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SEC Commissioner Says Agency Lacks Ability to Prohibit Mandatory Arbitration

October 16, 2018

Speaking last month on whether the Securities and Exchange Commission (“SEC”) should allow public companies to restrict investors’ ability to seek grievances in a courtroom, commissioner Hester Peirce said the agency lacks the authority to ban companies from requiring shareholder disputes be decided via arbitration. Peirce noted that the Federal Arbitration Act prevents the SEC from overturning an arbitration clause that agrees with state law. She believes the matter is the responsibility of state regulators.

Peirce also said that if any states allow, companies should have the ability to decide whether arbitration is required. She acknowledged that arbitration could be more effective and faster for some companies, and that it may be a less expensive way to settle disputes.

Additionally, Peirce admitted to not understanding the SEC staff’s previous reason for not permitting U.S. companies’ registration statements to be effective if the charter has a mandatory arbitration clause. If the staff advises that the SEC prohibits another company from registering an offering due to a mandatory arbitration provision, she would want to know the legal basis for the recommendation and how the ban aligns with foreign companies that agree to resolve disputes via arbitration already trade on the exchanges.