Democratic lawmakers are urging the Securities and Exchange Commission (SEC) not to weaken investor protections by instituting forced arbitration and cutting off investors access to courts in fraud and other cases.
The new SEC proposal would limit investors’ ability to recover their losses by suing in court, even when the company has committed securities fraud. The lawmakers said the proposal is laying the groundwork for allowing companies to put forced arbitration clauses in their governance documents. The proposal would also prevent investors from banding together to pursue securities class action lawsuits and violate the anti-waiver provisions of the Federal securities laws, the lawmakers said.
In a letter to SEC Chairman Jay Clayton, Democratic members of the House Financial Services Committee, including Rep. Carolyn Maloney (D-NY), asked the SEC to reaffirm its position that forced arbitration provisions in the corporate governance documents of public companies harms the public interest and violates the anti-waiver provisions.
“We are writing regarding a recent report that the Securities and Exchange Commission (SEC) is ‘laying the groundwork’ for allowing public companies to include forced arbitration provisions in their corporate governance documents,” the Democratic members wrote. “We strongly oppose any effort to reverse the Commission’s longstanding position that such forced arbitration provisions violate Federal securities law. The Commission should continue to prohibit public companies from requiring shareholders to individually arbitrate their claims against the company, including Federal securities law claims, both as a matter of public policy and as a matter of law.”
They said forced arbitration of Federal securities claims would devastate investor confidence in the U.S. capital markets.
“Moreover, the Commission’s position has long been that forced arbitration of Federal securities claims should not be allowed as a matter of public policy. In 1990, the Commission’s then-Assistant General Counsel, Thomas L. Riesenberg, wrote that ‘it would be contrary to the public interest to require investors who want to participate in the nation’s equity markets to waive access to a judicial forum for vindication of federal or state law rights, where such a waiver is made through a corporate charter rather than through an individual investor’s decision,’” they wrote.
Finally, they said any examination of this issue should be transparent, where the public is fully informed and able to participate.
“Anything less will be seen as a stealth attempt by the Commission to circumvent U.S. securities laws and the fundamental rights of shareholders. As such, we would expect a swift and negative response from Congress and the public,” they added.