What happened
- On 17 September 2025, the SEC voted 3-1 (along party lines) to reverse its longstanding informal policy that had blocked companies from including mandatory arbitration clauses in their charters or bylaws for shareholder claims under federal securities laws (such as fraud/misrepresentation). (Reuters)
- The change means that companies planning IPOs (and potentially existing public companies) can now include provisions which require investors to resolve claims through private arbitration rather than through class-action lawsuits in court. (GLI)
- Importantly, the policy change was made via a policy statement, not through the full formal rule-making process (which would have included public comment). (governance-intelligence.com)
- SEC Chair Paul Atkins argued the move restores “issuer flexibility” and reduces what the agency sees as unnecessary barriers to IPOs. (governance-intelligence.com)
- The dissenting Commissioner Caroline Crenshaw (the only Democratic commissioner on the panel) warned the change would undermine investor rights, reduce transparency and weaken the deterrent value of shareholder litigation. (Harvard Law Forum on Governance)
Pension Fund / Institutional Investor Reaction
- Institutional investors, including major pension funds, expressed strong concern. For example, in a letter to the SEC, California Public Employees’ Retirement System (CalPERS) said mandatory arbitration would “diminish the deterrent effect” of class actions. (Investing.com)
- Although the focus is mostly on US funds (e.g., CalPERS), this change is also of relevance to UK and global institutional investors (pension funds, asset owners) because it flags a shift in investor-rights and corporate governance regimes.
- The policy shift is seen by many funds as weakening investor protections, especially for smaller investors or pension plan members, because class actions allow aggregation of claims and sharing of litigation cost; arbitration tends to be individual, private, and may lack transparency. (Harvard Law Forum on Governance)
Why It Matters: Key Implications
For companies and IPOs
- Enables issuers to structure dispute resolution mechanisms that may reduce litigation risk from class-actions (which can be costly, attract settlement pressure, create precedent, and public scrutiny). (Skadden)
- Could make the US IPO market somewhat more attractive (in the view of proponents) by lowering potential legal exposure.
- But it also opens up state-law and enforceability issues — for example, corporate law in Delaware (where many companies are incorporated) might limit the enforceability of such clauses. (gunder.com)
For investors, pension funds, stewardship and governance
- Investor rights: The ability to join class action lawsuits has historically provided collective enforcement and acted as a deterrent for corporate misconduct. With arbitration forced, that enforcement mechanism may weaken. (Investing.com)
- Transparency & precedent: Court-based class actions produce opinions, public records, and precedent; arbitrations are private and may reduce public visibility of misconduct. (Harvard Law Forum on Governance)
- Pension fund stakes: Pension funds that invest in public companies (directly or via funds) care about governance and enforceability of shareholder rights — a shift away from collective litigation may reduce their leverage or ability to seek redress on behalf of members.
- Stewardship signals: Firms (including pension funds) increasingly consider environmental, social and governance (ESG) factors; limitations on rights might affect governance scores, proxy voting behaviour, shareholder activism. (Harvard Law Forum on Governance)
Global / UK relevance
- While the rule is US-centric (regarding the SEC and US public companies), global investors (including UK pension schemes) often hold US equities and monitor governance trends worldwide.
- The trend might influence how UK or other jurisdictions perceive shareholder rights, governance standards, and how institutional investors respond to companies with weaker shareholder protection.
- For UK pension funds concerned about global standards of corporate governance, this is a cautionary development they may reference in their stewardship policies.
Strategic Comments & Takeaways
- From a corporate governance perspective: this shift signals that the regulatory pendulum is moving toward issuer flexibility and away from collective investor rights. Pension funds and other large asset owners must reassess how they view rights enforcement, litigation risk, and stewardship levers.
- For pension funds / institutional investors, the key questions become:
- Do companies include arbitration clauses? If yes, how does that affect their risk profile, governance credentials, and attractiveness for long-term investors?
- How will this affect the ability of funds to aggregate and enforce claims on behalf of members? Are there alternative mechanisms (e.g., engagement, monitoring, activism) to substitute somewhat for legal enforcement?
- How will proxy advisers, rating agencies, and governance frameworks treat companies that adopt arbitration provisions? Some commentary suggests voting against or negative governance scores may apply. (Harvard Law Forum on Governance)
- From a risk management view for pension funds: If collective enforcement rights are weakened, then reliance on other mechanisms (monitoring, voting, governance engagement) becomes more important. Funds may need to reconsider portfolio risk, their exposure to companies with weak rights, and how they incorporate governance as part of fiduciary duty.
- From a regulation & stewardship viewpoint: This development might intensify the debate about the role of private litigation in investor protection versus alternative tools (regulation, enforcement by agencies, engagement). Pension funds might push for stronger stewardship frameworks, disclosure of arbitration clauses, and may demand greater transparency around companies’ dispute-resolution mechanisms.
- From a member/beneficiary perspective (for pension funds): The shift may matter because weaker enforcement rights could ultimately affect the integrity and value of investments held on behalf of pension scheme members. Pension trustees may need to ensure that their active governance/investor-rights policies remain robust in this changing environment.
