SEC Commissioner Robert J. Jackson Jr. Speaks Out Against Mandatory Arbitration Clauses

The number of companies that have engaged in IPOs has steadily decreased in the last two decades.  In an effort to reverse this slump, the SEC has reportedly been considering a policy change that would allow companies with upcoming IPOs to require investors to settle their disputes through arbitration, as opposed to filing a lawsuit.  But not everyone is in favor of this proposed policy shift.  In a speech given by SEC Commissioner Robert J. Jackson Jr. on February 26, 2018, Commissioner Jackson expressed his concern about requiring shareholders to give up their day in court, stating that whatever the SEC decides, it should do so “only through a careful, public rulemaking process,” which would allow the public to comment on the proposed policy.

According to Commissioner Jackson, “policing corporate wrongdoing is a team effort – the government and investors working together to make sure insiders who betray investors are held to account.” The ability of shareholders to sue privately is particularly important today, given that the SEC’s budget is frozen, and fraud is still as rampant as ever.  Commissioner Jackson noted that “in 2016, roughly sixty cents of every dollar returned to investors in corporate-fraud cases came through private rather than SEC settlements.” He further noted that “after scandals at Worldcom, Enron, Tyco, Bank of America, and Global Crossing, investors recovered more than $19.4 billion in private lawsuits.  By contrast, the SEC obtained $1.75 billion.”

In discussing the benefits of lawsuits as opposed to arbitration, Commissioner Jackson stated that “the resolution of private disputes in public courts creates positive externalities. In other words, the public also benefits when private litigants use courts because a public hearing gives judges a chance to tell corporate insiders what the law expects of them. Holding wrongdoers to account tells the public that we take corporate fraud seriously—and sends a signal to insiders, the bar, and investors, that being unfaithful to investors doesn’t pay. Arbitration, on the other hand, is usually conducted in a closed-door proceeding, depriving investors of their chance to air their objections—and the rest of us the knowledge of what the law is.”  The text of Commissioner Jackson’s speech is available here.