No Action Relief Prompts Clarification from SEC Chair on Mandatory Arbitration
In a novel sequence of events, SEC Chair Jay Clayton issued a statement on February 11, 2019 expressing the Commission’s non-view on mandatory shareholder arbitration provisions implemented by publicly-listed companies. The statement was released in conjunction with a no-action letter from Corp Fin staff issued on the same day concurring with the exclusion of a proposal seeking adoption of mandatory arbitration of shareholder claims arising under the federal securities laws.
In the Rule 14a-8 no-action letter request, the company argued that the proposal, if implemented, would result in a violation of both federal and state law in a manner that would permit exclusion of the proposal under Rule 14a-8(i)(2). The staff’s response was carefully drafted to note that the staff granted relief solely on the issuer’s argument that the proposal would violate New Jersey state law and expressed no view on the propriety of mandatory arbitration clauses under federal law. The Chairman’s corresponding statement also highlighted that the basis for the staff’s response was state law-specific and repeatedly indicated that the Commission’s policy on mandatory shareholder arbitration would need to be carefully considered by the Commission (not SEC staff) and that the staff’s no-action letter response is not binding on the Commission or other parties.
Both the staff’s response and Chairman’s statement also emphasized that the staff was strongly persuaded by the inclusion of the opinion of the Attorney General of State of New Jersey that the proposal, if adopted, would cause the company to violate state law. This, in and of itself, is a unique occurrence under Rule 14a-8, where requests for relief on the (i)(2) “improper under the law” basis often include inconclusive (and sometimes dueling) legal opinions. The authoritative nature of an opinion from the “the state’s chief legal officer” appears to have been a decisive factor in the staff’s determination.
The Commission and Division of Corporation Finance have historically been hesitant to express an official opinion on whether mandatory arbitration clauses would be improper under federal law. The staff’s response and the Chairman’s statement do not provide any additional insight on this point. As such, the staff’s no-action letter, as further clarified by the Chairman’s statement, should be viewed with a narrow lens. The Commission’s views on mandatory arbitration remain an open question that will no doubt continue to be tested in the context of requests for no-action relief under Rule 14a-8 and filing reviews notwithstanding any future “measured and deliberative” action from the body of the Commission.
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