- Here are case-studies and commentary showing how UK pension funds are responding to the Securities and Exchange Commission’s (SEC) recent U-turn on mandatory shareholder arbitration — including how they are reacting, what concerns they’ve raised, and what this means for investor rights and stewardship.
Case Studies
Case Study A: UK Pension Funds’ Reaction
- A recent article reports that UK pension funds are among investors to slam the SEC’s decision to permit mandatory arbitration clauses in IPOs and by-laws. (IPE)
- These funds view the policy change as weakening their ability to aggregate claims and enforce rights collectively. The article quotes concerns that:
“Investor groups and pension funds warned the SEC that class actions are a crucial deterrent against corporate fraud and misconduct.” (GLI)
- The UK funds’ response signals a shift: where previously they might rely on US class-action frameworks, now they see those tools potentially being diminished and have to rethink how they protect members’ interests across jurisdictions.
Case Study B: UK Pension Funds’ Litigation Role & Context
- A separate publication highlights how UK pension funds (including local government pension schemes) are increasingly using litigation as part of their stewardship toolkit — e.g., participating as lead plaintiffs in US securities litigation. (labaton.com)
- Examples given include: the Norfolk Pension Fund being lead plaintiff against Apple and the North East Scotland Pension Fund being lead plaintiff against Under Armour. (labaton.com)
- This background is important: UK pension funds have relied on the ability to use collective enforcement mechanisms and international litigation to protect value for their members. The SEC decision threatens to make that route more difficult in the US context.
Commentary & Key Insights
Here are some of the strategic observations and concerns expressed by pension funds and governance/legal commentators:
- Deterrence & enforcement risk
- The ability to bring class actions has been viewed as a deterrent against corporate misconduct. For example:
“Without the ability to join together and share the costs of litigation, many simply won’t sue at all.” (GLI)
- UK pension funds worry that if US issuers adopt arbitration clauses, misconduct might go less challenged — which in turn can harm long-term investor value for schemes with global exposure.
- The ability to bring class actions has been viewed as a deterrent against corporate misconduct. For example:
- Global investor rights divergence
- The decision by the SEC is seen as diverging from UK/EU norms of shareholder rights and collective redress. The legal commentary states:
“At precisely the time … the SEC’s reversal highlights a stark transatlantic divergence in approach. … In the UK listed companies … regulators … emphasise shareholder rights and transparency.” (GLI)
- For UK pension funds investing globally (including in US equities), this raises governance risk: companies in the US may now offer weaker recourse mechanisms.
- The decision by the SEC is seen as diverging from UK/EU norms of shareholder rights and collective redress. The legal commentary states:
- Stewardship and fiduciary duty implications
- Pension funds have a fiduciary duty to protect members’ interests. With enforcement tools potentially eroded, funds may need to emphasise engagement, voting, monitoring even more, rather than relying on litigation alone.
- A commentary piece on UK pension funds states that litigation is “increasingly being viewed as a legitimate and necessary tool to protect long-term value and investor rights.” (labaton.com)
- Thus: if litigation is made harder (via arbitration clauses), the burden on other tools of stewardship increases.
- Strategic responses & risk management
- Pension funds may now:
- Review their exposure to US-issuers and assess whether the presence of arbitration clauses affects their risk profile.
- Encourage greater disclosure by issuers about dispute-resolution mechanisms (e.g., whether arbitration is required).
- Increase their focus on corporate governance and rights provisions as part of their investment due diligence.
- From the investor advocacy angle:
- Investor groups have publicly criticised the policy change and may lobby for regulatory or legislative responses. (Law360)
- Pension funds may also coordinate globally: UK pension funds investing in US equities can join with US and global investor groups to monitor the effect of the policy change.
- Pension funds may now:
Why This Matters for UK Pension Funds
- Rights of redress: UK schemes invest internationally; if enforcement rights are weaker in major markets like the US, that may reduce their effective ability to recover losses or hold companies accountable.
- Governance risk: A shift away from collective litigation could reduce the deterrent effect of shareholder oversight, potentially increasing risk of governance failures for companies in portfolios.
- Stewardship burden: More emphasis will be needed on non-litigation tools (voting, engagement, escalation) which may require additional resources and expertise.
- Investor attraction: UK pension schemes may increasingly consider governance features (like dispute-resolution rights) when selecting equities or funds — meaning companies with weaker rights may become less attractive.
- Policy and regulatory terrain: The transatlantic divergence suggests UK policymakers and pension scheme trustees may need to review whether domestic regimes are sufficient or whether coordination with global investor rights frameworks is needed.
Summary
In short: UK pension funds are critical of the SEC’s U-turn on mandatory arbitration for shareholder disputes. Their case draws on (a) how they have used collective litigation as part of stewardship, (b) concerns about weaker deterrence and redress when arbitration replaces class actions, and (c) the implications for global investor rights and governance. The strategic takeaway is that pension funds must review their risk exposures, governance frameworks and stewardship tools in light of this shift.