The Securities and Exchange Commission (SEC) is set to consider a significant change on Wednesday that could let companies going public require shareholders to settle disputes through private arbitration instead of court cases. This move could reduce investors’ ability to sue companies in open courts.
For years, the SEC has had an informal rule that stops companies from including clauses in their charters or bylaws that force shareholders to handle fraud or false statement claims in confidential arbitration. Now, top SEC officials will vote on whether to issue a new statement that might change this policy, although details about the exact scope of the change remain unclear.
Supporters of mandatory arbitration, including some business groups and Republican lawmakers, argue it helps cut down on so-called frivolous shareholder lawsuits. On the other hand, consumer advocates and lawyers say open court cases are crucial. They believe court actions hold companies accountable, let small investors seek compensation, and provide public access to important information and legal precedents.
Ann Lipton, a former class-action lawyer and current law professor, warned that moving disputes to private arbitration could harm the public interest. She said lawsuits help expose bad behavior by companies and contribute to our understanding of the law.
This isn’t the first time the SEC has considered such a change. During the Trump administration, the agency looked at this idea but ultimately did not move forward. The issue goes back to 2012, when the SEC pushed back against the Carlyle Group’s initial public offering because it tried to demand arbitration for future shareholder disputes.
Senator Elizabeth Warren, the top Democrat on the Senate Banking Committee, recently voiced her worries in a letter to the SEC, urging caution about any shift that could limit investors’ rights.
On the same day, the SEC will also decide whether to extend the deadline for private investment funds to comply with updated disclosure rules introduced under the Biden administration.
The votes on these matters could shape how shareholders protect their rights in the future and how transparent companies need to be as they raise money from the public.