What a Government Shutdown Will Mean for SEC Rule Making

SPACs, 13D disclosure, and climate change risk proposals would be affected.


Illustration by II

As the U.S. government careens towards yet another shutdown, the potential fallout would include a delay in the Securities and Exchange Commission’s outstanding rule making efforts — including some of the most controversial ones. These are tighter disclosure rules on special purpose acquisition companies, 13Ds filed by activist investors, and climate change risk.

“If anyone was hoping to get a Final SPAC rule proposal from the SEC in October, that will be further delayed,” Kristi Marvin, founder of SPACInsider said Tuesday in her weekly newsletter, referring to a potential government shutdown. The proposed SPAC rule’s most critical new provision calls for heightened disclosure coupled with liability for underwriters and has already cast another chill on the market. Some $43.6 billion of SPACs have been liquidated this year, with only $13.8 billion raised in IPOs. Many of the liquidated ones came to market in the SPAC bubble year of 2021 when SPACs raised $162.5 billion, according to SPAC Insider.

When the SPAC rule was proposed in March, 2022, SEC Chairman Gary Gensler said that SPACs were being used as an alternative means to conduct an IPO, and “investors deserve the protections they receive from traditional IPOs, with respect to information asymmetries, fraud, and conflicts, and when it comes to disclosure, marketing practices, gatekeepers, and issuers.”

As a result, the new rule would also allow investors to sue SPACs over misleading projections, which would not only affect the sponsors, but also their underwriters, accountants, and others involved in a SPAC’s merger deal, known as a deSPAC. Once the rule was proposed, several big underwriters, including Goldman Sachs and JPMorgan, retreated from the market.

One of the most significant, and longest-debated, SEC rule changes that would get delayed by a shutdown is one that would affect shareholder activism. The SEC’s new rule on beneficial ownership proposed shortening the period after which an activist investor who amasses a 5 percent control stake of a company’s shares must file a 13D disclosure form. Under the new rule, which was proposed in February 2022, that window would shrink from ten days to five — giving the hedge fund fewer days to buy more shares before letting the world know it intends to agitate for change. (The rule change would force disclosure of swaps positions as well.)

As Institutional Investor has previously reported, hedge funds mounted a massive lobbying effort against this rule change. This spring the SEC reopened the comment period for the proposal, and a final decision is expected later this year.


The hedge funds haven’t let up. On Sept. 18, Elliott Management General Counsel Richard Zabel — who has written several letters to the SEC on the matter —penned his latest missive to the SEC. Zabel’s new letter mentioned a recent federal appeals court ruling against the SEC in its legal battle with Grayscale Investments over its application to launch the first bitcoin exchange traded fund, which the SEC opposed.

The appeals court ruling “merits the Commission’s careful attention — the decision validates the concerns Elliott has raised regarding the proposals in previous comment letters, and it emphasizes the Commission’s need to abandon the proposals, or at a minimum significantly amend them to adopt a considerably narrower confidential disclosure regime,” Zabel wrote the SEC. The appeals court in the Grayscale case ruled that the SEC’s decision was “capricious and arbitrary.”

The SEC’s new rule proposal on climate change risk disclosure, which came out in March 2022, is another controversial one that could get delayed — yet again. The proposal would require disclosure of climate-related risks that are “reasonably likely to have a material impact on their business, results of operations, or financial condition.” It would also include disclosure of a company’s greenhouse gas emissions, which the SEC says have become a commonly used metric to assess a registrant’s exposure to such risks.

Earlier this year, Politico reported that the SEC was considering scaling back the rule change, in response to opposition from corporate America and the expectation of a “wave of lawsuits” contesting it. (One of the most recent comment letters opposing the rule was the American Investment Council, the lobbying group for the private equity industry.)

In June, the SEC delayed the decision on that proposal until this fall. Since then, a group of 80 House Democrats pressed Gensler to create a strong rule. “We urge you to finalize and adopt a credible mandatory disclosure rule as quickly as possible,” they wrote in August.

Including these three proposals, 37 rule changes are at the “final rule stage,” according to the SEC.