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Six state treasurers urge SEC against forced arbitration clauses

California State Treasurer John Chiang was among six state treasurers who asked SEC Chairman Jay Clayton to not allow public companies to dictate forced arbitration.

A coalition of six state treasurers wrote a letter to Securities and Exchange Commission Chairman Jay Clayton on Monday urging the agency not to change its policy and allow public companies to dictate forced arbitration to shareholders.

"An essential aspect of our obligation to prudently manage public funds is ensuring that investment managers entrusted with public funds make investment decisions with a full understanding of the potential for financial frauds and abuses on the part of the companies we invest in," the letter said. "As investors, we are interested in preserving the ability to redress diminished public funds through private shareholder litigation when violations of the state and federal securities laws occur. Forced arbitration directly threatens our ability to meet these responsibilities."

The state treasurers of California, Illinois, Iowa, Oregon, Pennsylvania and Rhode Island signed the letter, which is in response to a news report that the SEC was considering allowing companies to prevent investors from filing class-action lawsuits by requiring arbitration instead.

Mr. Clayton was asked about the subject during a Senate Banking Committee hearing in February. "If this issue were to come up before the agency, it would take a long time for it 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 is on my list of where we could do better," Mr. Clayton told the committee.

The state treasurers concluded their letter by encouraging Mr. Clayton "to continue to resist this proposal and instead to uphold the commission's long-standing policy of prohibiting forced arbitration clauses and class-action waivers."