Staying in Our Lane: Statement on Two Recommendations from the Division of Corporation Finance

Thank you, Mr. Chairman, Cicely [LaMothe], John [Fieldsend], and Rob [Fisher]. Thank you also to the staff in the Division of Corporation of Finance, Division of Investment Management, Division of Economic and Risk Analysis, and Office of the General Counsel who worked on these items. Cicely, given that a permanent director has been named, I wanted to take a moment to thank you for your leadership of the Division. Working with you has been a delight. You promote others rather than yourself, and you follow through on what you say. Your no-nonsense leadership style has enabled the Division to be productive during this transition period. You do not shy away from problems; you solve them sensibly.

Today's actions exemplify this approach.

First, the Commission is acknowledging the limits of our authority. The presence of a provision requiring arbitration of investor claims arising under the federal securities laws will not factor into the SEC's decision about whether to accelerate the effectiveness of a registration statement.[1] This position is not an invention of the Commission but rather an acknowledgment of current Supreme Court precedent.[2]

Knowing that the SEC will not put its thumb on the scale, companies can decide whether they want to include arbitration provisions. A common consideration for any company contemplating going public is the litigation risk that comes with being a public company.[3] Past signaling from the SEC, unrooted in any apparent statutory authority, that it would block registration statements for companies with mandatory arbitration clauses prevented companies from taking a step some viewed to be value-maximizing, and thus good for shareholders.[4] Whether those companies are correct should be up to the market to decide.

If companies opt for mandatory arbitration clauses, investors can decide what to make of them. The costs and benefits of issuer-investor mandatory arbitration provisions spark lively debate.[5] The Commission, by today's action, appropriately is staying out of that debate.[6] The market will do a better job than we can in assessing issuer-investor mandatory arbitration provisions and will do so on a case-by-case basis. This statement empowers investors to decide for themselves whether the presence or absence of a mandatory arbitration provision in governance documents is positive, negative, or neutral. Investors' judgments will be reflected in companies' stock prices and in the general demand for allocation in an IPO.

Today we are also providing certainty to companies by making common sense changes to our rules of practice. Every day, Commission staff, by delegated authority, take effective registration statements and qualify offering statements. Were a registration to be stayed after effectiveness, a company would experience a cavalcade of horribles: impaired access to capital; less favorable financial terms; and a legal morass as the company tries to untangle what it means to have sold securities pursuant to an effective but subsequently stayed registration statement.[7] Instead, the Commission is adopting a tailored approach that allows us to consider on a case-by-case basis whether a stay is justified while removing unnecessary risk from the IPO process.

Where the SEC can remove needless uncertainty from an offering process it should. I am glad to see the Commission address the sluggish IPO market from all possible angles.

I have the following questions on today's recommendations:

1. How does the staff assess the sufficiency of disclosure regarding issuer-investor mandatory arbitration provisions when considering taking a registration statement effective?
2. Under what circumstances might a registration statement be stayed after it goes effective?