September 17, 2025/US SEC
By Commissioner Caroline A. Crenshaw
Good morning. Before I begin, I want to thank the staff in the Division of Corporation Finance, the Office of General Counsel, the Division of Economic and Risk Analysis and The Division of Investment Management for their work. And thank you to the operations staff who made today’s meeting possible.
Also, I would like to thank Cicely LaMothe for her service as Acting Director. For those of you who don’t know Cicely, she is a public servant in the best sense of those words. She is dedicated, hard-working, thoughtful and committed to her staff and to the public good. And she does it all with a smile and unflappable composure. She has taken on this very large task—probably for longer than she anticipated—and for that we are grateful. Thank you, Cicely.
***
Today the Commission finds another way to stack the deck against investors—this time primarily small, retail shareholders in public companies. We do so by opening the floodgates to something called mandatory arbitration. So, what is mandatory arbitration?
Mandatory arbitration forces harmed shareholders to sue companies in a private, confidential forum, instead of a court and without the benefit of proceeding in the form of a class action. While, in theory, arbitration could cut costs for companies, there are real downsides for investors. Arbitrations are typically more expensive for individual shareholders; they are not public; they have no juries;[1] they lack consistent procedures; arbitrators are not bound by legal precedent; arbitration precludes collective action among shareholders; there are limited rights of appeal; and, ultimately, there is no assurance that two identical investors would get the same outcome. If that collection of things transpired in a courtroom without a party’s consent, judges would not hesitate to call it what it is: a violation of due process.
Today, the Commission takes two steps to advance this policy goal. First, the Commission issues a policy statement dictating that staff make public-interest findings without considering whether a corporation has forced its shareholders into mandatory arbitration.[2] And, second, we amend the Rules of Practice to ensure that no Commissioner or third party can effectively intervene to challenge those public-interest findings.[3]
The policy statement fails on many fronts. It fails to identify a problem. It fails to adequately address numerous and complex legal and economic issues. And it fails entirely to discuss the practical consequences of allowing public companies to mandate arbitration. If, however, we actually were to consider whether mandatory arbitration is in the public interest—an analysis required by the Securities Act—we would face overwhelming evidence that it is not. So, to start there, what are some of those consequences?
***
The Practical Consequences of Our Policy Statement
First, small shareholders will be prevented from vindicating their rights. Cases involving offering frauds, accounting misstatements or other types of public company malfeasance are usually complex, and require extensive litigation resources, multiple experts, and services that require upfront fees.[4] For these types of claims, most shareholder investments are too small, and the costs of arbitration too high, to incentivize individual shareholder suits—even if the collective losses would more than justify the expense of litigation through class action. As one court put it, “The realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30.”[5]
Indeed, the primary defense of mandatory arbitration is that it provides cost savings to companies. But if every single member of a class sued in arbitration individually, there likely would not be great cost savings.[6] Part of the reason that companies will save money is precisely because many investors will decide not to sue in the first place.[7]
Second, the markets will go under-policed. If we erode private rights of action, not only are shareholders uncompensated for the wrong perpetrated on them, but the wrongdoers get off scot-free.
There are two ways to remedy wrongdoing in our markets—(i) by governmental enforcement action or (ii) by private lawsuit. Private lawsuits can be a more efficient remedy than government action in terms of investor recompense. In 2024, securities class action settlements brought by shareholders returned approximately $3.7 billion to harmed investors.[8] By contrast, over a similar period, Commission enforcement returned only $345 million to investors.[9] This may also explain why mandatory arbitration is so appealing – some companies would rather keep their ill-gotten gains than return them to harmed investors.
If we chisel away at private actions, then we lean more heavily on the Commission to police the markets. But that crutch is faltering. The staff of the Commission has shrunk by approximately 16% since the beginning of the current fiscal year.[10] But our markets have grown.[11] So, we are reducing private enforcement mechanisms at the same time as agency resources are shrinking.[12]
One might expect that, as we deregulate and seek less government intervention, we would lean more into an individual’s freedom to pursue her own recovery; not less.[13] But that is apparently not the case.
