The End of Private Securities Litigation? The SEC’s New Arbitration Policy and D&O Insurance Impacts

On September 17, 2025, the US Securities and Exchange Commission (SEC) issued a policy statement with potentially far-reaching consequences for corporate governance, securities litigation, and directors and officers (D&O) insurance.

In plain terms, the SEC announced that the presence of mandatory arbitration provisions in a company’s charter or bylaws will not prevent the agency from accelerating the effectiveness of a registration statement. This may sound technical, but it represents a meaningful shift.

For years, companies, investors, and governance experts have debated whether companies could direct shareholder disputes—including federal securities claims—into arbitration rather than court. The SEC had historically been reluctant to bless this approach, leaving companies uncertain about whether arbitration clauses could endanger the approval of their registration statements. The stakes are high when a company is looking to complete an initial public offering (IPO), so this uncertainty has caused companies to enter the public markets without a mandatory securities arbitration provision. There is also uncertainty whether such a provision would stand up in court.

With this new policy statement, the SEC has clarified that it won’t stand in the way so long as disclosures are clear, opening the door for companies to potentially free themselves from the specter of being sued for securities law violations in court, whether as a class action or otherwise.

But the SEC policy is not the end of the story.

State law, investor sentiment, and market practice will all shape whether arbitration becomes a fixture in public company governance—or remains more theoretical than practical.

Below, we explore the key questions for management teams and boards as they consider this development.

Q&A

1. What exactly did the SEC say?

The SEC’s September 17, 2025, policy statement makes one point clear: the agency will not refuse or delay the acceleration of a registration statement solely because a company’s charter or bylaws contain mandatory arbitration provisions. This applies even if the provisions extend to federal securities law claims.

Instead of policing arbitration clauses directly, the SEC will limit its role to ensuring that investors are adequately informed. Companies with these arbitration provisions will need to provide complete and adequate disclosure in their registration statements so that investors know, before purchasing securities, that they may be required to arbitrate disputes rather than pursue them in court.

This is a significant clarification by the SEC. For years, issuers worried that including arbitration clauses could slow or jeopardize their path to public markets. By narrowing its focus to disclosure, the SEC has shifted the responsibility back to companies, states, and the courts.

The big question now is whether companies will take the invitation and test the waters. At this point, it’s unclear whether the water is inviting or treacherous.

2. Why is this arbitration policy important?

For companies that plan on filing a registration statement with the SEC—for purposes of an IPO, secondary offering, or otherwise—clarity from the SEC matters. One of the biggest uncertainties was whether arbitration provisions could trigger regulatory delays or denials. That uncertainty is now gone. For now, companies can, at least from a federal securities law perspective, include mandatory arbitration clauses without worrying that the SEC will block their registration statement.

Mandatory arbitration for shareholder securities law grievances could drastically change the litigation profile of a company. Securities class actions are among the most expensive and time-consuming lawsuits that public companies face. Arbitration, by contrast, is often confidential and is typically characterized as faster and less costly. It also typically does not provide for a class mechanism. One can see why mandatory arbitration would be attractive to companies.

However, arbitration also shifts risk in ways that some argue limit investor protections. Individual arbitration can limit shareholders’ ability to band together, reducing the deterrent effect of litigation. Proxy advisory firms, like ISS and Glass Lewis, have historically made these provisions a focus of their governance reviews for this reason. Moreover, the provisions will also need to be analyzed under state and federal law. So, while the SEC may be providing a green light, companies will also want to consider market perception, governance optics, and legality before moving forward.

3. Does this mean shareholder class actions can be forced into arbitration?

In recent years, the US Supreme Court has handed down a series of rulings interpreting the Federal Arbitration Act (FAA) to provide a “liberal Federal policy favoring arbitration agreements” and has held that the FAA preempts certain state laws that would otherwise override mandatory arbitration provisions. In its policy statement, the SEC noted this jurisprudence before concluding that it is not within the agency’s purview to decide whether or not the FAA applies to mandatory securities law arbitration agreements. The SEC did, however, opine that—assuming the FAA does apply—the federal securities laws do not override the federal policy favoring arbitration agreements or preclude such arrangements.

