Coalition of Consumer Protection Advocates Again Urges SEC’s Clayton: No IPO Arbitration or Class Action Waivers
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A 133-member coalition of national and state consumer and investor rights advocates has written to the SEC urging that it not permit arbitration or class action waivers of IPO disputes.

The group, consisting of “organizations [that] 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,” sent an August 21st letter to SEC chairman Jay Clayton, urging that the Commission not permit publicly-traded companies to mandate individual arbitration of shareholder disputes. Said the group: “Forcing defrauded investors to arbitrate their claims individually would effectively eliminate both the deterrent effect of class action shareholder lawsuits and the opportunity for these defrauded investors to recover their losses. That is because the issues in a typical case of financial fraud are too complex, and the costs of discovery and expert testimony are too high, for these claims to be dealt with effectively through individual arbitration.” The letter built on a 50-page Whitepaper, A SETTLED MATTER: Mandatory Shareholder Arbitration is Against the Law and the Public Interest, issued August 21st by the Consumer Federation of America. The Whitepaper was accompanied by a Press Release.

Trial Balloon

This issue has been percolating for a while now. Readers may remember our coverage of the Carlyle Group IPO in SAA 2012-07 (Feb. 15), when that private equity group attempted to incorporate a class action waiver and PDAA in its registration statement as it prepared to go public in 2012. Carlyle gave up after withering criticism that included jawboning from SEC staff. In October 2017, the Treasury Department issued a Report, A Financial System That Creates Economic Opportunities. Nestled on pages 34 and 205 of the massive Report, right after the discussion of class actions, is the following recommendation: “Treasury recommends that the states and the SEC continue to investigate the various means to reduce costs of securities litigation for issuers in a way that protects investors’ rights and interests, including allowing companies and shareholders to settle disputes through arbitration.” Then, we reported in SAA 2018-05 (Jan. 31) that, more than five years after strongly discouraging the use of predispute arbitration agreements for IPO shareholder disputes, the SEC appeared to be considering changing course.


Within weeks of the idea being floated, the Commission appeared to back away from it. We reported in SAA 2018-08 (Feb. 21) that Congressional testimony from Chairman Clayton indicated that the Chairman was not in a hurry to make the change. Specifically, during a February 6th Senate Banking Committee hearing on cryptocurrency, Mr. Clayton was asked about this topic by long-time arbitration critic Senator Elizabeth Warren (D-MA). During the three-minute exchange, starting around marker 1:08 of the hearing video, Chairman Clayton said he is “not anxious to see a change in this area” and also notes that the process toward change would be thorough and time-consuming. He added that, in terms of his priorities, “this is not an area that is on my list …” We later reported in SAA 2018-17 (May 2) that this position was reaffirmed in the Chairman’s April 24 letter to House Financial Services Committee member Carolyn B. Maloney (D-NY), who had written March 12 on behalf of all Democrat Committee members, expressing concerns about the proposal: “As a threshold matter, and recognizing the complexity and importance of this issue, I reiterate my personal view that any analysis of this issue or decisions by the Commission in the context of a registered IPO by a U.S. public company should be conducted in a measured and deliberative manner.” He added his belief that any rulemaking would be done by Commission action and not by delegated authority. And, we reported in SAA 2018-27 (Jul. 18), the Treasurers of California, Illinois, Iowa, Oregon, Pennsylvania and Rhode Island joined to write a July 2nd letter to Chairman Clayton, urging that the Commission not permit mandatory IPO arbitration or class action waivers.

(ed: *As we’ve opined before, we’re sensing a lack of enthusiasm by the Chairman. **The coalition’s latest letter is nearly identical to its May 1st letter to Mr. Clayton, adding some updates. ***Politico on August 3rd reported that new Republican Commissioner Hester Peirce said she “absolutely believes mandatory arbitration should be an option for companies. Companies like mandatory arbitration in part because they would prefer to settle disputes with shareholders without going to court. But investors do not want to give up that option.” ****What about broker-dealers, though? If the issuer and officers and directors were insulated from class actions by shareholders, the underwriters would become a primary target and FINRA's Customer Arbitration Code won't allow BD-underwriters to utilize class action waivers.) (SAC Ref. No. 2018-33-01)

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