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Arbitrating securities fraud cases: Balancing efficiency with investor rights
This article originally published in the Daily Journal. It is published here with permission. You can view the original article here.
The SEC now allows mandatory arbitration in IPOs, reshaping litigation risk for public issuers, raising governance and insurance questions, and making expert, well-structured arbitration crucial for fair, efficient resolution of securities disputes.
The U.S. Securities and Ex-change Commission’s September 2025 policy shift allowing companies to include mandatory arbitration clauses in their IPO registration statements seeks to redefine the litigation landscape for public issuers. For the first time in decades, the SEC will not block or delay a company’s reg-istration statement merely because it requires investors to arbitrate federal securities law claims. SEC Chair Paul Atkins framed this as a deregulatory move to “make IPOs great again,” arguing that public markets have been burdened by exces-sive litigation and compliance costs.
From policy reversal to practical uncertainty
This decision overturns the SEC’s long-standing practice — rooted in the view that mandatory arbitration somehow undermines the public interest and investors’ ability to vindicate federal rights. Under the new guidance, the SEC’s review now focuses solely on the adequacy of a company’s disclosures regarding arbitration, rather than on the propriety of the clause itself.
While the move provides regula-tory clarity, it stops short of endorse-ment. The SEC explicitly stated that “nothing in this statement should be understood to express any views on whether arbitration provisions are appropriate or optimal for investors.”
Legal and political reactions
The policy has polarized stakeholders. Senators Elizabeth Warren and Jack Reed warned that forcing investors into arbitration “would eliminate a critical tool for account-ability” and “hide misconduct behind closed doors.” Democratic Commis-sioner Caroline Crenshaw dissented, cautioning that the change “fails to address numerous legal and economic issues” and risks under-enforcement of securities laws. The public advocacy group Save our Sa-vings Coalition wrote: “the issues in a typical case of financial fraud are too complex, and the costs of discovery and expert testimony are too high, for these claims to be dealt with effectively through individual arbitration.”
Corporate advocates and some market participants, however, argue that arbitration can reduce abusive class actions and align with the Fed-eral Arbitration Act’s (FAA) preference for private dispute resolution.
Delaware’s restriction will be tested by upcoming IPOs
Despite the SEC’s new policy, Delaware law (for the time being) remains a major barrier. Section 115(c) of the Delaware General Corporation Law prohibits bylaws that force all securities claims into arbitration without allowing accessto at least one Delaware court. This effectively bars Delaware-incorporated companies, which re-present the majority of U.S. public issuers, from adopting mandatory arbitration clauses for federal securities claims.
As Delaware faces competition from Texas and Nevada, both of which are creating more permissive corporate regimes, a new “race to the bottom or top” in corporate governance may emerge. The ultimate resolution may depend on whether courts find that the FAA preempts state law restrictions — a question we predict will be tested by IPO filings by the end of October. The ultimate resolution will likely be decided by the Supreme Court, which has recently balanced similar issues in favor of the FAA.
Governance and insurance implications
Boards considering these provisions must weigh governance optics and D&O insurance impacts. While arbitration may reduce claim frequency, it introduces uncertainty for insurers and complex new underwriting considerations. Early adopters should expect heightened scrutiny from proxy advisors who have historically opposed such clauses as limiting shareholder rights.
Arbitration vs. Litigation: The practical trade-off
For companies, arbitration promises speed, confidentiality, and cost control, avoiding the massive costs and disruptions inherent in securities class actions. In reality, arbitration is not without issues:
Arbitration costs can be substan-tial, especially since issuers typically cover arbitrator and filing fees.
Limited appellate review means limited oversight and potential inconsistency in outcomes.
Limited transparency could fuel investor distrust, as arbitration pro-ceedings are private and do not create binding legal precedent.
Yet most of the potential drawbacks with arbitrating securities fraud cases can be easily addressed by requiring that the selected arbitrators are ex-perienced in securities litigation and by carefully crafting arbitration agree-ments with the proper procedural architecture.
The expertise of arbitrators is paramount to ensure that proceedings focus on dispositive legal and factual issues, with discovery confined to matters material to resolution. Such discipline minimizes procedural inefficiencies and aligns arbitration with the policy objectives of prompt and equitable adjudication. Former federal district court judges and seasoned securities liti-gators, who understand the jurisprudential evolution of securities litigation, are best at applying the substantive protections of the securities laws and managing cases efficiently.
Proper procedural architecture
Issuers might want to ensure that their arbitration provisions explicitly incorporate the provisions of the Pri-vate Securities Litigation Reform Act (PSLRA) to maintain established se-curities litigation best practices — such as elevated pleading standard for securities fraud claims and an automatic stay of all discovery un-less and until plaintiffs defeat a mo-tion to dismiss. At a minimum, they should designate arbitral institutions whose procedural rules expressly permit dispositive motions — such as motions to dismiss and other summary mechanisms.
Unfortunately, most legacy arbitration providers are poorly equipped to administer large-scale or “mass arbitration” claims. Legacy arbitra-tion systems were designed to address individualized disputes, and their recent attempts to adapt to mass claims through the creation of “batch” or “bellwether” procedures have proved problematic and unwieldly. These hybrid approaches, while innovative, have been criticized for inconsistency in outcomes and protracted timelines — sometimes extending resolution of thousands of claims to well over a decade.
To overcome the deficiencies of legacy arbitration, a more thoughtful model that enables individualized arbitrations to proceed based on binding decisions that are common to all claimants. Under this framework, inspired by federal MDL, an arbitral panel with demonstrated expertise in securities law would render binding determinations on common issues of fact, law and damages applicable to all claimants. Subsequent individualized adjudications — limited to individual issues (liability or quantum) — could then be arbitrated efficiently, often through the submission of standardized claims forms. The foregoing process can be completed in less than a year.
Key takeaway — expertise is paramount.
The emphasis of the SEC’s policy statement is on the adequacy of the arbitration remedy, and therefore the enforceability of an arbitration pro-vision hinges on the quality of the arbitration remedy provided. Hence, it is vital that any arbitration process be provided by arbitrators with de-monstrated expertise in securities litigation who adhere to a process and rules that are fair and equitable to all participants.
Despite differing opinions on the wisdom of arbitrating securities claims, how arbitration is implemented — not whether it exists — will determine whether arbitration fulfills its promise as a streamlined, fair and expert-driven process for prompt resolution of securities disputes.
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