SEC Policy Change Diminishes Investor Protections of the Securities Laws

On September 17, 2025, the Securities and Exchange Commission issued a policy statement that allows companies to conduct initial public offerings even if there are mandatory arbitration provisions in their governing documents.

This policy statement reverses the SEC’s longstanding opposition to mandatory arbitration provisions. These provisions, if adopted by companies and found valid by the courts, would force shareholders to bring claims of violations of the federal securities laws through arbitration rather than in court, and individually rather than as class actions. While mandatory arbitration severely curtails shareholder rights, it remains to be determined whether companies will actually adopt such unpopular provisions and, if so, whether they are legally valid. Pomerantz has been, and will continue to be, at the forefront of protecting the crucial right of investors to seek redress through securities class actions.

This new policy reverses the SEC’s previous position, under which its Division of Corporation Finance refused to accelerate the effective date of registration statements for companies that included mandatory arbitration provisions in their governing documents because such provisions are inconsistent with “the public interest and protection of investors.” The SEC reaffirmed its prior
stance in 2018, when then-Chairman Jay Clayton stated in a letter to Congress that the Division of Corporation Finance would maintain its prior approach. Later that year, when the SEC continued to express interest in the issue, Pomerantz organized a coalition of important institutional investors from around the world to meet with Chairman Clayton and later, with a bipartisan group of Senate staffers. These meetings culminated in to a letter, signed by numerous State Treasurers and the State Financial Officers Foundation, urging the SEC to maintain its stance against forced arbitration.

The SEC’s decades-old position, shared by the investor community, was that forced arbitration harms investors by curtailing their ability to hold companies accountable for securities fraud. Its new policy statement is a drastic reversal of course that is inconsistent with the role of securities class actions as the primary method for investors to protect their rights.

Mandatory arbitration provisions are extremely harmful to shareholder rights for several reasons, as Senators Elizabeth Warren and Jack Reed wrote in a September 16, 2025 letter to SEC Chairman Paul Atkins, urging the SEC not to adopt this policy change. Commissioner Caroline Crenshaw, the lone Democratic commissioner on the SEC and the only one to oppose this policy change, raised similar concerns when dissenting from its approval of the policy statement and questioned whether the SEC even has the authority to issue the policy change without allowing for public comment, as it did.

By precluding class actions, mandatory arbitration provisions prevent most individual investors from recovering for the harm caused when companies commit securities fraud, because it is generally economically unfeasible for any but the largest shareholders to sue corporations. Securities class actions are an essential way to hold companies accountable to investors since the SEC lacks the resources to pursue all claims. Indeed, the Supreme Court has “long recognized that meritorious private actions to enforce federal antifraud securities laws are an essential supplement to criminal prosecutions and civil enforcement actions brought, respectively, by the Department of Justice and the Securities and Exchange Commission.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007). In addition, by requiring disputes to take place in private arbitration, which are often subject to confidentiality agreements, rather than in public judicial proceedings, the facts of individual cases will not come to light and there will be a dearth of new precedent to guide future cases.

Changes that weaken enforcement of the federal securities laws have significant, widespread repercussions by removing public accountability, eviscerating a key deterrent on companies and their executives from committing misconduct, and decreasing investor confidence in the U.S. markets. As Senators Warren and Reed wrote, “allowing shareholders to waive their litigation rights not only harms individual shareholders but also confidence in the market and the ability to deter future misconduct.”

There is a long history of public opposition to mandatory arbitration provisions within the investor community, and even by companies themselves. For example, in 2018, an activist shareholder sought to have Johnson & Johnson’s shareholders vote on adding such a provision into the company’s bylaws. Pomerantz represented the Colorado Public Employees’ Retirement Association as an intervenor in litigation that ensued, seeking to ensure that investors’ rights were protected. Several years of legal
maneuvering followed. First, the SEC granted J&J’s request for a no-action letter concerning the company’s exclusion of the provision from its proxy ballot based on the position that the proposal violated state and federal law. Then, after the company expressed its willingness to include the proposal in its proxy materials, apparently to avoid further litigation, in 2022, the federal district court in New Jersey dismissed the shareholder’s request for declaratory relief as not presenting a justiciable controversy. The Third Circuit Court of Appeals affirmed that decision in 2023. Although the company allowed the proposal to be included, it recommended that shareholders vote against it because J&J did “not believe that this proposal [was] in the best interests of Johnson & Johnson or its shareholders,” noting that no “other shareholders have expressed to us an interest in having us adopt”
such a bylaw. The activist investor ultimately withdrew the proposal before the shareholder votes in both 2022 and 2023, confirming J&J’s assessment that the shareholder was merely pursuing his longstanding “academic interest” in seeking a favorable court ruling on this issue, rather than focusing on whether shareholders actually favored the provision.

Similarly, in 2020, Intuit, another prominent public company, recommended against a similar proposal by the same activist shareholder, stating that it was “not in the best interest of Intuit or its shareholders.” Over 97.6% of Intuit’s shareholders agreed, and rejected the proposal, confirming that institutional and retail investors oppose provisions that curtail important shareholder rights.

Further, mandatory individual arbitration is not in companies’ best interests because, while small shareholders may be excluded from the process, large investors will seek to recover their substantial losses in arbitration. The proliferation of multiple separate arbitrations will strain company resources and the attention of executives, remove certain procedural benefits afforded to defendants in court proceedings, and take away the efficiencies of resolving many claims through a single action.

If any companies nonetheless do choose to move forward with mandatory arbitration provisions, litigation over the propriety of these provisions will inevitably follow. The legality of such provisions will be subject to challenge on numerous grounds, including whether they are prohibited by the federal securities laws and applicable state law, and whether they are enforceable from a contractual perspective, among other objections.

The widespread disapproval of mandatory arbitration provisions, along with the need to address contentious litigation alongside a company’s carefully planned and highly anticipated initial public offering — which companies will not want obstructed by litigation or diminished investor interest — is likely to deter most companies from including such provisions in the first place. Corporations that still insist on adopting these provisions are likely to get more than they bargained for, as investors and their counsel, such as Pomerantz, will be prepared to hold companies to account — including through arbitration, if necessary.

The SEC’s policy reversal marks the beginning of what will likely be a long process. Much uncertainty lies ahead regarding whether companies will actually adopt mandatory arbitration provisions, how their investor base will respond, and the legality of these provisions. Pomerantz will continue, at every step of the way, to lead efforts to protect shareholders’ rights to seek recompense for violations of the securities laws.