On September 17, 2025, the U.S. Securities and Exchange Commission (SEC or the Commission) voted to approve the issuance of a Policy Statement (the Policy Statement) providing guidance on the Commission’s views on the use of mandatory arbitration provisions in the governing documents of companies conducting registered offerings.  The Policy Statement indicates that the presence of mandatory arbitration provisions will not impact decisions regarding whether to accelerate the effectiveness of a registration statement, effectively reversing a longstanding (though unwritten) practice prohibiting the presence of such provisions in the governance documents of companies looking to go public.

The SEC also approved technical changes to Rule 431 of the Commission’s Rules of Practice to avoid disruptions of offerings in the event that the effectiveness of a registered offering (or qualification of a Regulation A offering) is challenged.

The Policy Statement is available here and the Rule 431 amendments are available here.  Both the Policy Statement and Rule 431 amendments will be effective upon publication in the Federal Register.

What is a mandatory arbitration provision?

Ordinarily, investors have a private right of action under the federal securities laws to sue issuers or directors of a corporation if the investors believe they were misled in connection with the purchase or sale of a security.  These lawsuits may be brought in either federal or state court and can take the form of a class action.

So-called mandatory arbitration provisions in a corporation’s governing documents generally require that investors waive their right to sue a corporation or its directors in court.  A mandatory arbitration provision will instead require investors to resolve any disputes against a corporation through a legally binding arbitration process.

In addition, mandatory arbitration provisions may contain additional features beyond a basic requirement to arbitrate claims, including prohibitions against plaintiffs forming a class or requirements that an arbitrator’s ruling be final and not subject to appeal.

What’s the big deal?

The Policy Statement marks a significant shift in the SEC’s views on the use of mandatory arbitration provisions, which have been controversial.  Prior to the issuance of the Policy Statement, the SEC had a longstanding policy prohibiting the use of mandatory arbitration provisions in the governing documents of companies seeking to go public.  Notably, in 2012, the staff of the SEC’s Division of Corporation Finance (the Staff) indicated that it would not exercise its delegated authority to accelerate the effectiveness of a registration statement submitted by a prominent private equity company in its initial public offering because the company’s partnership agreement would have required mandatory arbitration of investor claims, including under the federal securities laws.  In a 2018 letter to Congress, then-SEC Chairman Jay Clayton provided a summary of how the Staff viewed this issue:

The Division took the position, based on a consideration of relevant federal laws and case law, that it would not use its delegated authority to accelerate the effective date of a U.S. company’s registration statement when the company’s governing documents contained a mandatory arbitration provision covering disputes arising under federal securities laws.  In that context, the Division was unable to conclude that such provisions are consistent with “the public interest and protection of investors” as required by Securities Act Section 8(a) in light of, among other things, the anti-waiver provision in Section 14 of that Act.  More specifically, at that time, the Division advised a company that it did not anticipate exercising its delegated authority to accelerate the effective date of the registration statement if such a provision was included in the company’s governing documents and that the Commission would need to make any decision on a request for acceleration.

Under scrutiny from the Staff, investors, and even politicians, the company ultimately voluntarily withdrew its mandatory arbitration provision and proceeded with its IPO, sans mandatory arbitration.

As a brief reminder, Section 8(a) of the Securities Act of 1933, as amended (the Securities Act), provides that a registration statement filed under the Securities Act becomes effective automatically 20 calendar days after it is filed.  Securities Act Rule 473(a) permits an issuer to include a “delaying amendment” on the front page of a registration statement to extend the effective date to 20 calendar days after the issuer complies with Rule 473(b) or an indefinite period ending when the Commission grants the issuer’s request to accelerate the effective date of the registration statement.

The vast majority of issuers in registered offerings include a delaying amendment with an indefinite period and seek acceleration of effectiveness under Rule 461 of the Securities Act after Staff review of the registration statement.  The Staff, acting pursuant to its delegated authority, will accelerate the effective date of a registration statement if it meets the criteria under Section 8(a) and Rule 461, which are primarily focused on ensuring complete and adequate disclosure of material information to the public and require consideration of “the public interest and the protection of investors.”

In the Policy Statement, the SEC states that as a result of a “number of developments” involving the U.S. Supreme Court’s interpretation and application of the Federal Arbitration Act of 1925 (the FAA) informing acceleration requests, the SEC has determined that 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.”

Are mandatory arbitration provisions enforceable?

The legality of a particular mandatory arbitration provision requires a complex analysis of both state and federal law.  Indeed, the Policy Statement acknowledges that “potential uncertainty exists regarding the intersection of the FAA and state law.”

Generally speaking, corporations are governed by the law of their state of incorporation.  In Delaware, where most publicly traded companies are incorporated, courts have generally treated corporate bylaws and charter provisions as contracts between the company and its shareholders and have upheld the validity of some provisions that restrict shareholder rights, such as exclusive bylaw provisions.  However, recent amendments to the Delaware General Corporation Law (DGCL) have the effect of prohibiting any charter or bylaw provision that would bar access to any court located in the state of Delaware for federal securities claims, which arguably could bar the adoption of a mandatory arbitration provision.

At the federal level, the FAA requires that written provisions in any contract requiring a controversy to be settled by arbitration “shall be valid, irrevocable, and enforceable.”  The FAA preempts state laws that would limit any contract to arbitrate and the U.S. Supreme Court has upheld contractual agreements compelling arbitration of claims made under both the Securities Act and the Securities Exchange Act of 1934.

