AAJ Response to SEC Policy Change to Gut Shareholder Rights

AAJ Response to SEC Policy Change to Gut Shareholder Rights

The shareholder forced arbitration policy issued by the Securities and Exchange Commission (SEC) on September 17, 2025, is a radical policy change that will shield fraudulent companies from public accountability, put investors at risk of massive losses, depress shareholder value and stock prices, and undermine confidence in our capital markets.[i]

This stark reversal from the Commission's well-established, decades-old policy will inject chaos into U.S. markets, creating a more volatile environment for investors, shareholders, and businesses - and any company that includes a forced arbitration provision in its IPO filing will face legal challenges that will delay the offering indefinitely and result in significant risk and expense.

Despite SEC Chairman Paul Atkins' claims that the SEC has not weighed in on forced arbitration since the 1980s, over the course of multiple decades, the Commission has made clear on numerous occasions that the practice violates the federal securities laws and is bad for investors:

• In the late 1980s, the SEC blocked a stock sale by Franklin First Financial Corp., a Wilkes Barre, Pennsylvania, savings and loan association that had also included a forced arbitration provision in its corporate charter, according to Carl Schneider, a former securities attorney who represented the thrift.[ii]

• In 1990, when a corporation planning its IPO sought to include forced arbitration provisions in its corporate governance documents, the SEC objected, saying, "It would be contrary to the public interest to require investors who want to participate in the nation's equity markets to waive access to a judicial forum for vindication of federal or state law rights, where such a waiver is made through a corporate charter rather than through an individual investor's decision."[iii]

• In 2008, Alaska Air Group, Inc. asked the SEC for no-action relief to support its decision to exclude a forced arbitration proposal from its proxy materials - the SEC granted the no-action relief.[iv]

• During the 2011-2012 proxy season, the SEC granted two companies, Gannett Co., Inc. and Pfizer Inc., the no-action relief they sought in response to their desire to exclude a forced arbitration proposal from proxy materials. The SEC staff's decision was based on its conclusion "that there appears to be some basis for your view that implementation of the proposal would cause the company to violate the federal securities laws."[v]

• In 2012, the Carlyle Group submitted an IPO registration statement which included forced arbitration within its corporate bylaws. The SEC indicated it would not accelerate the effective date for a registration statement of an applicant with a forced arbitration clause in its bylaws. After the Carlyle Group withdrew the forced arbitration provision, SEC spokesman John Nester said in a statement, "We are pleased they have announced that they plan to remove this provision. We advised them that the staff was not prepared to clear the filing with the mandatory arbitration provision included." [vi]

• In 2018, multiple statements about the use of forced arbitration were made by SEC officials:

• In 2019, Johnson & Johnson, Inc. asked the SEC for no-action relief to exclude a shareholder proposal on shareholder forced arbitration-the SEC granted the no-action relief.[vii]

• Just this year, the very same SEC took the position that FINRA rules stating that FINRA rules that exempt class action lawsuits from FINRA arbitration are consistent with Supreme Court jurisprudence.

Proposals for shareholder forced arbitration raise serious legal issues under both the Securities Act of 1933 and the Securities Exchange Act of 1934:

• Forced arbitration provisionslikely violate the Securities Act's "anti-waiver" provision, which provides that "[a]ny condition, stipulation, or provision binding any person acquiring any security to waive compliance with any provision of this title or of the rules and regulations of the Commission shall be void." (Securities Act of 1933, 15 U.S.C. § 77n (2018)).
• The SEC's policy change raises issues with respect to provisions of federal securities law which grants jurisdiction over federal investor-protection issues to district courts; thus, any provision forcing shareholders into arbitration as opposed to giving them the option of filing a lawsuit in court is likely to be found contrary to federal law.
• The SEC's policy reversal also raises issues with respect to Section 29(a) of the Exchange Act which further provides that "[a]ny condition, stipulation, or provision binding any person to waive compliance with any provision of this title or any rule or regulation thereunder, or of any rule of a self-regulatory organization, shall be void" (Securities Exchange Act of 1934, §78cc (2018)).
• Additional Supreme Court guidance states that "anti-waiver" provisions are violated if a provision "weakens [investors'] ability to recover under the Exchange Act" (Shearson/American Express, Inc. v. McMahon, 482 US 220, 230 (1987)).

Chairman Atkins' claims misrepresented the legality and enforceability of forced shareholder arbitration provisions under state law:

• While he noted that a recent change in state law would make these provisions unenforceable under Delaware state law, Atkins failed to acknowledge that most states, and thus most Fortune 500 companies, follow Delaware law for state corporate law considerations.

Investors opposed forced shareholder arbitration:

• In 2020, Intuit Inc. had a shareholder proposal that would have forced all shareholder cases into individual forced arbitration and denied class relief. When the vote was called, the proposal received less than 2.5% of shareholder support.[i]
  • Major institutional investors declined to support the proposal, including the New York State Common Retirement Fund - a large institutional investor - which filed an exempt solicitation opposing it.
  • The Council for Institutional Investors also submitted a letter recommending a vote against the proposal forcing shareholder claims into arbitration.
• A similar threat occurred in late 2018, when the same activist shareholder, who would later file the Intuit proposal, filed a bylaw proposal to force all Johnson & Johnson shareholder cases into arbitration. J&J and its counsel at Skadden Arps argued in its letter to the SEC that "Johnson & Johnson believes that the adoption of a bylaw amendment described in the proposal would be contrary to the public policy interests underlying the federal securities laws and would cause Johnson & Johnson to violate federal law."[ii]

Key stakeholders opposed forced shareholder arbitration: