October 28, 2025
On September 17, 2025, the U.S. Securities and Exchange Commission (SEC) issued a “policy statement” endorsing the inclusion of forced arbitration provisions in initial public offering (IPO) registration statements.
Issued with just one week of public notice, with no opportunity to comment, and without any analysis of the impact of such a “policy” change on either investors or the public markets, the move reverses the Agency’s decades[1]long opposition to such clauses. Though touted by SEC Chairman Paul Atkins as part of his plan to “make IPOs great again,” this dramatic policy shift overlooks the significant costs that forced arbitration imposes not only on investors, but also on the companies it purports to benefit.
The harm to investors is clear. Forced arbitration strips them of the well-established right to pursue class-wide recovery in court. Without the class action mechanism, only the wealthiest shareholders will have the resources to bring claims, leaving retail investors without any recompense when companies engage in fraud. Further, because arbitration is confidential and non-public, the deterrent effect of such litigation will evaporate, likely leading to more fraud.
But smaller investors aren’t the only ones at risk. Fragmenting singular class actions into multiple individual arbitrations will also burden companies with duplicative claims from deep-pocketed, sophisticated investors. Litigating identical allegations across dozens, if not hundreds, of separate arbitrations will significantly inflate legal costs and risks by increasing the likelihood of adverse outcomes, compelling company officers and executives to be deposed in each separate arbitration, and driving up directors’ and officers’ insurance premiums. Companies will also lose key protections available under the Private Securities Litigation Reform Act (PSLRA) and the Federal Rules of Civil Procedure, such as heightened pleading standards and discovery stays during motions to dismiss. Moreover, early adopters of forced arbitration provisions will face an onslaught of litigation challenging the constitutionality and viability of such provisions under both federal and state law.
The structure of private arbitration adds further risk for both sets of stakeholders. Arbitrators are not bound by precedent, and decisions are not published, thereby depriving investors and companies alike of guidance on what conduct is permissible. And without a guaranteed right to appeal, parties have few avenues for recourse if an arbitrator issues a ruling untethered to law.
Both investors and issuers have recognized these risks. In recent years, shareholders and corporations alike have opposed adding forced arbitration clauses to corporate bylaws. In 2018, pharmaceuticals giant Johnson & Johnson sought an SEC no-action letter to exclude a shareholder proposal mandating arbitration for securities fraud claims. The SEC granted such relief, agreeing the provision would violate both federal law and New Jersey state law. More recently, 97.5% of Intuit shareholders— including all major asset managers—voted against a similar proposal.
Ultimately, forced arbitration undermines the integrity of U.S. public markets as a whole. These markets have long attracted investors by operating under a disclosure-based regime that provides material information and a path for redress in cases of fraud. If investors are unable to vindicate their rights, they will exit the market, eroding investor confidence and, in turn, company valuations.