Commissioner Caroline Crenshaw disagreed, however, writing in dissent: “[N]either the Supreme Court nor Congress has ever adjudged that the FAA requires enforcement of mandatory arbitration provisions tucked away in governance documents of public companies. And there are good reasons to believe that neither the FAA nor certain state laws would require enforcement of such provisions in the context of shareholder disputes.” Similarly, a 2023 article co-authored by former SEC Commissioner and prominent legal professor Joseph A. Grundfest concluded that state law bans on mandatory arbitration in securities cases are not preempted by the FAA.

Watch this space moving forward. Given the high stakes, it is reasonable to expect that at least some companies will be willing to adopt mandatory securities arbitration agreements and to be sued in federal court over the validity of such agreements. As the lower federal courts begin to weigh in on such cases, we will gradually get more information. In the normal course, however, cases take a long time to move through the federal court system, meaning that a conclusive answer on questions of federal law may not be forthcoming for some time.

4. Does state law allow companies to adopt mandatory arbitration agreements for securities claims?

In its policy statement, the SEC also discussed the potential impact of Section 115(c) of the Delaware General Corporations Law (DGCL), which provides: “[T]he certificate of incorporation or bylaws may require stockholders, when acting in their capacity as stockholders . . . to bring any or all such claims only in 1 or more prescribed forums or venues, if such claims relate to the business of the corporation, the conduct of its affairs, or the rights or powers of the corporation or its stockholders, directors or officers; provided that such requirement . . . allows a stockholder to bring such claims in at least 1 court in this State that has jurisdiction over such claims.” 

Section 115(c) can be read to prohibit Delaware corporations from establishing governing documents that send all federal securities claims straight to arbitration, without any ability to file an action in state or federal court. To the extent this is the correct reading of the DGCL, it represents another meaningful development in the ongoing recent competition between different state corporate law regimes. Texas and Nevada, aspirants in challenging Delaware’s dominance as the domicile of choice for sophisticated companies, may take a different approach to mandatory securities arbitration. If so, they will certainly seek to differentiate themselves on that basis.

5. Should late-stage private companies consider these provisions? 

Late-stage private companies eyeing an IPO may be tempted to adopt arbitration provisions now that the SEC has removed a key obstacle. While this may reduce litigation exposure once public, there are real risks.

First, it’s a truth universally acknowledged that no one wants to jeopardize what could otherwise be a successful IPO. For this reason, expect potential pushback from everyone, from your investment bankers to your attorneys. The concern is that, when it comes to an IPO, if you are explaining anything other than your business, you may already be losing.

Investor pushback is another possibility given the perception that mandatory arbitration tends to restrict shareholder rights. Convincing investors, particularly large institutional investors, that it is in their best interest to invest in companies with mandatory arbitration clauses should require quite a bit of effort. Until and unless it becomes a norm, first movers in adopting mandatory arbitration provisions could be seen as less desirable investments by some governance-focused money managers.

(To be fair, there is a real argument that investors should prefer rules that tamp down securities class action litigation. After all, companies use company cash—so really, investor cash—to do things like pay for D&O insurance as well as indemnify directors and officers for defense costs and settlements.)

Finally, as discussed above, state law considerations loom large. Delaware-incorporated companies, for example, are likely prohibited from adopting these provisions.

That said, for private companies incorporated in states not named Delaware, arbitration provisions may provide a degree of litigation risk management. The key is to balance long-term governance credibility against short-term litigation strategies.

One thing is clear: there is no doubt that mandatory arbitration provisions will be much easier to insert into the charter documents of a private company whose shareholder base is still largely in the hands of founders and venture capital or private equity investors. As the shareholder base grows, including as a result of going public, there will inevitably be more stakeholders with differing views of mandatory arbitration.