In remarks released in connection with the Policy Statement, SEC Chair Paul Atkins stated:

[T]he 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. . . .  Over the past forty years, federal courts, including the Supreme Court, have issued several decisions informing the analysis of whether the federal securities statutes override the [FAA].  As the Policy Statement details—and the staff’s presentation will highlight—the law in this area has been clear since at least 2013.

The Policy Statement includes a lengthy discussion of Supreme Court jurisprudence and the FAA, concluding ultimately that “in the context of issuer-investor mandatory arbitration provisions, the Federal securities statutes do not override the [FAA]’s policy favoring enforcement of arbitration agreements.”

As for state law, Chair Atkins stated that “[n]either the Commission nor its staff has the expertise to address a provision’s enforceability under state law and any preemption concerns raised by the Arbitration Act with respect to state law.”  The Policy Statement similarly notes that “we do not consider it within the Commission’s purview to conclude whether any particular issuer-investor mandatory arbitration provision is enforceable for purposes of the FAA.”

Nevertheless, the Policy Statement explains that “any relevant issues concerning an issuer-investor mandatory arbitration provision are best addressed through complete and adequate disclosure of material information in the registration statement.  Accordingly, when considering acceleration requests pursuant to Section 8(a) and Rule 461, the staff will focus on the adequacy of the registration statement’s disclosures, including disclosure regarding issuer-investor mandatory arbitration provisions.”

Did the SEC address the advisability of adopting a mandatory arbitration provision?

No.  The Policy Statement expressly states that “Nothing in this statement should be understood to express any views on the specific terms of an arbitration provision, or whether arbitration provisions are appropriate or optimal for issuers or investors.”  Accordingly, when considering acceleration requests pursuant to Section 8(a) and Rule 461, the Staff will focus on the adequacy of the registration statement’s disclosures, including disclosure regarding issuer-investor mandatory arbitration provision.

What constitutes adequate disclosure about a mandatory arbitration provision?

In comments before the SEC, representatives of the Staff noted that disclosure of a particular mandatory arbitration provision would be assessed on a “facts and circumstances” basis.  Notably, Cicely LaMothe, Acting Director of the Division of Corporation Finance, indicated in particular that companies should consider whether they have an adequate description of any mandatory arbitration provision, a discussion of the risks associated with the provision, including any uncertainty regarding its enforceability, and the potential impact of the provision of shareholder claims.

What is an SEC “policy statement”?

From time to time, the SEC will issue a “policy statement” to clarify its position on particular matters.  Policy statements differ significantly from legislative rules.  The provisions of the Administrative Procedure Act (APA) regarding notice of proposed rulemaking, opportunities for public comment, and prior publication are not applicable to general statements of policy.  Similarly, the provisions of the Regulatory Flexibility Act, which apply only when notice and comment are required by the APA or another statute, are not applicable.

What are the amendments to the SEC’s Rules of Practice?

As noted above, the acceleration of the effectiveness of registration statements occur through delegated authority to the Staff, which saves time and resources.  When acting via delegated authority, however, any individual Commissioner or aggrieved person may ask the Commission to review that particular action.

Subject to limited exceptions contained in Rule 431 of the SEC’s Rules of Practice, a request for review automatically stays the action that was taken by delegated authority until the Commission orders otherwise, meaning that an offering pursuant to an effective registration statement can be halted after the fact.

As explained in the amendment’s adopting release, this can be “disruptive to the registration and qualification processes.”  Once a registration statement is effective and sales of an issuer’s securities commence, an automatic stay could disrupt the sales process, and market participants could experience costs and uncertainty as a result.

Recognizing this potential for disruption, Rule 431(e) was amended to add new exceptions to the automatic stay in the event of (1) determinations of the effectiveness of a registration statement and post-effective amendments to a registration statement and (2) determinations of the date and time of qualification of an offering statement and post-qualification amendments to an offering statement under Regulation A to the list of actions for which there shall be no automatic stay of delegated action when the Commission reviews an action taken by delegated authority.

The adopting release also noted that although the automatic stay for determinations of the effectiveness of a registration statement and post-effective amendments and determinations of the qualification of an offering statement and post-qualification amendments under Regulation A are being eliminated, “there are still important safeguards to help ensure robust investor protection.”  For example, Section 8(b) of the Securities Act allows the Commission to issue an order preventing a registration statement from becoming effective and Section 8(d) permits the Commission to issue a stop order to suspend the effectiveness of a registration statement.  Similarly, Rule 258 of the Securities Act allows the Commission to enter an order suspending a Regulation A exemption at any time.

How will this change things going forward?

It is not immediately clear whether companies looking to go public will take advantage of the SEC’s change in policy.  While Chair Atkins stated that these changes “are among the first steps of my goal to make IPOs great again,” mandatory arbitration clauses are controversial and opposed by many investors.

Even under the SEC’s historical approach, companies were not prohibited from amending their bylaws or charter to include mandatory arbitration provisions once public—but such provisions have not become common.  It may be the case that despite this new policy, companies will be reticent to test the waters with adopting mandatory arbitration provisions.

Nevertheless, the SEC’s adoption of the Policy Statement and corresponding amendments demonstrate a clear commitment to a deregulatory agenda with the goal of boosting capital markets.

In addition, issuers seeking to adopt mandatory arbitration provisions should be sure to heed the advice in the Policy Statement that “the staff will focus on the adequacy of the registration statement’s disclosures, including disclosure regarding issuer-investor mandatory arbitration provisions.”

This post comes to us from Morrison & Foerster LLP. It is based on the firm’s memorandum, “U.S. SEC Reverses Prohibition on Mandatory Arbitration Provisions,” dated September 18, 2025, and available here.