Third, mandatory arbitration undermines deterrence. Deterrence is subverted, not only because wrongdoers are not held to account, but also because arbitration claims and awards are non-public. Parties bear the burden of compelled silence. Defrauded investors who are not part of an arbitration may not know they have been defrauded, nor may the markets, paving the road for the same company to inexpensively engage in the same misconduct again in the future. And where there is no public account, there is also no deterrence to other would-be wrongdoers.[14]
This lack of deterrence will lead not only to more brazen misconduct, but it will also reduce the integrity of our markets. It lays the groundwork for less accurate disclosures, less reliable financial statements, and executives who are incentivized to cut corners. Less accurate market information is a solution to a problem that I don’t think exists.
Fourth, market transparency and integrity will suffer. Judicial resolution of shareholder disputes provides a public good. Arguments about the costs of litigation often leave out the tremendous benefits being provided.
Private litigation allows the law to develop. Many seminal federal and state securities law cases have developed from private litigation.[15] Where caselaw is allowed to develop, it provides for consistent and predictable outcomes for market participants. On the contrary, there is no consistency in arbitration.
- Arbitrators are often not required to follow the law;
- There are not bound by precedent;
- Arbitrators need not provide reasoning for their decisions;
- Nor are they required to apply rules of evidence;
- Discovery and evidence are curbed; and,
- Judicial review is limited.
This means that similarly situated investors—victims of the same mass fraud—may face significantly divergent outcomes in arbitration. That is bad for our markets, which thrive on consistency and predictability.[16]
Finally, allowing companies to mandate arbitration squelches investor choice. It is worth pointing out the dissonance in allowing companies to strip investors of the choice to litigate in court, while touting the primacy of investor choice in other contexts—for example, in the Commission’s push to open the private markets to retail investors. This raises the unsavory specter that “freedom of investor choice” is only a Commission priority when that choice serves the goal of lining the pockets of favored business interests.
***
The Commission’s Policy Position is Out of Step with History and the Law
All of this is to say, there are compelling reasons that mandatory arbitration provisions are against the public interest and at odds with protecting investors.[17] They deprive shareholders of fundamental rights, fundamental choices, and they fly in the face of market integrity, fairness and efficiency. And perhaps that is why today’s action is so out of step with our agency’s history.[18] The Commission has never—either expressly or implicitly—granted permission to a public company to force their shareholders into mandatory arbitration.[19] And Chairmen and Commissioners of both parties—such as Chairmen Breeden, Donaldson, and Levitt—have exalted the import of private litigation,[20] alongside Congress.[21] Before today, we have never adopted a policy of willful blindness to those provisions.
To be clear—the legal analysis that staff puts forward in the Policy Statement does not demand the conclusion that we reach. Today’s actions are a matter of policy and not a matter of law. Certainly, the Supreme Court has interpreted the scope of the Federal Arbitration Act to allow for greater enforcement of arbitration agreements. But, neither the Supreme Court nor Congress has ever adjudged that the FAA requires enforcement of mandatory arbitration provisions tucked away in governance documents of public companies.[22] And there are good reasons to believe that neither the FAA nor certain state laws would require enforcement of such provisions in the context of shareholder disputes.[23] For example, do corporate bylaws bear the hallmarks of privity and consent sufficient to constitute written agreements under the FAA?[24]
Absent unequivocal mandates from the courts or Congress to enforce forced arbitration provisions, the Commission should enforce the securities laws, which provide (unequivocally) that any attempt to require a shareholder to waive her rights is void.[25]
***
A Needless Binding of Our Hands
But, perhaps the most anomalous outcome of today’s policy statement is that we predetermine a certain outcome—regardless of what a particular mandatory arbitration clause says and regardless of our statutory obligation to make a specific public interest finding for the offerings of individual issuers. Today’s statement leaves little room for staff or the Commission to make an assessment of whether a particular mandatory arbitration provision violates a quintessential shareholder right—which the Supreme Court has stated would be unlawful.[26] One could imagine many clever ways that arbitration provisions could eliminate substantive rights by, for example, wholesale eliminating remedies, limitations periods, or even entire causes of action. What if there were a provision that required shareholders to bring fraud claims within one day of the occurrence of the fraud?
