United States: SEC Commissioner Opposes Mandatory Arbitration Provisions In IPOs

SEC Commissioner Robert J. Jackson Jr. expressed opposition to the SEC potentially approving initial public offerings ("IPOs") of companies that have adopted provisions requiring mandatory arbitration of shareholder disputes. Such an action, he said, would "radically alter[] the balance between shareholders and corporate insiders." Mr. Jackson argued that any action in this area deserves careful consideration through a public rulemaking process.

In remarks at the CECP CEO Investor Forum in New York, Mr. Jackson contended that policing corporate wrongdoing requires action by both government regulators and private investors (see also Investor Advocate Rick Fleming's remarks on the subject). He characterized shareholder lawsuits as a key tool for ensuring that bad corporate actors are held to account, noting that budgetary and legal constraints may limit the ability of the SEC Enforcement Division to pursue increasingly sophisticated securities law violators. Mr. Jackson also said that the resolution of private disputes in public courts has a number of benefits, including (i) giving judges the opportunity to explain the contours of the law and (ii) sending a message to the public that society takes corporate fraud seriously. While he acknowledged the costs of shareholder lawsuits, Mr. Jackson explained that there are already mechanisms in place under both federal and state law to limit these costs and keep shareholder lawsuits in check.

Mr. Jackson emphasized that any proposal to alter the scope of investor protection must be subject to serious evaluation that considers the implications for investor rights and for SEC enforcement priorities and resource allocation. He characterized shareholder lawsuits as a "fundamental mechanism for fighting corporate fraud," and said that any adjustments should be afforded an appropriate level of deliberation in a manner visible to the public.

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