A Major Shift: SEC Reverses Its Stance on Mandatory Arbitration Provisions

On September 17, 2025, the U.S. Securities and Exchange Commission (SEC) took a pivotal step by approving a Policy Statement that alters its longstanding position on mandatory arbitration clauses in corporate governing documents. In effect, the SEC will no longer treat the mere presence of such provisions as a bar to accelerating the effectiveness of registration statements. This marks a reversal of what has been, for many years, an unwritten but firm practice of disfavoring mandatory arbitration in registered offerings.

To support this change, the SEC also adopted technical amendments to Rule 431 of its Rules of Practice, aimed at reducing disruption in capital raising processes in the event that the effectiveness or qualification of a registered or Regulation A offering is challenged.

What Is a Mandatory Arbitration Provision?

A mandatory arbitration provision generally requires that disputes between investors and the issuer (or its directors/officers) be resolved through arbitration, rather than in court. Such provisions often go further, forbidding class actions, restricting appeals, or placing limitations on discovery or relief. In the securities context, these clauses may require investors to waive their right to sue under federal securities laws in court and instead submit claims to private arbitration.

Before this change, the SEC (through its staff) took the position that it would decline to accelerate or “green-light” registration statements for some issuers if their charters or bylaws included mandatory arbitration clauses affecting investor rights under federal securities laws. The rationale was that such clauses might conflict with investor protection principles or anti-waiver provisions embedded in the securities statutes.

Why the Change Matters (and What Is Driving It)

This shift is significant for several reasons:

1. Regulatory posture reversal
   The SEC’s prior informal practice created de facto pressure on issuers to avoid arbitration clauses in their governance documents if they intended to go public. With this reversal, that pressure may ease.

1. Alignment with federal arbitration law
   The SEC’s Policy Statement rests in part on evolving Supreme Court precedent interpreting the Federal Arbitration Act (FAA). Over time, courts have increasingly held that arbitration agreements should generally be enforced, even in the context of securities claims. The SEC now takes the view that the securities statutes do not override the FAA’s policy favoring enforceability of arbitration provisions.
2. Disclosure becomes central
   Under the new policy, the staff will not treat mandatory arbitration provisions per se as a disqualifying factor. Instead, it will scrutinize how those provisions are disclosed in registration statements. The issuer must include clear discussion of the provisions, associated risks, enforceability uncertainty, and their potential impact on investors. The adequacy of disclosure will thus become a battleground.
3. Practical capital markets implications
   While some companies may adopt such provisions, many may remain cautious. Investors and institutional buyers are wary of limiting access to court or class mechanisms. The real test is whether issuers will test the new waters, or avoid potential reputational backlash.

Legal and Structural Constraints on Enforceability

Although the SEC’s policy shift is meaningful, it is not a carte blanche allowing mandatory arbitration everywhere. Whether an arbitration clause is enforceable requires careful analysis under both federal and state law.

• Federal level: The FAA generally mandates the enforcement of arbitration agreements, unless a specific statute clearly prohibits waivers of judicial remedies. The SEC’s Policy Statement holds that, in the context of issuer-investor arbitration clauses, federal securities law does not override the FAA.
• State law and corporate law variations: Governing law of a corporation (often Delaware) may impose limits on charter or bylaw provisions. Notably, Delaware’s General Corporation Law contains amendments that can prohibit provisions that deny access to courts for securities claims. Thus, inclusion of arbitration clauses in corporate governance documents must be assessed under applicable state corporate law standards and public policy constraints.

In short: even if the SEC will not withhold acceleration for a registration statement, an arbitration clause may still be subject to legal challenge on other grounds.

Changes to Rule 431: Mitigating Disruptions

A companion change to Rule 431 aims to reduce procedural disruptions in offerings if the SEC (or staff) reviews or challenges the effectiveness or qualification of a registration or Regulation A statement. Under prior practice, review by the full Commission could trigger an automatic stay on delegated staff actions, which in turn could interrupt or delay offerings already in motion. The amendments carve out exceptions to the automatic stay in several contexts, promoting certainty in capital markets.

What Issuers and Investors Should Consider Now

• Issuers planning IPOs or registered offerings
  Issuers contemplating the adoption of mandatory arbitration provisions must be strategic. If included, the registration statement must present robust and clear disclosure about the clause: how claims will be handled, associated risks, the enforceability question, and potential investor consequences. If the disclosure is deficient, the staff may delay or decline acceleration on that basis.
• Investors and litigation counsel
  For investors or class counsel, the change underscores that challenges to arbitration clauses may shift from relying on SEC policy to deeper legal arguments under state law or equitable doctrines. The enforceability issue may become a more frequent battleground in arbitration-related motions to compel or in dismissal challenges.
• Negotiation leverage and market signaling
  Even though arbitration clauses may become more viable, issuers may hesitate to adopt them if investors push back or view them as unfavorable. Market demand, investor sentiment, and underwriter pressure could continue to constrain broad adoption.
• Disclosure as a fulcrum
  Given that disclosure will be key under the new paradigm, issuers should consult securities counsel early to craft a narrative addressing investor rights, risk factors, and uncertainties around enforceability. The SEC staff will examine the “facts and circumstances” of each issuer’s disclosures.

Potential Risks and Criticisms

• Investor protection concerns
  Critics argue that arbitration—particularly with limitations on appeals, class actions, or discovery—may curtail investor rights and yield less favorable remedies compared to court litigation. For smaller investors especially, limited recourse in arbitration could reduce incentives to pursue meritorious claims.
• Uncertainty over enforceability
  Because state law variances remain, there may be challenges in courts (or arbitrators) over whether a given arbitration clause is enforceable. The transition period could spawn litigation over the “test cases” that define boundaries.
• Reputational and market backlash
  Issuers attempting to include such clauses may face scrutiny from institutional investors, proxy advisors, or securities analysts. The question of fairness may influence investor demand or valuations.

Conclusions

The SEC’s reversal of its de facto prohibition on mandatory arbitration provisions marks a notable shift in securities regulation. Under the new Policy Statement and Rule 431 amendments, issuers will no longer face automatic disfavor simply for including arbitration clauses. Instead, the emphasis moves to disclosure, enforceability, and negotiation dynamics in the capital markets.

That said, this change does not eliminate legal risk. Whether a provision is enforceable will depend on federal arbitration law, state corporate law, and the quality of disclosure. For investors and issuer counsel alike, the coming months will likely bring new litigation and clarifications defining the boundaries.

Torres & Zheng at Law, P.C., regularly advises clients on IPOs, de-SPACs, and M&A transactions. If you would like us to assist with your transaction, please contact our team.

Contact Person: Nick L. Torres, Esq. and Zhiqi Zheng, Esq.