By Douglas Gillison
WASHINGTON (Reuters) – A divided Securities and Exchange Commission on Wednesday handed a victory to companies that want to shield themselves from investor class action lawsuits, making it easier for firms seeking to go public to require that investors resolve claims of fraud or other false statements through arbitration rather than in court.
The commission voted 3-1 along party lines to reverse a long-standing but unwritten SEC policy in which the agency blocked the Wall Street debuts of companies that want to ban shareholder class action lawsuits in their charters and bylaws.
During President Donald Trump’s previous administration, the agency considered such a change but ultimately took no action.
“The commission is not a merit regulator that decides whether a company’s particular method of resolving disputes with its shareholders is good or bad,” SEC Chair Paul Atkins said at a public meeting.
Caroline Crenshaw, the commission’s lone remaining Democrat, lambasted the new policy, saying it would effectively deny many shareholders their rights while allowing companies to keep their alleged misdeeds in the shadows.
Corporate interest groups and Republicans have long complained about what they see as the frivolous filing of shareholder class action suits, and often advocate for the use of mandatory arbitration to reduce the amount of litigation.
Consumer advocates and plaintiffs lawyers say court action helps hold companies to account, gives small investors the chance to recover damages they otherwise couldn’t, and gives the public access to evidence and legal reasoning that helps build case law.
Ann Lipton, a former class action litigator now at the University of Colorado law school, said the change would be damaging to the public interest, noting law suits can expose corporate misconduct among other things.
“From a public policy perspective, this is horrific,” said Ann Lipton, a former class action litigator now at the University of Colorado law school, adding that law suits can expose corporate misconduct among other things. “It halts all development of the law and it halts all insight into what companies are really doing.”
The issue first gained prominence in 2012 when the SEC signaled it would oppose an IPO planned by the private equity fund Carlyle Group, which sought to require future shareholders to resolve disputes in arbitration.
Senator Elizabeth Warren, the top Democrat on the Senate Banking Committee, on Wednesday released a letter she wrote to the SEC expressing “deep concern” that the SEC was poised to undermine shareholder rights and the public interest.
In a separate matter on Wednesday, the SEC is also due to consider whether to extend for a second time the deadline for private investment funds to comply with Biden-era regulations requiring enhanced disclosures.
(Reporting by Douglas Gillison in Washington; Editing by Chizu Nomiyama and David Gregorio)
Comments