We have, in effect, hard-wired a finding that that mandatory arbitration is in the public interest, without any real consideration of any issuer’s filings. Do we even have authority to make such a broad finding through a policy statement? I can’t remember another time in recent history where the Commission chose to take a critical tool out of its toolbox for performing a task it was mandated to do by Congress.
***
A Policy Without a Process
This brings me to the utter lack of input from market participants.
Today’s statement includes a quasi-economic analysis, which glaringly concludes that … we have no idea what the outcome of our policy shift might be.[27] There is a reason why we don’t know the full extent of the costs and the benefits of today’s action—because we didn’t ask. This seismic policy shift has too many ramifications to be done without an economic analysis.
The last time mandatory arbitration provisions took the limelight, then-Chairman Jay Clayton promised that “[no] decision would be made by the Commission absent a fair amount [] of consideration and debate, including [input on] the law, the economics, [and] what investors want.”[28] Commissioners who came before us shared that view.[29] Hundreds of interested stakeholders have in the past written to the Commission expressing not only concern over green lighting mandatory arbitration provisions, but also seeking the opportunity to be heard before the implementation of any policy change. These interested stakeholders include members of Congress,[30] State Treasurers of both parties,[31] academics of all stripes,[32] institutional investors,[33] and investor advocates, [34] among many others.[35]
Indeed, one letter from 26 Members of Congress summed it up well:
[B]ecause of the longstanding public-position of the SEC, and the significant impact such a monumental shift in policy would have on American investors, any examination of this issue should be done in a transparent manner…. Anything less will be seen as a stealth attempt by the Commission to circumvent U.S. securities laws and the fundamental rights of shareholders.[36]
Today we fail to heed this warning. Instead of soliciting public comment as to the practical, economic and legal effects of our actions, we cover our ears and simply do the thing that we want to do. We could have engaged in rulemaking. We could have considered building in guardrails to protect investors and market integrity. And we could have actually addressed complex substantive questions about the nexus between our policy statement and state law,[37] and the fiduciary duties corporate managers owe to investors.[38] But, full speed ahead—no matter the consequences. Through today’s policy statement, we not only silence investors in court, we also silence their ability to be heard by the Commission, the body specifically tasked with protecting their interests. This is a double slight, at best. A due process violation at worst.
This also begs the question—what other consequential actions does the Commission think it can adopt without soliciting public comment? The public should be concerned because today might mark the beginning of an era in which the Commissions acts first and asks questions only later (if at all).[39]
***
Doubling Down on Disenfranchisement
It would be bad enough if all the Commission did today was issue the mandatory arbitration policy statement. But we simultaneously propose amendments to our Rules of Practice in order to eviscerate the procedural rights of those who might choose to challenge an issuer’s inclusion of mandatory arbitration.
Currently, when either a Commissioner or a third-party requests Commission review of almost any staff action made pursuant to delegated authority, those actions are automatically stayed pending Commission consideration. This consideration is an important backstop to delegated staff action. That all goes away with today’s amendments. From now on, the automatic stay, which provides the mechanism for meaningful Commission review of registration statements before an offering hits the market, vanishes. Accordingly, I also cannot support today’s amendments to the Commission’s Rules of Practice.
First, creating a new exception—only the third one and the first in 30 years—to the automatic-stay provisions amplifies the tension between Rule 431 of our Rules of Practice and Section 4A of the Exchange Act.
