But much as a child would prefer a dinner without vegetables, giving in to investors who want to buy the latest hot start-up is not necessarily a good idea. Just last week, a onetime darling of Silicon Valley, Theranos, announced that it would dissolve. The move will cost the high-net-worth individuals and private equity firms that invested in it nearly $1 billion. If Theranos could have tapped into the retail market, a group Mr. Clayton has called “Mr. and Ms. 401(k),” the devastation from the company’s collapse would have been far worse.
Lawsuits against management and directors for failing to fulfill their fiduciary duties, or against a company for making faulty or incomplete disclosures, are the best way for shareholders to police companies. These lawsuits are the bane of corporate management.
One way to limit them would be to require that these claims be heard in arbitration rather than as a public class-action lawsuit. But the S.E.C. has long taken the position that federal securities law prohibits a company from requiring that claims be brought in arbitration rather than in federal court. In 2012, the agency kept the Carlyle Group from including an arbitration requirement that would have barred shareholders from filing class-action lawsuits as part of its planned initial public offering.
But the S.E.C. may soften its position on arbitration of shareholder claims. In July 2017, Michael Piwowar, an S.E.C. commissioner at the time, floated the idea that companies could put mandatory arbitration into their charters. Mr. Clayton said in a letter to Representative Carolyn B. Maloney in April that allowing arbitration was “not a priority for me,” although he tempered that by pointing out “it does not mean that it is not worthwhile to analyze.”
Does that mean the idea is dead, or is the S.E.C. just waiting for the right company to request dispensation to limit shareholder access to the courts for challenging management? Once the S.E.C. permits arbitration of claims, companies can be expected to jump on board quickly.
Of course, disclosure is not always perfect. The collapse of Lehman Brothers showed that. A report by the bankruptcy examiner pointed out how the company used an accounting trick, called “Repo 105,” at the end of the first and second quarters in 2008 to make the firm’s financial statements look stronger than they were. Yet neither the S.E.C. nor the Justice Department ever pursued charges related to Lehman’s accounting, so perhaps the questionable tactic was not enough to warrant a claim that investors were defrauded.
Last week, Mr. Musk joined a late-night webcast during which he appeared to smoke marijuana along with the host. That is hardly a securities law violation, but the disclosure the same day that the company’s recently appointed chief accounting officer had resigned sent a chill through Wall Street because investors rely on strong internal controls in putting together financial reports.