The Securities and Exchange Commission’s Head of Corporate Finance poured cold water on a January Bloomberg article which suggested that the SEC was laying the groundwork to force defrauded investors into arbitration with publicly traded companies.
Carolyn Maloney, a Democrat from New York, referred to a January article in Bloomberg which stated that the SEC was laying the groundwork to force arbitration between shareholders and companies.
“I was troubled when I read an article in Bloomberg in January that said the SEC staff was laying the groundwork for a change that would allow public companies to strip investors of their right to sue for securities fraud in court and instead force all of those claims into secret arbitration proceedings.”
The article in January noted in part, “In its determination to reverse a two-decade slump in U.S. stock listings, a regulator might offer companies an extreme incentive to go public: the ability to bar aggrieved shareholders from suing.
“The Securities and Exchange Commission in its long history has never allowed companies to sell shares in initial public offerings while also letting them ban investors from seeking big financial damages through class-action lawsuits. That’s because the agency has considered the right to sue a crucial shareholder protection against fraud and other securities violations.
“But as President Donald Trump’s pro-business agenda sweeps through Washington, the SEC is laying the groundwork for a possible policy shift, said three people familiar with the matter. The agency, according to two of the people, has privately signaled that it’s open to at least considering whether companies should be able to force investors to settle disputes through arbitration, an often closed-door process that can limit the bad publicity and high legal costs triggered by litigation.”
The Bloomberg article said the idea is in response to frivolous actions- which could quickly be dealt with in arbitration- brought by shareholders.
But when Maloney asked Hinman, whose division she noted would enforce this proposal, to comment, he all but shut down what Bloomberg had reported.
“This is not something we are not actively looking at- in terms of trying to bring something in and address this issue. It’s a complex issue. It involves our laws and regulations; it involves other federal laws, such as the federal arbitration act and state laws. As the Chairman’s (SEC Chairman Jay Clayton) correspondence (a letter Clayton sent to the committee) noted, if this issue were to come forward to my division in the context you mentioned, of an IPO of a US company, we would not be declaring effective at the division level.”
Hinman said such a decision would only be made by the entire SEC, and not merely his division.
According to the Bloomberg article, this purported proposal would allow new initial public offerings (IPOs) to write into their registration clauses which would force shareholders who believe they’ve been defrauded by the publicly traded company to settle their dispute not in court but with an arbitrator, often a process done in secret.
Kevin Kennedy, a securities lawyer, was quoted in that Bloomberg article saying: “It’d be a real sea change,” of such a provision.
But Hinman noted that the story was based on things said at a conference which the SEC did not even attend.
Forced arbitration is a controversial topic, not merely in securities.
Fox News Channel had forced arbitration clauses in their contracts, and as such, many of the women who accused men like Bill O’Reilly and Roger Ailes with sexual harassment were forced into exactly these sorts of secret arbitration hearings.
Last year, The Industry Spread covered a class action lawsuit brought by investors of FXCM, which was accused of withholding pertinent information, before its stock dropped dramatically.
That was a class action lawsuit, and it is exactly the sort of lawsuit which could not be brought if these sorts of forced arbitration agreements were enforced, Maloney noted, but as Hinman said, the SEC is not looking at this issue currently.
