Curbing shareholders' ability to sue companies would be a "significant mistake" that harms the US capital markets, leading Democrats have warned, foreshadowing a potentially bitter fight to protect decades-old investor rights.

The Securities and Exchange Commission was scheduled on Wednesday to discuss the possibility of allowing listed companies to require arbitration of shareholder claims, something that would move disputes out of the glare of the court system.

In a letter ahead of the public meeting, Elizabeth Warren, ranking member of the Senate banking committee, said that any such move would eliminate a critical tool for investors and allow misconduct to go unpunished. Democratic senator Jack Reed of Rhode Island also signed the letter.

"We are concerned that the SEC may be poised to change its long-standing policies and allow public companies to force investors into arbitration rather than allowing them their day in court," the senators wrote in a letter to SEC chair Paul Atkins, which was seen by the Financial Times.

"This would be a significant mistake, putting investors and markets at risk . . . Shareholders would be subjected [to] a regime where facts of the case are hidden behind closed doors and participants are subject to confidentiality obligations, bad actors are not accountable to the public, and there are no legal precedents to guide future conduct."

The SEC did not respond to a request for comment ahead of Wednesday's meeting.

The agency has for decades prevented companies from going public if they have mandatory arbitration clauses in their bylaws. In one recent flashpoint, the private equity group Carlyle proposed floating with such a clause in 2012 but backed off challenging the SEC in court and dropped the policy before its initial public offering.

Executives and corporate directors have long recoiled at the cost of securities litigation, and complained that class action lawsuits are launched by ambulance-chasing lawyers whenever a share price declines.

Shareholder advocates, however, have historically opposed the use of mandatory arbitration. When the issue was last aired in 2018, under a prior Republican SEC chair, Jay Clayton, the Council of Institutional Investors argued that disputes going to arbitration rather than the court system lose their deterrent effect. Other campaigners have argued arbitration favours companies because the rules are drafted by the groups themselves.

Clayton ultimately decided not to make the issue a policy priority for his commission.

Democrats hit out at plan to curb investor lawsuits against US companies