Investor Coalition Says SEC Support for Forced Arbitration ‘Threatens’ Markets

A host of institutional investors and pension funds published a letter rebuking the Securities and Exchange Commission’s controversial policy allowing companies to compel shareholders into private arbitration, a move institutional investors say will erode transparency, limit accountability and jeopardize the integrity of U.S. capital markets.

In mandatory arbitration, parties agree to resolve their disputes outside of court via a third-party arbitrator. The arbitrator hears arguments from both sides and makes a determination that the parties must follow.

Under the policy, announced on September 19, the agency confirmed it will no longer consider the presence of mandatory arbitration clauses as a barrier to processing registration statements for companies going public.

According to the SEC, its decision stems from recent Supreme Court precedent affirming the primacy of the Federal Arbitration Act over other statutes, noting that nothing in the text of federal securities laws expresses intent to exempt investor claims from arbitration requirements.

The change reversed decades of SEC policy discouraging or disallowing such provisions, which had effectively protected investors’ rights to pursue class action litigation in court.

Investor Coalition Responds: ‘Radical Departure From Precedent’

More than 60 organizations, including  public pension funds from the U.S., Canada and the U.K. representing more than $8 trillion in assets, sent a joint letter to SEC Chairman Paul Atkins on November 3, demanding that the agency reverse course immediately.

Signatories included major state and city pension systems and their operators, among them the New York State Common Retirement Fund, the office of the Illinois state treasurer and the Maryland State Retirement and Pension System in the U.S., as well as global funds such as the Universities Superannuation Scheme and Nest Corp. in the U.K. and Ontario’s University Pension Plan.

The letter accused the SEC of acting unilaterally without public consultation and warned that the decision “will destabilize confidence in U.S. markets” by insulating corporations from public accountability. The letter further argued that forcing shareholder disputes into arbitration will multiply costs, inconvenience corporate executives and ultimately discourage investment and reduce corporate value.

Investor advocates argue that the SEC’s move could drastically reduce public accountability. Because arbitration is a private action, arbitrators are not bound by legal precedent, and rulings are not published. If disputes are decided in arbitration, it would strip away transparency and deterrence, according to the joint letter.

“Public accountability, transparency, and the vindication of rights based on the consistent (and known) application of law are pillars of our legal system,” the letter stated, warning that their erosion “threatens the value and security of U.S. capital markets.”

Further Opposition

SEC Commissioner Caroline Crenshaw, the only Democrat of the four commissioners on the five-person commission and who opposed the rule change, noted that $3.7 billion was recovered through securities class actions in 2024, compared with just $345 million from SEC enforcement actions.

Other major groups—including the California Public Employees’ Retirement System, the Council of Institutional Investors and the International Corporate Governance Network—have issued separate letters and statements denouncing the SEC’s action.