Given the extreme swing in the regulatory environment, investors cannot afford to sit on their hands. They must take decisive action to preserve their critical access to the courts. The SEC might act quickly, and investors need to be highly proactive and engaged to resist any regulatory blessing of forced arbitration. The engagement should occur on multiple levels:
1. Investors should directly advocate their positions to lawmakers and regulators. Such advocacy works. In 2015, prominent institutional investors fought back and won a legislative reversal of a Delaware Supreme Court ruling that appeared to endorse one-way fee-shifting bylaws designed to discourage shareholder litigation. The investment community should proactively coordinate its engagement with Congress and the SEC on the importance of keeping the courthouse doors open to investors.
2. Investors should mount a grass-roots campaign that draws upon both shareholder advocacy groups and direct engagement with corporations, using their investment dollars to send the message that they will not surrender their right to the courthouse. This strategy has recently reaped huge benefits in other high-profile campaigns. To address global warming, for example, more than 225 determined institutional investors with more than $26 trillion in assets are directly engaging with the world's largest carbon emitters, and already have persuaded Exxon Mobil Corp., ConocoPhillips Co. and Royal Dutch Shell PLC to develop business plans that better address climate change. Similar grass-roots campaigns and direct engagement with companies regarding basic court access is necessary now.
3. Investors should "vote with their assets." Earlier this year, pressure from the institutional investor community and proxy advisory firms led the top four index fund companies — Standard & Poor's, Dow Jones, MSCI and FTSE Russell — to restrict from their flagship indexes companies that employ multiclass stock structures aimed at entrenching insiders and disenfranchising public investors. The investment community can send a similarly strong message by refusing to invest in companies that seek forced arbitration and class-action bans and by petitioning index providers to exclude those companies from their indexes.
Investors have achieved immense benefits by enforcing the securities laws in public courthouses. Now, a dramatic shift in priorities under the Trump administration threatens to block investors' access to the courts, effectively strip investors of critical protections and foster a crisis of public confidence in our nation's capital markets. The need for decisive and coordinated action by the investment community is urgent. As new calls emerge to cram investors into individual, closed-door arbitration, the investment community must again make its voice heard to preserve its access to the courts.