Mandatory Arbitration in IPOs: The SEC’s New Policy Shift and What It Means
On September 17, 2025, the Securities and Exchange Commission (SEC) quietly approved a policy shift that could dramatically alter the way shareholder disputes are handled. In a 3–1 vote, the Commission endorsed a pair of controversial measures that pave the way for companies going public to include mandatory arbitration clauses in their governance documents.
While the move may not have made front-page news, it is a watershed moment in the relationship between corporate governance, investor protection, and dispute resolution. For litigators, in-house counsel, and anyone tracking the evolution of arbitration in securities law, this development raises important questions about the future of shareholder rights, class actions, and the role of arbitration in corporate America.
What Changed?
The SEC’s decision contained two key components:
Policy Statement on Mandatory Arbitration
The SEC announced that the inclusion of a mandatory arbitration clause in a company’s charter or bylaws will not prevent staff from accelerating the effectiveness of a registration statement for an IPO.
In plain terms, the staff will no longer block companies from going public simply because their governance documents require shareholders to arbitrate federal securities law claims.
Amendment to Rule 431
The Commission also revised Rule 431 of its Rules of Practice, removing the ability of a single Commissioner—or an aggrieved investor—to require the SEC to review staff decisions declaring a registration statement effective.
This amendment narrows the path for challenging staff-level actions, reducing a potential check on controversial IPO practices.
Together, these changes lower the regulatory barriers for companies that want to require arbitration of shareholder disputes as part of their initial public offering.
A Sharp Turn in Policy
Historically, the SEC resisted the idea of companies mandating arbitration for shareholder claims. While the Supreme Court has long upheld arbitration clauses under the Federal Arbitration Act (FAA), the SEC informally took the position that such provisions conflicted with federal securities law’s anti-waiver provisions, which ensure investors cannot be forced to waive rights under the securities statutes.
For decades, staff declined to accelerate IPOs that contained mandatory arbitration language, effectively blocking the practice. The new policy marks a sharp reversal from that stance, with the majority concluding that securities statutes do not “clearly express congressional intent” to carve shareholder arbitration out of the FAA’s reach.
The Legal Foundation: FAA Meets Securities Law
The majority leaned on a series of Supreme Court precedents that reinforced the FAA’s strong pro-arbitration mandate:
AT&T Mobility LLC v. Concepcion (2011): Courts must enforce arbitration agreements even if they bar class actions in consumer contracts.
American Express Co. v. Italian Colors Restaurant (2013): Arbitration provisions that prevent class actions are enforceable with respect to federal claims, not just state claims.
By citing these decisions, the SEC majority aligned itself with the broader judicial trend of treating arbitration agreements as presumptively valid—even in the context of shareholder disputes.
The Dissent’s Concerns
Commissioner Caroline Crenshaw dissented, voicing concerns that resonate with many investor advocates. In her view, mandatory shareholder arbitration:
Erodes Investor Rights: Small shareholders may lack the resources to pursue individual claims, especially without the efficiencies of class actions.
Reduces Transparency: Arbitration is private, decisions are not precedential, and arbitrators are not required to explain their reasoning.
Weakens Deterrence: With fewer lawsuits and less public scrutiny, corporate misconduct could become harder to detect and deter.
Limits Appeal: Shareholders face extremely limited avenues to challenge an unfavorable award.
Crenshaw also criticized the Commission’s process, noting that the changes were adopted without public comment or a thorough cost-benefit analysis.
Implications for Public Companies
For issuers and their counsel, the SEC’s shift removes a long-standing barrier to experimenting with mandatory arbitration provisions. But whether to adopt such clauses is far from a simple decision.
1. Monitoring Market Reaction
Some companies may move quickly to test the waters, while others will wait to see how investors, proxy advisors, and exchanges respond. Adoption could trigger pushback from activists or institutional investors, particularly those with strong governance priorities.
2. State Corporate Law Limits
Not all states permit mandatory arbitration in governance documents. Delaware, home to many public companies, recently barred bylaws that deny access to at least one Delaware court for internal corporate claims. Companies incorporated in other states may have more leeway, but this patchwork will complicate decision-making.
3. Investor and Proxy Advisor Resistance
Major institutional investors, including the Council of Institutional Investors and CalPERS, have historically opposed mandatory arbitration for shareholders. Proxy advisors like Glass Lewis have already signaled they may recommend voting against directors at companies that adopt such provisions.
4. Stock Exchange Role
It remains to be seen whether the NYSE or Nasdaq will propose listing standards addressing shareholder arbitration. Exchanges are required by law to protect investors and the public interest, so they may face pressure to weigh in.
5. Potential for Litigation
Early adopters could face lawsuits challenging the validity of arbitration provisions, particularly if boards impose them without shareholder approval. Courts will likely be asked to decide whether unilateral adoption satisfies the FAA’s requirement for a valid arbitration agreement.
The Cost-Benefit Question
Advocates for mandatory arbitration argue it reduces exposure to costly securities class actions. But some corporate defense lawyers warn the opposite may be true. If class actions are replaced with dozens of individual arbitrations filed by different shareholder groups, defense costs could spiral.
As one securities defense lawyer put it years ago, “In a world without securities class actions, the adversary would be far, far worse—a collection of plaintiffs and plaintiffs’ firms with no set of rules for getting along.” For companies weighing adoption, the financial calculus is far from straightforward.
What This Means for Litigators
For litigators representing issuers, underwriters, or investors, this policy change will demand new strategies:
Advising Issuers: Counsel must carefully evaluate whether arbitration provisions align with the company’s state of incorporation, investor base, and long-term governance strategy.
Representing Investors: Attorneys may need to prepare clients for arbitration’s unique dynamics—streamlined discovery, limited appeal rights, and potentially inconsistent outcomes.
Navigating Uncertainty: With proxy advisors, institutional investors, and exchanges yet to finalize their positions, lawyers must help clients anticipate evolving risks.
Arbitration’s Expanding Role in Corporate Governance
The SEC’s decision is more than a technical policy adjustment. It signals a broader trend: arbitration is no longer confined to consumer contracts, employment disputes, or broker-dealer agreements. It is moving into the very heart of corporate governance.
For arbitrators and mediators, this raises the stakes. Securities disputes are often high-value, complex, and fiercely contested. They require neutrals with deep subject-matter knowledge, procedural savvy, and the ability to manage contentious parties while preserving fairness.
Conclusion: Unlocking Solutions in a New Era
The SEC’s policy shift will not end the debate over shareholder arbitration—if anything, it will intensify it. Some companies may seize the opportunity to limit class actions, while others will tread cautiously in light of investor resistance and legal uncertainty. Shareholders, meanwhile, face a new landscape where their rights may be reshaped by arbitration provisions embedded in IPO governance documents.
What is clear is that arbitration will play an increasingly important role in resolving disputes at the intersection of securities law and corporate governance. Companies, counsel, and investors alike will need trusted neutrals who understand both the promise and the pitfalls of arbitration in this setting.
At Nationwide ADR, the focus is always on Unlocking Solutions for Demanding Cases. With decades of experience in complex business, tort, consumer, and employment disputes, and a growing emphasis on securities matters, the practice is built on fairness, balance, and resolution. When arbitration moves into uncharted territory, parties benefit from neutrals who bring clarity, calm leadership, and a commitment to reasoned outcomes.
Trusted. Balanced. Resolution Driven.