Pomerantz LLP

Protecting Shareholder Rights: Forcing Away Forced Arbitration Clauses


Pomerantz is the oldest law firm in the world dedicated to representing defrauded shareholders. When it came to our attention that the United States Securities and Exchange Commission (the “SEC”) hinted that it might consider allowing companies to include mandatory arbitration clauses in their bylaws, Pomerantz acted quickly to express its concern that such clauses could eviscerate a sharehold­er’s ability to hold to account a corporate wrongdoer.


Banks, credit card issuers and other companies, preferring to settle disputes with shareholders without going to court over class action lawsuits, often insert mandatory arbitra­tion/class action waiver provisions in the fine print of their service agreements. But for investors, a bar on securities class actions would eliminate the ability of all but the largest shareholders to seek compensation from compa­nies who have violated U.S. securities laws.

For decades, it has been the policy of the SEC not to ac­celerate any new securities registrations for companies that contained a class action waiver provision, as such waivers run counter to the SEC’s mission to enforce the federal securities laws. In 2012, the Carlyle Group’s Initial Public Offering registration was delayed because it con­tained such a waiver bylaw. Ultimately, under pressure to complete its offering, the Carlyle Group scrapped the offensive waiver. Since then, no public company has at­tempted to include such a waiver bylaw in its registration statement, preserving the right of defrauded investors to participate in securities class actions.

Then last year, a Consumer Financial Protection Bureau rule banning mandatory arbitration was overturned by the Republican-controlled Congress, under the Congres­sional Review Act. President Donald Trump signed the legislation, H.J. Res. 111 (115).

Adding concern is a recent push by the U.S. Chamber of Commerce and other affiliated groups to allow forced arbitration clauses. At a Heritage Foundation conference in July 2017, then Republican SEC Commissioner Michael Piwowar openly encouraged corporations to file registration statements containing class action waiver bylaws. In October 2017, the U.S. Treasury Department issued a position paper whereby it encouraged the SEC to change its policy regarding class action waivers. A few months ago, Republican Commissioner Hester Peirce answered “absolutely” to the question as to whether she believed such bylaws should be allowed.

The position today is that unless the cur­rent Chairman of the SEC, Jay Clayton, is convinced to maintain the status quo, the SEC can and will easily change its policy to allow class action waiver bylaws, which would doom investors’ rights to hold corporate wrongdoers accountable via securities class actions in the U.S.

Hear Us Roar:

To express concerns over a potential shift in policy, Pomerantz organized a coalition of large institutional investors from around the globe to meet with SEC Chairman Jay Clayton in D.C. on October 24, 2018. The key focus of this meeting was to attempt to persuade Chairman Clayton against the recent push by the U.S. Treasury Depart­ment and the Republican Commissioner of the SEC to allow for forced arbitration/class action waiv­er bylaws which could seriously undermine the future of defrauded investors.

Wanting to make sure all bases were covered, and after meeting with Chairman Clayton, Pomerantz and the team of institutional investors then met with a number of both Republican and Democratic Senate staffers. The purpose of the meetings was to encourage them, in particular Republican Senators, to write to Chairman Clayton cautioning against a shift in policy that would impose forced arbitration bylaws on investors.

Our Voices Were Heard:

On November 13, 2018 – two weeks after the SEC meetings – ten Republican State Treasurers, in a letter co-authored by the State Financial Officers Foundation, urged the SEC to maintain their existing stance against forced arbitration. In the letter, the State Financial Officers Foundation, which represents mostly conservative-lean­ing state treasurers, auditors and controllers, expressed “concerns about recent news reports that the SEC may change its long-standing position and allow public companies to include forced arbitration clauses in their corporate governance documents.” The letter went on to say that: “Allowing public companies to impose a private system of arbitration on investors “will eliminate the ability of all but the largest shareholders to seek recompense from criminals.” Republican Treasurers signing the November 13 letter represent Arizona, Arkansas, Idaho, Indiana, Kentucky, Louisiana, Maine, Nevada, South Carolina and Washington State. It is a significant and unusual step to have ten Republican Treasurers publicly take a position contrary to two Republican SEC Commissioners and the Treasury Department.

Pomerantz has been credited by the American Association for Justice for our dedication to this effort.

Jeremy Lieberman, Pomerantz’s Co-Managing Partner, said of the firm’s efforts on this matter: “Bringing a coalition of large institutional investors from around the globe to ex­press our concern to Chairman Clayton is an important step to ensuring the continued viability of shareholder litigation for institutional and retail investors. While we be­lieve that Chairman Clayton was receptive to our position, it is critical to continue a full court press to ensure that both Congress and policy makers understand the significance of this issue to the investor community.”

Looking Ahead:

Democrats remain concerned about mandatory arbitration and the issue is likely to get renewed attention when the party takes control of the House in January.

Rep. Carolyn Maloney of New York, currently the Dem­ocratic head of the House panel that oversees the SEC, said in April that “allowing companies to use forced arbi­tration clauses would devastate investor confidence in our markets.”

While the Republican letter to the SEC is a strong step for­ward, the institutional investor community should remain concerned about any SEC shift in policy. Pomerantz will continue to work proactively with the institutional investor community to prevent a policy change that would harm institutional investors.