On September 17, 2025, Chairman Paul Atkins of the Securities and Exchange Commission (SEC) issued an open meeting statement that started its conclusion section with this statement: “Today’s recommendations on mandatory arbitration and rule 431 are among the first steps of my goal to make IPOs great again.” [1] The official title of the statement, more technically, is “Open Meeting Statement on Policy Statement Concerning Mandatory Arbitration and Amendments to Rule 431 of the Commission’s Rules of Practice.” This “Policy Statement”, instead of a formal rule proposal, is not subject to public notice and comment. The Policy Statement resulted from the Commission voting 3 to 1 along party lines to reverse a long-standing but unwritten SEC policy in which the agency had blocked the initial public offerings (IPOs) of companies that wanted to ban shareholder class action lawsuits in their charters and bylaws.
In this Policy Statement regarding mandatory arbitration, Chairman Atkins highlighted two queries to support the Commission’s shift in policy to allow for the use of mandatory arbitration by newly publicly traded companies:
There are two separate questions with respect to mandatory arbitration. First, what is the state of the law on the permissibility of mandatory arbitration provisions? Second, assuming such provisions are allowed, should a company adopt mandatory arbitration?
The answer to the first question sits at the intersection of the federal securities laws, state corporate law, and the Federal Arbitration Act of 1925 (the “Arbitration Act”). The expertise and domain of the Commission and its staff is, of course, in the federal securities laws. Accordingly, the Policy Statement provides the Commission’s views on whether mandatory arbitration provisions are inconsistent with the federal securities laws – and concludes that they are not.
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Turning to the second question – with clarity under the federal securities laws and assuming validity under state corporate law – should a company adopt a mandatory arbitration provision? I expect there to be robust public debate on this issue among various interested parties. I have views on this issue, and I am sure that my fellow Commissioners do as well. However, the Commission, as a body, will not be part of this debate because it is outside of the scope of the matters over which the Commission has authority under the federal securities laws.
In support of this Policy Statement, Commissioner Hester M. Peirce stated that, “The market will do a better job than we can in assessing those arbitration provisions, and will do so on a case-by-case basis.”[2] Commissioner Caroline Crenshaw criticized the Policy Statement and expressed concerns that mandatory arbitration will require shareholders to “sue companies in a private, confidential forum” without the “benefit of proceeding in the form of a class action.”
In addition to this Policy Statement essentially allowing mandatory arbitration clauses, the Commission also voted along party lines to prohibit a single commissioner or third party from putting the brakes on an IPO by challenging a registration statement before the Commission.
The primary consequence of the Policy Statement is that the SEC will no longer stop a company from going public simply because its registration statement includes a clause that investors need to arbitrate any disputes with the company.
This Policy Statement is not the final say though. First, certain states prohibit the use of mandatory arbitration clauses in corporate bylaws or charters. A primary example is Delaware, where most Fortune 500 companies are incorporated. Next, is whether a new public company is willing to take on the litigation risks that come with inserting an arbitration clause into its registration statement. Lastly, certain investors, in particular certain large institutional investors, may be alienated by arbitration clauses being inserted into registration statements and not want to invest in such public companies.
[1]https://www.sec.gov/newsroom/speeches-statements/atkins-091725-open-meeting-statement-policy-statement-concerning-mandatory-arbitration-amendments-rule-431.
[2]https://www.sec.gov/newsroom/speeches-statements/peirce-statement-recommendations-division-corporation-finance-091725.