Section 4A provides a statutory basis for the Commission to delegate its own authority to staff.[40] However, by statute, the Commission must review such delegated action if one Commissioner requests review.[41] Third parties may also petition the Commission for review of delegated actions.[42] The statute further specifies two (and only two) situations in which the delegated action “shall . . . be deemed the action of the Commission.”[43]
Despite these two narrow circumstances in which the statute deems delegated action to be Commission action, Rule 431 broadly states, “An action made pursuant to delegated authority shall have immediate effect and be deemed the action of the Commission.”[44] On its face, the expansiveness of the rule’s text directly conflicts with the statute. In our legal system, that is impermissible, and the statute wins.[45]
Historically, the automatic-stay provisions of Rule 431 eased that tension between the rule and Section 4A since decisions made pursuant to delegated authority were automatically stayed once review was requested, thus halting the immediate effect of any staff action.[46] But, by removing the pressure-release valve of the automatic-stay provisions, today’s amendments amplify the conflict between Rule 431 and Section 4A.[47] Thus, today’s amendments raise serious questions regarding whether Rule 431 violates the Exchange Act.[48]
Second, the Commission errs, yet again, by deciding to enact these amendments without the benefit of public comment. We assert that today’s amendments are not subject to the notice-and-comment requirements of the Administrative Procedure Act because they qualify for an exemption for “rules of agency organization, procedure, or practice.”[49] I am not convinced that this exemption applies here since after today’s amendments an investor’s right to Commission review will exist in name only. Seems to me, this is more than just internal agency procedure.[50]
Even if the amendments do qualify for the exemption to notice-and-comment rulemaking, we still should have solicited public comment. By my count, over the last 30 years the Commission has revised our Rules of Practice 17 times.[51] And, like today, we have often (though not always[52]) asserted that the revisions do not require notice-and-comment rulemaking.[53] The Commission nevertheless solicited public comment on revisions to the Rules of Practice in all but seven instances, and six of those seven involved amendments that were technical, ministerial, or related to other simultaneous amendments that themselves went through notice and comment.[54] And, again, today’s amendments are much more than technical or ministerial changes. Indeed, the only other time that the Commission carved out exceptions to the automatic stay, it did so after notice and comment.[55]
So why not ask for comments today when the weight of past Commission practice would dictate that we do so? Maybe the Commission views the amendments as controversial, is afraid of the comments it might receive, and is uncertain how it might effectively answer those comments. Maybe it is just in a hurry to stymie investors’ access to courts. Whatever the reason, the Commission’s rush to adopt this change without input from the public is perplexing and hard to square with my colleagues’ past calls for more robust public comment when the Commission issues rules.[56] The Commission’s decision to promulgate these consequential amendments without first hearing from the public is unsound.
Third, the amendments are bad policy. They cut off the ability for investors to obtain any meaningful Commission review of staff decisions to accelerate the effectiveness of registration statements. Once a registration statement is declared effective, issuers can offer and sell those securities.[57] Thus, without an automatic stay, the offers and sales might well be completed before the Commission can review staff actions. Unwinding those transactions after the fact would be much more difficult and disruptive than it would be under the current automatic-stay regime. In light of this, after today’s amendments, the opportunity for Commission review of staff acceleration of registration statements will exist merely as an illusion. Moreover, rather than providing issuers with more predictability, stripping away the automatic stay introduces more uncertainty and a greater possibility for disruption following Commission reversal of staff action than the current automatic-stay regime, which has been on the books for decades—seemingly without any complaint.[58]
As such, even if the amendments were not being so transparently paired with the Commission’s attempt to promote mandatory arbitration clauses, they would not merit inclusion in our rulebook. But these amendments are not travelling alone. The Commission is using them as a tool to further tilt the scales and accelerate the adoption of mandatory arbitration clauses by public companies. This will, correspondingly, supercharge our descent into a world where investors are unable to effectively vindicate the rights Congress promised them in our nation’s securities laws.
***
Today, the Commission has decided to hastily construct a new shortcut to its preferred policy destination. Investors will be distressed to discover that the only thing waiting to greet them at the end of their journey down this new path is a courthouse with its doors welded shut.
