Investor Protection

A Settled Matter: Mandatory Shareholder Arbitration Is Against the Law and the Public Interest

The first section of this paper provides background information on investors’ right to redress under federal securities laws, on mandatory arbitration generally, and on the Securities and Exchange Commission’s (SEC) response to past attempts by issuers to adopt mandatory shareholder arbitration provisions. The second section of the paper argues that mandatory shareholder arbitration is contrary to the law because it violates the anti-waiver provisions of the federal securities laws and is not compelled by the Federal Arbitration Act (FAA). The third section outlines the many reasons why public policy requires that investors have the ability to pursue private actions in court, the most prominent being the central role such lawsuits play not only in enabling defrauded investors to recover their losses, but also in deterring fraud and misconduct. Finally, the paper discusses a number of ways in which the issue could arise at the SEC, argues that any efforts to abandon the SEC’s long-held position on this issue must comply with both the federal securities laws and the Administrative Procedure Act, and raises additional issues that companies would face if mandatory shareholder arbitration were permitted.

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