The SEC’s Embrace of Mandatory Arbitration in IPOs: A Retreat from Investor Protection and Public Accountability
Authors:
Rebecca Dawson, Kara Wolke, Jonathan Rotter
Tue 26th May 2026 | Posted by Melissa Wright, on Publications
On September 19, 2025, the Securities and Exchange Commission (“SEC” or “Commission”) adopted a policy that potentially marks one of the most consequential shifts in U.S. securities regulation in decades, and at the very least will impose tremendous uncertainties and costs on investors and companies. In a unilateral announcement that bypassed the required rulemaking process, the SEC said that it would break from long-standing precedent to facilitate the inclusion mandatory arbitration provisions in corporate charters and bylaws.[1] Mandatory arbitration forces shareholders who have been victims of fraud to individually sue companies in a private, confidential forum, instead of a court, and without the benefit of proceeding alongside other investors in a class action. Former SEC Commissioner Caroline Crenshaw warned the change would “stack the deck against investors — [] primarily small, retail shareholders in public companies.”[2]
The change, framed as a mere procedural clarification, attempts to weaken investor protections, undermines the development and enforcement of securities law, erodes confidence in U.S. capital markets, and, paradoxically, will impose immediate costs on companies that attempt to impose arbitration, and in the long run hinder the companies it purports to benefit.
The Policy Shift: What Changed and Why It Matters
Under the Securities Act of 1933[3] the SEC is required to weigh “the public interest and the protection of investors” in deciding whether to declare a registration statement effective.[4] For decades, it had been the SEC’s position that mandatory arbitration provisions were counter to the public interest and investor protection.[5] SEC Commissioners, Republican and Democrat alike, voiced the SEC’s serious concerns about the compatibility of mandatory arbitration with federal securities law and investor rights.[6] These concerns were not merely theoretical: the SEC’s former approach recognized that forced arbitration may violate state and federal laws, including the SEC’s core enabling acts,[7] and threatened securities class actions which are an important market enforcement mechanism contemplated by Congress.[8]
But in September 2025, the SEC abandoned its previous position against forced arbitration of shareholder lawsuits under the banner of ‘making IPOs great again.’[9] Going forward, the SEC will assess only whether mandatory arbitration provisions are adequately disclosed, not whether they are appropriate, lawful, or consistent with the public interest.[10] That itself is a fundamental abandonment of the SEC’s investor protection role.
The Consequences: Wide-ranging Dangers of Gutting Investor Protections
Mandatory Arbitration Harms Investors. Mandatory arbitration forces shareholders into forums that lack basic protections associated with courts of law; they are not public, there are no juries, procedures vary widely, and arbitrators are not bound by precedent or, in many cases, even required to provide reasoned decisions.[11] In the securities context, where information asymmetry already heavily favors companies over investors, these deficiencies are especially troubling.
Mandatory arbitration provisions also typically prohibit plaintiffs from proceeding together in class actions, requiring each shareholder to pursue claims individually. For securities claims, where fraud often causes massive aggregate harm, but where individual retail investors’ losses may be too small alone to pursue a legal action, forced arbitration and the prohibition of class actions is a functional elimination of claims. This is precisely why dozens of Senators and Congressional members have voiced that prohibiting forced arbitration helps ensure protection for individual investors and the markets.[12]
The plaintiffs’ bar is stepping in as the SEC’s own enforcement is diminishing. In 2023, the SEC filed 784 enforcement actions.[13] In 2024, that dropped to 583 enforcement actions.[14] In 2025, in keeping with trends of the Trump administration, the SEC declined to publicly announce statistics, but private analysis concluded the SEC filed just 313 enforcement actions, the lowest level of SEC enforcement activity in 10 years.[15] Meanwhile, in 2025, 207 new securities class actions were filed by civil litigants, covering cutting edge claims including Artificial Intelligence, Cryptocurrency, and cybersecurity-related cases.[16]
Forced Arbitration of Securities Claims Runs Afoul of Federal and State Laws. The SEC’s Policy does not guarantee enforceability of an arbitration provision, and investor advocates surely will mount legal challenges to these provisions in venues around the country. Forced arbitration of securities claims violates a plethora of investor rights, including under the below laws, and companies that attempt to include mandatory arbitration provisions in IPO registration statements or corporate charters are thus likely to face serious and costly challenges.