6. What does this mean for public company management teams and boards?

Management teams and boards would be wise to view this development not just through a legal lens, but also a governance one, as well as the lens of shareholder engagement.

While adopting arbitration provisions could reduce litigation risk and its attendant costs, it also raises questions about fairness, transparency, and investor protection. From a fiduciary duty perspective, boards will need to carefully consider whether arbitration provisions serve the best interests of the company’s shareholders.

The decision to adopt arbitration provisions will therefore require a multi-disciplinary review involving outside counsel, including corporate governance securities and litigation specialists, as well as experienced D&O insurance advisors. The opaqueness of the current situation and the high stakes will make it difficult to proceed without a comprehensive perspective.

Consider, too, whether some sort of special committee may be required, depending on the nuances of a company’s state of incorporation and the potential for unhappy shareholders to claim that directors and officers adopted mandatory arbitration provisions for the self-interested reason of avoiding personal liability.

Having said that, this may be a fairly easy charge to defeat given that, absent bankruptcy, corporations routinely indemnify directors and officers for defense costs and settlements of securities litigation. In other words, there is no conflict given that directors and officers do not actually pay for their own defense and settlement now.

Finally, this may be a place where a good investor relations strategy is worth its weight in gold. No board wants to go down this route and then be surprised by negative shareholder pushback—including no votes for board members at the annual shareholder meeting.

7. What are the potential implications for D&O insurance? 

The SEC’s policy statement introduces a new variable in claims modeling. If arbitration provisions gain traction and prove enforceable, the frequency and severity of securities litigation will likely decrease. This could, in theory, impact D&O insurance pricing, retention levels, and coverage.

What is not clear, however, is that the cost of D&O insurance will immediately go down.

First, consider the question of whether arbitration is really better, i.e., less costly for companies and by extension their shareholders, than securities class action litigation.

Many people who have never been through arbitration think so. But arbitration has its own quirks and costs. This could well be a case of the devil you may know.

Consider the recent experience of consumer-facing companies, some of whom have found themselves hoisted on their own petard by mandatory arbitration inserted in contracts. Mandatory arbitration in this context is used as a way to avoid class action litigation. The issue is that the respondent company has to pay filing fees on a per-claim basis. This is at the beginning of the process, before merits have been established.

Predictably, plaintiffs found a way to weaponize the situation. A good example is a food delivery service that found itself in the position of needing to pay a filing fee of $1,900 for each of 5,879 mandatory arbitration claims brought by its couriers. This upfront $11 million tab may well have been less than the cost to litigate and settle the claims on a class action basis. The company’s costs would have dropped even more if it were to win its case on a motion to dismiss.

On the other hand, it is not clear that federal securities claims are as amenable to mass arbitration strategies as consumer or employment claims.

How many claimants are part of a class in a typical securities class action suit? We have not seen data on this question. Anecdotally, however, we know that the number can be high. For example, court filings show that securities class action settlement of $809.5 million for In re Twitter Inc. Securities Litigation involved 114,846 claimants. The securities class action settlement in Purple Mountain Trust v. Wells Fargo & Company, et al. of $300 million involved 518,572 claims.

Also, consider what happens when it comes to settlements. While large settlements that sometimes accompany securities class action litigation can be burdensome for companies, there is at least a robust body of data that provides a level of predictability—and allows companies to manage balance sheet risk by carefully constructing a D&O insurance program. That data will not be available in the early days of mandatory arbitration for securities claims.

Of course, companies will want their D&O insurance to pick up the cost of defending against an action brought in arbitration. Given that this is new ground, however, expect D&O insurance carriers to be challenged when it comes to underwriting mandatory arbitration for securities claims. It is not at all clear that carriers will reduce premiums for companies with mandatory arbitration provisions for securities claims.

