By Dave Michaels

Updated Nov. 8, 2017 11:41 a.m. ET

NEW YORK—The Trump administration’s top securities regulator on Wednesday urged a review of how shareholders weigh in on public companies’ executive pay proposals, board of director nominees and contentious issues raised by activist investors.

Securities and Exchange Commission Chairman Jay Clayton told a New York legal conference that retail-investor participation in such elections is so low that it “may be a signal that our proxy process is too cumbersome and needs updating.” Mr. Clayton, who took over the commission in May, said he would seek public input on how to overhaul the proxy-voting system.

Mr. Clayton, a political independent, called out one particular weapon in the proxy tool kit: shareholder proposals. Under SEC rules, shareholders who own at least $2,000 worth of company stock can submit corporate-governance proposals for a vote. Stock-exchange operator Nasdaq Inc. and many public companies say that low threshold allows dissident shareholders and critics to impose proposals on the entire investor base.

“Shareholder proposals can gain traction and lead to corporate governance changes that better track the long-term interests of Main Street investors,” Mr. Clayton said at the annual Institute on Securities Regulation event. “They also create costs, including out-of-pocket costs and the use of board and management time that otherwise could be devoted to operation of the company itself.”

Proxy voting is also used by activist hedge-fund managers seeking to shake up the strategies or boards of firms whose shares they own. William Ackman, for instance, lost his bid this week for three seats on the board of Automatic Data Processing Inc., as ADP investors on Tuesday re-elected the entire 10-person board at its annual meeting.

While fights between activist investors and companies capture the attention of institutional investors, retail participation in many corporate elections is low. While retail investors own 30% of all shares issued by public companies, less than a third of those shares voted, Mr. Clayton said Wednesday.

Votes on shareholder proposals are only advisory, yet companies have long resented small shareholders’ ability to draw attention to pet issues.

“The current shareholder proposal process is dominated by a limited number of individuals who file common proposals across a wide range of companies but own only a nominal amount of shares in the companies they target,” the Business Roundtable wrote in a report this year.

Nasdaq Chief Executive Adena Friedman, in a Wall Street Journal op-ed earlier this year said the proposals are a costly hassle to public companies. She wrote that Nasdaq supports a legislative provision written by House Republicans that would raise the threshold to 1% of a company’s shares.

Last year, 36% of all shareholder proposals that got a vote were sponsored by individual shareholders—the type of investor whose activity would most clearly be affected by the Choice Act—according to data from ISS Analytics, the data arm of Institutional Shareholder Services Inc.

Many of the proposals are sponsored by so-called gadflies—critics who often use small stakes to push for changes at companies—and the measures often pass. Individual investor John Chevedden, for instance, has sponsored 91 proposals since 2007 that garnered more than 50% support, ISS data shows. The average rate of support for his proposals was 39%.

The SEC hasn’t weighed in on the Republican proposal to raise the bar to 1%. Mr. Clayton said he supports rules that allow shareholder proposals but acknowledged the debate divides investors and companies. He is “searching for a way to reconcile the multiple positions and find common ground,” he said.

Mr. Clayton said the SEC is separately looking at ways to improve disclosures that investors receive from mutual funds and brokers about transaction and advice fees. The SEC has recently brought enforcement cases against SunTrust Bank and other companies for selling more expensive mutual-fund share classes to investors when cheaper options were available.

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