Paul Hodgson: Arbitration only: SEC and Clayton in non-denial denial

During a meeting of the Senate Committee on Banking about virtual currencies, after about an hour of testimony from Securities and Exchange Committee (SEC) Chair Jay Clayton and Commodity Futures Trading Commission (CFTC) Chair Christopher Giancarlo, Senator Elizabeth Warren hijacked proceedings to ask about rumours that the SEC was going to allow companies to IPO with arbitration-only clauses, effectively shielding them from shareholder class action lawsuits. What does that have to do with bitcoin? Nothing, but that’s never stopped Senator Warren. “I just want to get a straight yes or no answer from you on this,” she said. Of course, she got nothing of the kind. Clayton responded by saying: “I think you know that I can’t prejudge an issue that may come before the SEC. I can’t dictate whether this issue comes before us or not, because of the way it has come before the SEC in the past. But I’m not anxious to see a change in this area.” Warren responded by saying: “Okay, so I’m reading tea leaves here.” Which prompted Clayton to add: “If this issue came up before the agency it would take a long time for this to be decided because it would be the subject of a great deal of debate. In terms of where we can do better, this is not an area that’s on my list of where we can do better.” It’s a non-denial denial. Warren replied with: “I’m gonna let you get away with that,” and then moved on to another issue, also nothing to do with bitcoin.
In a speech in New York, new Commissioner Robert Jackson indicated that he would be strongly opposed to allowing IPOs with arbitration-only clauses, taking up the opposition position of Commissioner Michael Piwowar, who first aired the issue saying “come and talk to us”.
So, how does the issue come up before the agency, apart from being thrown into the ring by Commissioner Piwowar? It comes up before the SEC when a company asks for it. And there’s the danger: since Clayton has the deciding vote – something that Senator Warren was very clear about in her questioning – he could just ask staff to allow it ‘in this instance’.The only example we are aware of so far was a limited offering from hedge fund Carlysle. And it was denied. I spoke to Phil Brown of Intelligize, a web-based compliance and research platform, who noted that when Piwowar first brought up the issue, he wasn’t necessarily talking about a change to the SEC’s policy, he was just saying that they would consider it; they’re not going to change it for everybody, but they would consider it for certain companies. I asked Brown what he thought the likelihood was of another company seeking a listing that includes an arbitration only-clause. He replied: “Somebody’s going to try it again.” Brown searched out where the SEC had made its decision about Carlysle, which he found in a discussion that was inserted in the prospectus.
The discussion notes the mandatory individual arbitration provision, saying that “in a phone call on February 1, 2012, we advised counsel that the Division of Corporation Finance does not anticipate that it will exercise its delegated authority to accelerate the effective date of your registration statement if your limited partnership agreement includes such a provision….” It does not say that it would deny the registration statement if it included the provision, it says it would deny the acceleration. Carlysle did eventually remove the provision. Perhaps it was in a hurry.
So, yes, we have different commissioners now, and we have a commission controlled by a Trump appointee, but in theory everybody else in the SEC is basically the same, the same set of securities lawyers. On the other hand, we have already seen a shift in the attitude of the SEC towards companies filing no action letters, in particular in the AES case, and Staff Legal Bulletin 14i also signalled a shift. So, since there has been change within the SEC there’s no saying that were somebody to bring forward an IPO that had an arbitration-only clause in it that the SEC wouldn’t act differently from how it did with Carlysle.