We should also expect that plaintiffs will challenge the adoption of arbitration provisions (see above). These challenges could lead to prolonged (and expensive) litigation battles over the enforceability of those provisions, even before addressing any underlying claims. If this happens, and a court finds that the arbitration provisions are not enforceable, the arbitration provisions would have actually increased the cost of defending the case.

On the other hand, if the courts deem these provisions to be enforceable, they may well have a chilling effect on securities litigation. Notwithstanding the cautionary story of the food delivery company (see above), mass arbitrations are likely more cumbersome and less lucrative for plaintiffs’ firms than traditional class action litigation.

Companies adopting arbitration provisions should expect insurers to ask more questions during underwriting and potentially adjust terms based on litigation trends. Before even getting to that point, ensure that Q&A #6 above is considered.

8. What’s next? 

The SEC’s policy statement won’t be the final word.

We should expect court challenges, especially when companies attempt to enforce arbitration provisions in the context of securities class actions.

At the same time, there will more than likely be a debate at the state level. Delaware’s restrictive stance is already a counterweight to the SEC’s policy statement. Unless Delaware amends its law, the tension between federal policy and state law will persist. Other states—looking at you Nevada and Texas—may seize this opportunity to attract incorporations by offering greater flexibility on arbitration.

Finally, governance stakeholders—proxy advisory firms, institutional investors, and shareholder activists—are likely to have strong opinions. Even if arbitration provisions prove legally viable, market resistance could limit adoption. As a result, companies should weigh not only legal enforceability but also reputational consequences before moving forward.

Key Takeaways

With the SEC’s new policy statement in play, it would be prudent for management teams and boards to keep the following takeaways in mind:

• The SEC’s policy statement on arbitration provisions is about disclosure, not endorsement. Companies can include arbitration provisions without fear of the SEC delaying the effectiveness of their registration statements. The one catch: complete and adequate disclosure of those provisions, if they are adopted, must be present. That said, the SEC made clear that they aren’t endorsing the adoption of these provisions. They say as much in the policy statement:
  
  “Nothing in this statement should be understood to express any views on the specific terms of an arbitration provision, or whether arbitration provisions are appropriate or optimal for issuers or investors.”
• State law is decisive. Delaware corporate law may blunt the impact of the SEC’s policy statement, while Nevada and Texas may emerge as more flexible alternatives.
• Litigation risk may change, but it will not disappear. Arbitration provisions may reduce exposure to securities class actions, but enforceability is untested and stakeholder pushback may be strong.
• Governance and perception. Even if legally permissible, arbitration provisions may trigger investor resistance and reputational scrutiny.
• D&O insurance markets will watch closely. The long-term impact on claims frequency and severity will ultimately shape how insurers price coverage for companies adopting arbitration provisions. For the time being, D&O insurance markets will likely take a “wait and see” approach.
• Engage with your advisors, including D&O insurance broker. Engagement with your advisors, including your outside counsel and experienced D&O insurance broker, will be critical when evaluating whether to adopt arbitration provisions. As an example, an experienced D&O insurance broker will be able to help the company anticipate the types of questions that insurers may raise if the company plans to adopt arbitration provisions and help to ensure coverage remains aligned with your risk profile.

Parting Thoughts

The SEC has opened the door to arbitration provisions. The decision now lies with management teams, boards, their advisors—and the courts. They must weigh litigation strategy against governance credibility, investor trust, and state law realities. In the meantime, many, including the D&O insurance market and securities litigators, will be watching closely.

DIsclaimer: The information contained herein is offered as general industry guidance regarding current market risks, available coverages, and provisions of current federal and state laws and regulations. It is intended for informational and discussion purposes only. This publication is not intended to offer financial, tax, legal or client-specific insurance or risk management advice. No attorney-client or broker-client relationship is or may be created by your receipt or use of this material or the information contained herein. We are not obligated to provide updates on the information contained herein, and we shall have no liability to you arising out of this publication. Woodruff Sawyer, a Gallagher Company, CA Lic. #0329598.