Trump is making it harder for shareholders to sue companies

Much of the financial news during the first half of the year has been dominated by President Trump’s sweeping tariffs, especially their effects on the global economy and the trade wars they’ve ignited.

But the focus on tariffs has meant that Trump’s other big economic initiative entering his second term (deregulation) has been somewhat muted thus far. But that might be about to change.

Although it was done with little fanfare, the SEC this week said that a company’s IPO registration “will not be affected by the presence of a provision requiring arbitration of investor claims arising under the federal securities laws.”

For context, the SEC has often blocked a company’s IPO registration if its charters and bylaws had provisions seeking to ban class-action lawsuits filed by shareholders.

But by making clear that this will no longer be factored into its consideration for public listing, the SEC is essentially shifting power away from shareholders in favor of CEOs and their companies.

SEC Chairman Paul Atkins said in a statement that his goal is “to make IPOs great again” and that amending the rules “will make being a public company an attractive proposition for more firms by eliminating compliance requirements that yield no meaningful investor protections, minimizing regulatory uncertainty, and reducing legal complexities throughout the SEC’s rulebook.”

It is, in other words, a move to support Trump’s push toward further deregulation. But it’s also a move toward clarifying what has largely been an unwritten rule that the SEC has followed through the years.

“As an agency that trumpets the importance of disclosure and transparency, the Commission’s lack of a recent public position on this important topic is unmoored from both its mission and its mandate,” Atkins said. “That ends today.”

When Trump nominated Atkins to chairman, experts expected that he would likely move to limit shareholder power.

As Jamie Hanley, a partner at the UK-based law firm Labaton Keller Sucharow noted, he’d “openly criticized the guidance that led to the proliferation of environmental, social, governance and climate-related shareholder proposals under Biden and Gensler.”

SEC commissioner says move will ‘stack the deck against investors’

Because of the SEC’s rule change, shareholders will now most likely have to pursue actions through arbitration, which could diminish their chances of filing a class-action lawsuit.

Commissioner Caroline Crenshaw, the lone Democrat left on the SEC, slammed the commission’s action, saying in a statement that it “finds another way to stack the deck against investors—this time primarily small, retail shareholders in public companies.”

She said that the SEC was “opening the floodgates” to mandatory arbitration which she argued has many disadvantages to investors and the markets – including the fact that arbitrations are private hearings instead of public the way a class-action lawsuit is handled.

This “undermines deterrence,” which could “lead not only to more brazen misconduct, but it will also reduce the integrity of our markets.”

“Defrauded investors who are not part of an arbitration may not know they have been defrauded, nor may the markets, paving the road for the same company to inexpensively engage in the same misconduct again in the future,” Crenshaw said.

Meanwhile, the SEC this week also issued a “no action” letter to ExxonMobile (XOM), indicating that it would not block a plan by the company to automate votes by retail shareholders in line with the positions held by its board of directors.

This means retail investors will have to opt out in order for their votes not to be counted as being in favor of management. “This is a gap we want to close ,” Exxon said in a statement. “Activist groups often exploit this gap to push political goals at the expense of shareholder value.”

Critics say that the SEC is giving Exxon the power to squelch shareholder activism.