Federal Securities Laws. The Securities Act prohibits issuers from imposing on investors “[a]ny condition, stipulation, or provision binding any person acquiring any security to waive compliance with any provision” of the securities laws.[17] For decades, the prevailing view was that these anti-waiver provisions created a bar to mandatory arbitration clauses in IPO documents and corporate charters.
Federal Arbitration Act (FAA). Arbitration clauses and class action waivers may be enforceable only if consent is obtained, and questions of the sufficiency of such consent and enforceability are typically governed by state contract law.[18] In the internet context, this includes requiring explicit clicks on arbitration agreements. Inclusion of arbitration provisions in IPO registration statements or corporate bylaws raises substantial doubt about consent.
Seventh Amendment. The 7th Amendment guarantees the right to a jury trial of federal civil claims. This constitutional protection has been underutilized in the arbitration context, but the Supreme Court’s 2024 decision in SEC v. Jarkesy[19] suggests that 7th Amendment challenges will have teeth. Quoting earlier Supreme Court cases and leading historical commentators, Jarkesy called the jury trial right, which arbitration destroys, “the glory of the English law”, and noted that it is “of such importance and occupies so firm a place in our history and jurisprudence that any seeming curtailment of the right . . . should be scrutinized with the utmost care.”[20] The Supreme Court held that the SEC could not force Jarkesy into an administrative tribunal without a jury.[21]
State Laws and Common Law. Forced arbitration provisions also may be unenforceable under state corporate law or fiduciary-duty principles. The Commission itself acknowledges that Section 115(c) of the Delaware General Corporation Law requires shareholders retain access to at least one Delaware court for internal corporate claims, calling into question whether Delaware-incorporated companies may lawfully adopt mandatory arbitration for securities claims.[22] The Policy may also violate fiduciary duty law as corporate governance documents raise unique questions of consent, privity, and equity that do not arise in bilateral contracts contemplated by the Arbitration Act.
The SEC’s About-Face Risks Damage to Capital Market Integrity Introduces Uncertainty. Public securities litigation serves a critical market function. Court proceedings generate precedent, promote consistent application of the law, and provide transparency that benefits all market participants. Arbitration, by contrast, operates in silence; claims, evidence, and outcomes remain confidential, so defrauded investors may never learn of misconduct. Markets cannot price risk accurately when wrongdoing is hidden. This lack of transparency undermines deterrence. For foreign investors drawn to the stability and predictability of U.S. markets, this shift signals a troubling retreat. The Policy also gives no reassurance that future administration would not simply reverse course. Notably, the SEC itself concedes that it does not know the economic consequences of its policy change.[23]
Moreover, arbitration regimes capable of handling mass claims are underdeveloped and untested. Two of the largest providers of arbitration services, JAMS (Judicial Arbitration and Mediation Services) and AAA (American Arbitration Association), only recently began to establish mass arbitration procedures and guidelines beyond the employment context in 2024.[24] These new procedures are untested, and questions regarding batching, bellwether cases, and procedural coordination remain unanswered.
Warnings from Experts and Early Market Signals
The dangers of the SEC’s new Policy have not gone unnoticed. Former SEC Commissioner Caroline Crenshaw issued a forceful warning that mandatory arbitration would prevent shareholders from vindicating their rights, leave markets under-policed, and undermine global confidence in U.S. capital markets.[25] Shortly thereafter, she resigned.[26]
Other experts echo these concerns. After the Policy was issued, proxy advisory firm Glass Lewis advised against adopting mandatory arbitration provisions, citing governance and investor-confidence risks.[27] Institutional Shareholder Services (“ISS”) similarly warned that the Policy might backfire, leading to “supercharged” securities cases as issuers “risk responding to multiple arbitrations, perhaps thousands, providing more opportunities for investors, opposed to the finality of a class action in court.
