As readers may recall, in September, the SEC announced that it had revised its policy on whether prospective IPO companies may have their registration statement declared effective if the companies have mandatory arbitration bylaws, as discussed in detail here. In the following guest post, Salvatore Graziano, a partner in the Bernstein Litowitz Berger & Grossman LLC law firm and a member of the firm’s Executive Committee, provides his views on the SEC’s changed policy and suggests the implications the changed policy may have for D&O insurers. My thanks to Sal for allowing me to publish his article on this site. Here is Sal’s article.
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In September 2025, the Securities and Exchange Commission (SEC) reversed decades-old policy to permit public companies to adopt forced arbitration clauses. The real impact of this significant change will be skyrocketing legal fees and new uncertainty and liability for D&O insurance.
The SEC’s sudden reversal has already been criticized as a blow to market integrity that could severely destabilize confidence in U.S. markets. Key investor groups have also argued that it shields fraudulent companies from public accountability, and puts investors at risk of massive losses.
But what has not been discussed is the mess that is in store for directors’ and officers’ liability insurance. Such insurance will become exorbitantly expensive, and the amount of insurance needed to litigate securities cases in front of arbitration panels will be fraught with uncertainty, for companies who choose to adopt novel provisions against their shareholders.
Prior to the SEC’s forced arbitration change, for decades, the Commission declined to accelerate the IPOs of companies who had adopted forced shareholder arbitration clauses on the grounds that such provisions were against the public interest. This position provided stability and predictability for both the insurance industry and corporations. For companies considering adopting forced arbitration provisions against their shareholders, the uncertainty that has been created by the SEC’s forced arbitration policy change means that the companies’ directors and officers will be expensive to insure because of several key factors:
Legal costs will increase. Rather than litigating one consolidated case, as companies would with securities class actions, companies that adopt forced arbitration provisions will need to defend against dozens to thousands of individual arbitration cases. Each arbitration proceeding would involve individual discovery obligations, separate depositions or hearing testimony of numerous officers, directors and executives, multiple expert costs, etc. Given that the Private Securities Litigation Reform Act of 1995 (the PSLRA) triggered institutional investor awareness and strong participation in securities litigation over the last 30 years, securities claims will still be filed if the forum is shifted from the courts to arbitration. Moreover, rather than the small, even nominal individual damages in consumer cases, the individual loss amounts in securities actions are far larger than nearly all consumer cases where individual arbitrations in similar forced arbitration circumstances are going strong.
No PSLRA discovery stay pre MTD. Under the PSLRA, discovery is stayed during the pendency of a defendant’s motion to dismiss in federal court. The PSLRA discovery stay is not applicable in arbitration. Without the PSLRA discovery stay, discovery and legal costs will increase exponentially, as document and deposition discovery will occur earlier in the process and in every case, not just the 40-50% that historically have survived motion to dismiss practice.
Insurers will not be able to risk-assess the value of the potential claims. It will be impossible for insurers to assess the value of potential securities claims because any such assessment will be highly dependent on how many individual actions are taken and by which investors. The variations on claims and claimants will greatly vary by case, making predictability on costs largely impossible.
Settlement value will increase. Investors pursuing claims will likely not resolve their individual actions for a percentage of total estimated class damages. Recoveries per claimant will vary greatly depending on the investors that file claims and the law firms who represent them.
Novel questions will be raised. There are no easy answers when it comes to deciding which defendants would be covered by such arbitration provisions, and importantly which defendants would not be covered.
For example, underwriters (who are typically indemnified by the company), auditors, officers and directors (again, who are typically indemnified) likely would not be covered by forced arbitration provisions because of privity issues. As such, claims against them would continue to proceed in federal court, not an arbitration forum, with joint and several liability to the Company, who would need to then be sued by those entities. This invites multi-forum dispute resolution that is anything but streamlined.
While the hope of boosting the number of US public companies might be commendable, unfortunately the SEC’s shift will have the opposite impact. Companies that adopt forced arbitration clauses will face debilitating costs and uncertainty, which may hinder their ability to go (or remain) publicly traded.
On first glance, the notion of lessening legal headwinds for newer companies might seem appealing. But as seen in the consumer arbitration space, there is serious potential for significant and expensive mass arbitration in securities cases, which for insurers would be extremely difficult to predict. The reality is that companies that go down that path will be burdened with skyrocketing costs because of new uncertainty and liability for D&O insurance.
This is a mess that insurers, and the corporations they work for, should steer clear of. If only the SEC sought public comment before it dramatically changed its long-standing position on this important issue, discussion of these concerns may have avoided these obvious pitfalls. Speaking of the PSLRA, those who oppose investor access to courts mostly look back at that major piece of federal legislation as “be careful what you wish for.” Here we go again?
Salvatore Graziano is a BLB&G partner and member of the firm’s Executive Committee. Widely recognized as one of the top securities litigators in the country, he has served as lead trial counsel in several historic securities fraud class actions, recovering billions of dollars on behalf of institutional investors and hedge fund clients.