Letter to the SEC Urges Protection of the Right to Bring Shareholder Lawsuits

133 state and national entities have written to SEC Chair Jay Clayton urging him to protect the right of shareholders to sue corporate management in court and not restrict them to binding arbitration. The full text of the letter is attached below.

Arbitration letter 08.21.18-Updated-SEC-Sign-on-Letter-Forced-Arbitration

An excerpt:

The 133 under-signed organizations work on behalf of middle income, working Americans, many of whom turn to our nation’s capital markets to save for retirement and other long-term goals. These investors are the primary, and often unknowing, beneficiaries of system that allows shareholders to band together to enforce securities law violations through private class action lawsuits. Even if they personally never bring a claim, these investors nevertheless benefit from the crucial role shareholder lawsuits play in deterring financial fraud and protecting the integrity of U.S. capital markets. We are writing on their behalf to urge you to ensure that the Securities and Exchange Commission (SEC), under your leadership, will not strip investors of these vital protections….

Shareholder class actions help to ensure that publicly held companies provide the accurate and reliable financial information on which our markets depend. Foreign investors hold more than $6.2 trillion in stock in U.S. corporations, in no small part because American markets have traditionally been particularly well policed compared with those in many other countries. The ability of shareholders to enforce their rights with the full protections of our legal system is crucial to investor confidence, both domestic and foreign.

We recognize that whether this issue comes before the Commission is outside your control. As you have previously indicated, if a company seeks to register an IPO with the Commission that includes a forced arbitration clause, the Commission will have to consider that request. We appreciate the assurance you provided in your April 24 letter to Rep. Carolyn Maloney that, should this occur, the Commission itself, rather than staff, would deal with the issue and would do so in “a measured and deliberative manner.”

However, this assurance, welcome as it is, falls short of what is needed to lay this issue to rest.

• Ideally, you would simply reaffirm the SEC’s longstanding position that forced
arbitration provisions that prevent investors from bringing or participating in class actions violate Section 29(A) of the Exchange Act, because arbitration in this context is insufficient to protect investor rights. Instead, your April 24 letter suggests that, since the Commission last decided the issue in the IPO context, “federal case law regarding mandatory arbitration continues to evolve.”
• Short of reaffirming past policy, you could issue a clear public statement pledging that the SEC will not change this policy without first going through a full and transparent review process that includes an opportunity for public comment on whether such a change ought to be adopted and an economic analysis of the likely impact on investor protection, market integrity, and the cost of capital. The promise of a “measured and deliberative” process fails to provide that assurance.

While your letter to Rep. Maloney sends a welcome message that any company challenging this policy should not expect a speedy resolution, taking either of these additional actions would do even more to dissuade companies who might otherwise consider challenging the policy.

Commissioner Hester Peirce’s recent public endorsement of forced arbitration clauses being added to companies’ charters heightens the urgent need for SEC leadership to affirm thatinvestors will retain these crucial rights. [Footnotes omitted]

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