SEC Chairman Jay Clayton. (Photo: Diego Radzinschi/ALM)

Twenty-six Democratic members of the House Financial Services Committee pressed Securities and Exchange Commission Chairman Jay Clayton Monday to not reverse the commission’s longstanding policy of prohibiting public companies from including mandatory arbitration clauses in their corporate governance documents.

Reps. Carolyn Maloney, D-N.Y., and Maxine Waters, D-Calif., both members of the Subcommittee on Capital Markets and Government-Sponsored Enterprises, told Clayton in a Monday letter that Congress has repeatedly passed laws recognizing that private securities fraud class actions are “an indispensable tool with which defrauded investors can recover losses without having to rely upon government action.”

As a matter of public policy, the lawmakers wrote, “there is a strong public interest in ensuring that shareholders have access to the courts to resolve their claims,” which includes “the ability to participate in securities class-action lawsuits.”

Richard Fleming, the SEC’s investor advocate, said during a recent speech that investors are concerned about efforts to force public company shareholders to forego class action lawsuits and seek recovery individually through arbitration.

The issue, he said, has been a matter of concern “to investors recently, after commentators have suggested that U.S. IPO issuers should consider including arbitration provisions in their articles or bylaws.”

The idea of mandatory arbitration, Fleming said, “has been promoted as a way to reduce costs of securities litigation for public companies and thereby remove a perceived disincentive for companies to be public. Reportedly, it is too easy for plaintiffs’ firms to bring dubious cases and win settlements, and some have argued that class action lawsuits, even meritorious ones, fail to compensate harmed investors in any meaningful way.

“There may be some validity to these concerns,” Fleming continued. “But stripping away the right of shareholders to bring a class action lawsuit seems to me draconian and, with respect to promoting capital formation, counterproductive.”

SEC Commissioner Robert Jackson, a Democrat, also expressed his concern in a recent speech “about the recent rumors that the securities industry is eager to slip mandatory arbitration of shareholder disputes into an upcoming IPO.”

The idea, Jackson said, “is that our Division of Corporation Finance will be forced to approve the IPO, stripping shareholders of their right to their day in court — and radically altering the balance between shareholders and corporate insiders.”

Jackson continued that he’s “expressed a great deal of skepticism about proposals like these in the past,” noting his Senate testimony in October, in which he stated that he does “not have the sense that what we have in corporate America today is too much accountability.”