On June 1, 2018, Colorado PERA sent a letter to Hon. Jay Clayton, Chair of the Securities and Exchange Commission (SEC), to express concern about a possible shift in policy away from opposing forced arbitration provisions in public companies’ governance documents.

Forced arbitration provisions would prevent shareholders from suing public companies by requiring investors to settle disputes through arbitration rather than litigation. Some public companies consider arbitration as a way to avoid costly legal disputes and bad publicity as well as discourage lawsuits that they consider frivolous. However, forced arbitration would cost shareholders, including public retirement plans and their members, in the loss of critical transparency and important protections against corporate fraud.

The issue of forced arbitration has been a matter of serious deliberation at the SEC over the past year and, if changed, would mark a considerable turn for the enforcement agency. In a letter to Congresswoman Carolyn Maloney (D-NY) sent earlier this year, Clayton wrote that he has not “formed a definitive view on whether or not mandatory arbitration for shareholder disputes is appropriate in the context of an [initial public offering] for a U.S. company.”

Allowing forced arbitration would be a serious change in longstanding SEC policy that has historically refused to accelerate the effective date of a company’s registration statement if it contained a mandatory arbitration provision. In doing so, the SEC has demonstrated a preference for maintaining the right to sue, which has long been considered a crucial shareholder protection against fraud and other securities violations.

As PERA General Counsel Adam Franklin notes, “Colorado PERA has long recognized the importance of securities litigation, and specifically securities class actions, due to the role it plays in creating a culture of accountability and deterring corporate fraud.”

Forced arbitration “is private and confidential, preventing investors and the public from having access,” Franklin continues. “In order to protect our investments and to deter future fraud it is imperative that investors retain our ability to bring suit in court against corporations under the federal securities laws.”

PERA has long been active in advocating for strong corporate governance policies and has recognized the importance of securities litigation and securities class action in creating a culture of accountability and deterring corporate fraud. Earlier this year, PERA Interim Executive Director Ron Baker joined the board of the Council of Institutional Investors (CII). CII supports strong governance standards at public companies and strong shareholder rights and includes membership of more than 125 public, union and corporate employee benefit plans, endowments and foundations.

PERA staff will continue to monitor the SEC’s position on forced arbitration provisions and we’ll update readers of PERA on the Issues if there are further developments about this issue.