEC noted, for example, a provision of the Delaware General Corporation Law may be interpreted to bar including mandatory arbitration provisions in the bylaws or certificates of incorporation of Delaware corporations. See DGCL Section 115(c) (recently amended to provide that, for claims by stockholders “in their capacity as stockholders … relate[d] 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,” a corporation may prescribe a forum or venue so long as it “allows a stockholder to bring such claims in at least one court in [Delaware] that has jurisdiction over such claims”). In a decision addressing the prior version of DGCL 115, the Delaware Supreme Court also referenced the view, in passing, that provisions in a Delaware corporation’s certificate or bylaws requiring mandatory arbitration of “internal corporate claims” would violate the Delaware General Corporation Law. See Salzberg v. Sciabacucchi, 227, A.3d 102, 137, n. 169 (Del. 2020). However, if Delaware courts were to issue decisions squarely holding that mandatory arbitration provisions are not permitted under DGCL 115, other states may choose to compete for company incorporations via a more arbitration-friendly stance, as some already do. And federal courts might rule that the Federal Arbitration Act preempts state laws that would limit or preclude mandatory arbitration provisions in company charters.
How would markets react to a company mandating arbitration?
Another potential roadblock to charters and other organizational documents with mandatory arbitration is the receptiveness of investors. Activist investors and proxy voting advisors may mobilize against these provisions. Moreover, investor concerns with mandatory arbitration provisions and their impact on shareholder remedies could affect investor decisions to participate in IPOs. Even so, as witnessed by recent corporate governance developments, some companies might be willing to accept this risk and might seek to explore mandatory arbitration now that at least one light has started flashing green.
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[1] U.S. Securities and Exchange Commission, Acceleration of Effectiveness of Registration Statements of Issuers with Certain Mandatory Arbitration Provisions, Release No. 33-11389; 34-103988 (Sept. 17, 2025) available at https://www.sec.gov/files/rules/policy/33-11389.pdf (the “Policy Statement”).
[2] U.S. Securities and Exchange Commission, Commission’s Rules of Practice, Release No. 34–103980, 90 Fed. Reg. 45123, available at https://www.govinfo.gov/content/pkg/FR-2025-09-19/pdf/2025-18237.pdf.
[3] E.g., Sarah N. Lynch, SEC's Piwowar urges companies to pursue mandatory arbitration clauses, Reuters (July 17, 2017) available at https://www.reuters.com/article/usa-sec-arbitration/secs-piwowar-urges-companies-to-pursue-mandatory-arbitration-clauses-idUSL1N1K814W/.
[4] Cf. Chairman Jay Clayton, Statement on Shareholder Proposals Seeking to Require Mandatory Arbitration Bylaw Provisions (Feb. 11, 2019) available at https://www.sec.gov/newsroom/speeches-statements/clayton-statement-mandatory-arbitration-bylaw-provisions. In one request for exclusion of a shareholder proposal, a company included a statement from the New Jersey Attorney General, that state’s chief law enforcement officer and legal advisor, that the provision would violate New Jersey state law, although the Commission Chair noted that no party identified any New Jersey case law precedent.
[5] Commissioner Caroline A. Crenshaw, Statement on “Mandatory Dis-Agreements: The Commission’s Policy of Quietly Shutting the Door on Investors,” (Sept. 17, 2025) available at https://www.sec.gov/newsroom/speeches-statements/crenshaw-statement-mandatory-dis-agreements-the-commissions-policy-of-quietly-shutting-the-door-on-investors-091725.
[6] Securities Act Section 14 (15 U.S.C. § 77n).
[7] Exchange Act Section 29(a) (15 U.S.C. § 78cc(a)).
[8] 17 CFR § 201.431.
