Reports that the Securities and Exchange Commission was considering allowing companies that were undertaking IPOs to include mandatory arbitration provisions in their charters raised many concerns. While the inclusion of such provisions does not appear to be a priority for the Commission, the consideration has resulted in a series of letters between members of Congress and the Commission that are worth reading. The communications may not be as interesting as the Issa-Schapiro letters, but certainly present a good history lesson regarding the matter. In a March 12, 2018 letter to Chair Clayton, Congresswoman Carolyn Maloney and others outline the historic views of the Commission that forced arbitration of securities law claims is contrary to public policy and contrary to the Supreme Court’s view that such a provision would violate the anti-waiver provisions of Section 29(a) of the Securities Exchange Act. In a letter dated April 24, 2018, Chair Clayton responded to Representative Maloney and her Congressional colleagues. Chair Clayton’s letter includes a summary prepared by the Division of Corporation Finance regarding how it has addressed mandatory arbitration provisions to date. The summary notes that this issue arose in 2012 in the context of the Division’s review of an IPO filing wherein the company’s charter documents contained a mandatory arbitration provision. The Division was at the time unable to conclude that such a provision was consistent with the public interest and protection of investors and, therefore, the Division could not declare effective the registration statement if that provision was included in the charter documents. The Commission would have had to make a decision on the request for acceleration of the effectiveness of the registration statement. The Commission staff has noted that certain issuers conducting Regulation A offerings have included mandatory arbitration provisions in their charter documents; however, the Staff concluded that it did not have grounds to withhold qualification of the Regulation A offerings. Similarly, foreign companies with securities listed on U.S. securities exchanges have included mandatory arbitration provisions due to local law requirements. The summary concludes with the note that the Division would defer the acceleration of effectiveness of an IPO registration statement where the issuer’s charter documents include a mandatory arbitration provision and refer the matter to the Commission. On May 3, 2018, Senator Sherrod Brown and other members of the Senate wrote a letter to Chair Clayton noting their encouragement of the skepticism Chair Clayton expressed during his Congressional testimony regarding mandatory arbitration clauses but urged the Chair to clarify the Commission’s position and declare that it intends to maintain its view against mandatory arbitration.
