New SEC Policy Opens Door to Mandatory Investor Arbitration

Summary

On 17 September 2025 the Securities and Exchange Commission announced a landmark policy: mandatory issuer-investor arbitration provisions will not factor into the SEC staff’s decision to accelerate registration statements, provided disclosure about the provision is adequate. The Commission grounded the change in Supreme Court precedent interpreting the Federal Arbitration Act (FAA), concluding federal securities laws do not override the FAA in this context. The statement clears a major regulatory hurdle that long discouraged companies from including mandatory arbitration clauses in charters, bylaws or offering documents — though state law and shareholder reaction remain material constraints.

Key Points

The SEC will focus on disclosure quality, not the presence of mandatory arbitration, when assessing acceleration requests for registration statements.
The policy leans on Supreme Court jurisprudence that gives the FAA primacy absent clear congressional intent to the contrary.
Mandatory arbitration can cut litigation costs, shorten dispute timelines and limit class action exposure for public companies.
Arbitration also offers privacy and more control over arbitrator selection and procedures versus court litigation.
Significant risks include likely negative reactions from institutional investors, proxy advisers (ISS, Glass Lewis) and potential ESG-rating impacts.
Delaware and other state-law developments complicate implementation; Delaware amended its General Corporation Law effective 1 August 2025 to potentially prohibit such charter/bylaw provisions.
Comprehensive, plain-English disclosure about the scope and investor impact of arbitration provisions will be required and reviewed by SEC staff.
Practical implementation options include phased application (new securities only), contractual mechanisms (indentures) and proactive stakeholder engagement to mitigate backlash.

Context and relevance

This is one of the most consequential shifts in securities arbitration policy in decades. For companies that face recurring securities litigation risk, the SEC’s clarity materially changes strategic calculus: arbitration is now a realistic tool to manage litigation exposure without triggering registration delays. However, the change sits inside a complex matrix of state corporate law (notably Delaware), investor expectations on governance and ESG considerations. Expect a patchwork of corporate responses and legal challenges as market participants test the new boundaries.

Practical implications for companies

Boards and counsel need a cross-disciplinary plan before adopting arbitration provisions. Key steps should include: legal review for state-law constraints and enforceability; drafting robust, plain‑English disclosure templates explaining investor rights and arbitration mechanics; targeted outreach to major institutional holders and proxy advisers; and governance safeguards (sunsets, phased rollouts, or exemptions for existing shareholders) to reduce market friction.

Why should I read this?

Short answer: this changes the playbook. The SEC just removed a major regulatory excuse that kept companies from using arbitration to shrink securities-litigation risk. If you work in legal, investor relations, corporate governance or are an institutional investor, you’ll want the skinny on how this affects filings, disclosures and the likely shareholder fight that follows. We’ve boiled down the legal reasoning, the practical pros and cons, and the tactical moves companies should consider — so you don’t have to read the full memo unless you need the granular detail.