Investor advocates continue to warn that the Securities and Exchange Commission’s September 2025 policy statement allowing companies to compel shareholders into private arbitration will negatively impact markets, including hurting stock valuations and investor confidence.
The policy, which reflects President Donald Trump’s goal of making it easier for companies to conduct initial stock offerings, was swiftly met with criticism from institutional investors, who insisted the move would hinder transparency.
In mandatory arbitration, parties agree to settle disputes outside of court by submitting them to a third-party arbitrator. After hearing arguments from both sides, the arbitrator issues a binding decision that both parties are required to follow. Much of this happens privately, beyond the purview of investors. The decisions apply only to the parties and issues involved and, unlike class-action litigation, do not apply for other investors in the same stock with similar fact patterns.
In an essay last fall discussing the SEC’s new policy, published in November 2025 on the Harvard Law School Forum on Corporate Governance, law firm Cooley LLP Partners Brian French, Peter Adams and Tejal Shah wrote, “The SEC’s policy statement emphasized two main takeaways. First, the SEC is taking a neutral stance on mandatory arbitration provisions—specifically, ‘the presence of an issuer-investor mandatory arbitration provision will not impact decisions whether to accelerate the effectiveness of a registration statement under the Securities Act.’ Second, disclosure remains paramount. The SEC made clear that it will ‘focus on the adequacy of the registration statement’s disclosures, including disclosure regarding issuer-investor mandatory arbitration provisions.’”
Mandatory arbitration clauses in IPOs have historically been extremely rare, if not entirely absent. A notable recent example saw the Carlyle Group initially include a forced arbitration clause in its 2012 IPO filings, then remove it after the SEC indicated it would not approve the offering with such a provision.
According to opponents of the SEC’s proposal, the reversal of long-standing rules that protected shareholders’ ability to bring class action lawsuits threatens to undermine basic shareholder rights and could erode confidence in U.S. capital markets. Critics warn that restricting shareholder lawsuits not only weakens a vital check on insider trading, but could also drive down the valuations of U.S.-based IPOs, making the country a less attractive place to invest.
“The thing that makes sure companies tell the truth is the threat of a lawsuit from the SEC or the threat of a lawsuit from a private plaintiff,” says Tyler Gellasch, president and CEO of the Healthy Markets Association. “Uniquely, this SEC is trying to take away both of those.”
‘Frivolous Litigation’
The Trump administration has not minced words in its desire to reduce red tape that affects financial services activities. Since taking office, most government agencies have experienced staff reductions. Regulatory bodies, such as the SEC and the Commodity Futures Trading Commission, are currently operating without their typical five commissioners.
Senator Richard Durbin, D-Illinois, wrote in late February to CFTC Chair Michael Selig asking about commission staffing levels, especially regarding the commission’s enforcement efforts.
“[S]taffing in the Division of Enforcement overall has declined by at least 25 percent, perhaps more. These declines come amid broader declines in enforcement activity,” Durbin wrote. “It is no surprise that, under the Trump Administration, the CFTC has brought fewer enforcement actions, resulting in fewer penalties. For example, in Fiscal Year (FY) 2025, the CFTC brought 13 enforcement actions, obtaining less than $10 million in relief, compared to 58 actions yielding $17.1 billion in FY2024 and 96 actions yielding $4.3 billion in FY2023.”
Durbin also asked Selig about ongoing enforcement resources and whether Selig has “taken steps to reallocate resources to ensure adequate enforcement capacity?” Selig was asked to respond by March 12.
Part of Trump’s agenda has focused on rooting out “frivolous litigation.”
According to Laura Posner, a partner in the securities litigation and investor protection practice of law firm Cohen Milstein Sellers & Toll PLLC, over the past 30 years, courts have shown that the Private Securities Litigation Reform Act of 1995, which increased the pleading standards plaintiffs must meet to initiate a suit, is working as intended: Roughly half of securities cases are dismissed at the motion-to-dismiss stage, meaning frivolous or weak claims are filtered out early, while credible ones are allowed to move forward.
Posner says the risk to company valuations will deter companies from seeking forced arbitration provisions.
“The reason we haven’t seen companies adopt such a provision—in addition to upsetting their investor base, which they should be responsive to—is that [forced arbitrations] are going to increase the cost of litigation pretty exponentially,” Posner says. “Instead of having one, maybe two, cases that are class action, you’re then dealing with hundreds or thousands of cases” in arbitration.
Losing an Insider Trading Buffer
In addition to making it more difficult to bring complaints, investor advocates who oppose the SEC’s policy statement argue it eliminates traditional litigation, which has put a vital check on insider trading and other corporate wrongdoings, thereby keeping markets more trustworthy and stock prices more precise.
In a 2018 speech in New York, former SEC Commissioner Robert Jackson Jr. said that in scandals at Worldcom, Enron, Tyco, Bank of America and Global Crossing, investors recovered more than $19.4 billion in private lawsuits. By contrast, the SEC obtained $1.75 billion.
“Without the ability to bring class actions, a lot of misconduct that is perpetrated by aiders and abettors of the insiders can go unpoliced because the ability to root it out through the civil litigation system is essentially gone,” says Jill Gross, a securities law professor at Pace University.
According to Gross, retail investors stand to lose the most if mandatory arbitration becomes the standard, since they are less able than institutional investors to detect or prevent corporate misconduct. Retail investors typically lack the resources and tools to monitor companies effectively before investing.
Investor advocates argue that U.S. markets, widely regarded as the strongest in the world, owe their strength to robust mandatory disclosure requirements. Removing these safeguards, they contend, would harm all market participants.
“This SEC is uniquely intent on making investing in U.S. public securities a crappier deal for investors and the public,” says HMA’s Gellasch.
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Tags: arbitration, SEC