In October, the Trump administration weighed in when it recommended that the SEC consider letting companies and shareholders use arbitration to settle disputes. In a report, Treasury Secretary Steven Mnuchin and his counselor Craig Phillips said the change could be a way to “reduce costs of securities litigation for issuers in a way that protects investors’ rights and interests.”
Clayton hasn’t commented publicly on the matter since taking over as SEC chairman in May. Though he has taken several steps aimed at bolstering the attractiveness of going public.
Hugely Controversial
In June, he announced that the SEC would let all companies that are preparing to IPO file documents confidentially to the agency laying out the proposed structures of their share sales. The objective was to let companies work out any kinks without alerting the broader market to their plans to eventually sell shares. Previously, only small businesses could submit their IPO documents confidentially to the SEC.
Clayton also tapped William Hinman, a former Simpson Thacher partner based in Silicon Valley who also worked on Alibaba’s share sale, to lead the SEC unit that oversees corporate disclosures. Hinman’s division, which reviews the filings that companies must submit ahead of IPOs, would play a key role in deciding whether to allow firms to include mandatory arbitration clauses in their registration documents, one of the people said.
“The question is who is going to be the first company because they’re going to be the lightening rod of criticism,” said Hal Scott, a professor at Harvard Law School who has long argued that shareholder lawsuits should be reined in. “It would definitely be controversial, there’s no doubt about it. But, it’s something they should endure the controversy over because it’s worth it.”
Scott added that if the SEC allowed one company to prohibit lawsuits, a “landslide” of others would follow.
Heated Rhetoric
The issue has stoked heated rhetoric. The Council of Institutional Investors, a trade group whose members include state pension funds, warned in 2013 that forced arbitration represents “a potential threat to principles of sound corporate governance that balance the rights of shareowners against the responsibility of corporate managers to run the business.”
Meanwhile, the U.S. Chamber of Commerce, the nation’s biggest business lobby, has said that class-action lawsuits are devastating for the economy because they impose huge costs on companies. The chamber also contends that the main beneficiaries are plaintiff’s lawyers, with individual shareholders rarely pocketing much money at all. There are signs those arguments are making traction.
Last year, Republican lawmakers killed a regulation that would have restricted companies from including mandatory arbitration clauses in contracts for credit cards and other financial products.
In July, SEC Republican Commissioner Michael Piwowar, who served as acting chairman last year, signaled that the agency’s views on arbitration clauses could be changing.