SEC Commission Michael Piwowar caused quite a stir last summer when he suggested that the SEC would favorably view submissions by IPO companies that included bylaw provisions requiring mandatory arbitration of securities claims. The idea of mandatory arbitration for shareholder claims has continued to circulate in the intervening months. In the past few days, several current and former SEC Commissioners and SEC representatives have weighed in on the issue, mostly to pour cold water on the idea. Because I believe this idea will continue to percolate, I survey the latest statements below. Even though the most recent statements strongly suggest a lack of support for the idea in many circles, I suspect we will continue to hear more about this issue.
As discussed here, according to a July 17, 2017 Reuters article entitled “U.S. SEC’s Piwowar Urges Companies to Pursue Mandatory Arbitration Clauses” (here), Piwowar said in a speech at the Heritage Foundation that “For shareholder lawsuits, companies can come to us to ask for relief to put in mandatory arbitration into their charters. I would encourage companies to come and talk to us about that.”
As Alison Frankel pointed out at the time on her On the Case blog (here), mandatory arbitration of shareholder claims is not a new idea. Academics have been debating the possibility for decades. And as I noted in a post a few years ago, several courts did uphold the enforceability of one company’s bylaw provision requiring arbitration of shareholder claims.
Since Piwowar’s July 2017 speech, the idea has continued to bubble to the surface. Advocates of the idea contend that the burdens and expense of securities class action lawsuits are among the factors that have led to a decline in the number of IPOs in the U.S. in recent years. An October 2017 U.S Treasury Department Capital Market Report (here) recommended that the SEC investigate ways to reduce the cost of securities litigation, including allowing companies and shareholders to settle disputes through arbitration. Indeed, there has been considerable speculation that the new SEC leadership might be “laying the groundwork for a possible policy shift” to allow mandatory arbitration provisions.
But if there were prior signals that some observers chose to interpret as favoring the possibility of mandatory arbitration provisions, in more recent days SEC representatives have made a number of statements suggesting that the idea does not necessarily have widespread support at the agency.
More Recent SEC Representative’s Statements
First, SEC Chair Jay Clayton said during questioning about the possibility of mandatory shareholder claim arbitration provisions at a February 6, 2018 Senate Banking Committee hearing that “I am not anxious to see a change in this area,” adding that if the topic came before the SEC “it would take a long time for it to be decided because it would the subject of a great deal of debate.”
The SEC Chair’s general statements are interesting, but the more specific statements that have followed in more recent days may be even more interesting.
In a February 24, 2018 speech, Rick Fleming, Investor Advocate at the SEC, called mandatory arbitration of shareholder claims “an illusory remedy.” He said that while there “may be some validity” to the concerns that have been cited in support of mandatory arbitration provisions, “stripping away the right of a shareholder to bring a class action lawsuit seems to me to be draconian, and, with respect to promoting capital formation, counterproductive.”
There are, Fleming notes, “some very good reasons why shareholders have been given private rights of action.” Congress and the Supreme Court “have recognized the importance of private suits in helping to protect investors and deter wrongdoing.” While some advocates of the idea have argued that arbitration would be efficient, Fleming said, “as a practical matter, unless a class-wide remedy is available there is often no other recourse for investors with small holdings.” Fleming concluded by expressing his hope that the Commission “does not actually have to confront this issue again in the near future,” as the Commission’s time “would be better spent on matters that address more urgent needs of issuers and their investors.”
Finally, in a February 26, 2018 speech, newly appointed Democratic Commissioner Robert J. Jackson, Jr. said in a speech said he is “concerned” about the idea of mandatory arbitration provisions. Jackson noted that due to budget constraints and an expanding agenda, there are limits to what the SEC itself can do. At a time of increasing budget constraints, Jackson said, this is “hardly the time to be thinking about depriving shareholders of their day in court.” If investors are barred from bringing suits in court, “then the burden of investigating and litigating these cases may fall entirely on the SEC.” How much, Jackson asked, “would Congress need to appropriate to make sure we have enough resources to do the job?”
Jackson went on to say that the reason he is “so skeptical” of proposals like the mandatory arbitration provision “because they deprive the public of the law our judges make when they hold corporate insiders accountable to investors.” The public resolution of private disputes “creates positive externalities” because it “gives judges a chance to tell corporate insiders what the law expects of them.” Arbitration, by contrast, is a closed-door proceeding.
The statements of investor advocate Fleming and Democratic commission Jackson are hardly the last word on these issues. However, along with the commentary by SEC Chair Clayton that he is “not anxious” to see these kinds of changes, these comments suggest that the support for the idea of mandatory arbitration provisions is not widespread, and at a minimum, that the idea is not a priority within the agency.
Just the same, I expect we will continue to hear about these issues. There are a number of advocacy groups and academics that have tried to give precedence to the possibility of mandatory arbitration provisions. The negative comments by the agency’s investor advocate and by a Democratic commissioner will not deter or discourage these efforts.
The debate lines on this issue are sometimes quite interesting. I had a lengthy email exchange with a prominent plaintiffs’ securities lawyer within the past few days in which he expressed his interest, on efficiency grounds, for increased use of arbitration of securities claims. In his view, his clients (mostly large pension funds) would secure redress more quickly in the arbitration setting. I suspect strongly his view is in the distinct minority among plaintiffs’ side advocates. I also wonder, as SEC Investor Advocate Fleming wondering, whether the increased use of arbitration procedures in the absence of any mechanism to proceed on a class basis would leave retail investors high and dry.
There is one aspect of both SEC Chair Clayton’s comments and Commissioner Jackson’s comments that is worth noting; that is, in both of their views, these kinds of changes would not come about without a great deal of study, thought, and discussion – which is as it should be, for a change of this kind. However, given the magnitude of effort that a project like this would involve, it is a fair question, as Jackson asked, whether the Commission’s limited resources are better spent on issues of more immediate interest to investors and issuers.
That said, I freely recognize that there are those who strongly believe that measures like the allowance of mandatory arbitration provisions are exactly the kinds of changes that our markets need now to eliminate competitive disadvantages that U.S. companies face. For that reason, this issue is likely to remain as an important concern to watch in the months ahead.