• Key takeaway: The Securities and Exchange Commission is proposing to repeal Rule 14a-8, which allows investors to raise concerns with companies through shareholder proposals. 
• Expert quote: "Rescinding Rule 14a-8 will increase instability and costs for both companies and investors and further weaken American capital markets and the foundations that uphold them." — Andrew Collier, senior director, Freedom to Invest
• What's at stake: Shareholder advocacy groups characterized the move as an attempt by the SEC to weaken investor protections.

The Securities and Exchange Commission proposed Wednesday to repeal a rule that allows shareholders to publicly raise concerns about companies, drawing criticism from shareholder advocacy groups.

SEC Rule 14a-8 allows investors to submit proposals for inclusion in a company's proxy statement and request a vote on issues involving the companies they own.

In an announcement Wednesday, the SEC said the rule exceeds its statutory authority and intrudes on matters of state law. The agency said the rule is outdated and "less compelling today" and has resulted in "unintended consequences," including discouraging states from developing their own rules governing shareholder proposals.

"Today's proposals demonstrate my focus on ensuring that the commission's rules are within the agency's statutory authority and reflect policy positions grounded in current and anticipated market practice," SEC Chair Paul Atkins said in a statement.

Public comment on the SEC's proposal will be open for 60 days after its publication in the Federal Register.

Advocacy groups, including Better Markets, the Council of Institutional Investors and Freedom to Invest, criticized the proposal, saying it could reduce transparency.

Andrew Collier, senior director of Freedom to Invest, a Ceres initiative that advocates on behalf of investor and shareholder rights, said shareholder proposals are a free-market tool that allows investors to air grievances and creates accountability between companies and investors.

"For decades, these proposals have been capital markets' most practical accountability tools, increasing transparency and communication between companies and investors and giving both groups access to information and the freedom to act on it," Collier said. "Rescinding Rule 14a-8 will increase instability and costs for both companies and investors and further weaken American capital markets and the foundations that uphold them."

Glenn Davis, executive director of the Council of Institutional Investors, called the proposed rescission "a solution in search of a problem." He said shareholder proposals are rare and nonbinding and provide a way for company leaders to receive input from investors and make better-informed decisions.

Davis said the rule could be improved but that moving responsibility to the states could create a "patchwork" of inconsistent standards that could make it harder for small shareholders to bring proposals to a vote.

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"That patchwork will launch a new race to the bottom in state corporate law and result in a dramatic reduction in shareholders who qualify as proponents, notwithstanding smaller investors' history of putting forward many of the most highly supported proposals," he said.

The proposal is one of several recent SEC initiatives that have drawn criticism from shareholder advocacy groups. In May, the agency proposed allowing public companies, including banks, to report financial results twice a year instead of quarterly. Companies that opt for semiannual reporting would file a new Form 10-S twice a year instead of a Form 10-Q each quarter. Public comments on the proposal closed July 6. 

Many investors argued that quarterly reporting should remain mandatory to preserve transparency, though some business groups representing public companies say reducing reporting requirements would ease compliance costs and regulatory burdens.