The SEC's schedule of investment adviser examinations will likely grind to a halt if the federal government is forced to shut down Friday
The SEC's schedule of investment adviser examinations will likely grind to a halt if the federal government is forced to shut down Friday.
“In general, under a government shutdown only essential functions can be performed,” said Securities and Exchange Commission spokesman John Nester. “The SEC is conducting contingency planning to determine which of the commission's functions would fall into this category.”
Most likely, adviser examinations wouldn't be deemed essential. That means that SEC audits or interviews probably would be canceled.
Those who submit filings during the shutdown would likely experience a delayed SEC response.
Other activities that likely would be put on ice include approval of applications for exchange-traded funds, creation of new funds and initial public offerings, according to Laura Anne Corsell, a partner at Montgomery McCracken Walker & Rhoads LLP.
“I imagine that traffic would build so that when the agency comes back, there would be a traffic jam,” she said.
WHAT SHUTDOWN?
The fallow period of commission activity, however, might not be noticeable to financial advisers, according to Brian Hamburger, managing director of MarketCounsel.
“We're not talking about a regulator who moves so quickly that a short-term shutdown would really impact investment advisers,” he said.
“Inspections can be put off to another day. That happens every day,” Mr. Hamburger said.
The results of a shutdown could mean trouble for staff members who are responsible for other SEC functions.
“If it lasted for more than a few days, it could have a very profound effect on the agency's ability to police the market,” said Barry Goldsmith, a partner at Gibson Dunn & Crutcher LLP and a former SEC chief litigation counsel. “If there were another flash crash, it could be very problematic.”
Less dramatic, but just as important, would be a missed chance to track down a lead about financial malfeasance, said Stephen Crimmins, a partner at K&L Gates LLP and a former SEC deputy chief litigation counsel.
One of the challenges during a shutdown is determining who is an essential employee, he said. For instance, in the Division of Enforcement, top officials and some trial attorneys on cases with pending hearings might stay on board.
Other staff members who likely would be furloughed are the ones who answer the phones or respond to e-mail tips that could lead to a revelation about a Ponzi scheme or a fraud network.
“You do not know which of the junior staff is about to hit pay dirt,” Mr. Crimmins said. “Essential personnel allow just enough staff in the building to perceive that the agency's mission is not collapsing, but not to do anything about it.”
Mr. Crimmins worked at the SEC during the 1995-96 shutdown. The SEC was able to stay fully operational then because it discovered available funds that could be spent in any fiscal year, rather than being tied to the fiscal year in which the budget ran out.
“It was a deus ex machina solution,” Mr. Crimmins said.
BUDGET BATTLE
A battle between Democrats and Republicans over a measure that would fund the government through September could come to a head March 4, when a temporary continuing resolution expires and federal agencies would cease most operations.
The chances of that outcome diminished late on Feb. 25, as Senate Democrats reacted favorably to a two-week stopgap funding measure proposed by House Republicans.
The GOP plan relies in large part on cuts that President Barack Obama outlined in his fiscal 2012 budget. Even if this low-hanging fruit is approved this week by House freshmen bent on slashing the budget, it only delays a shutdown showdown until the middle of March.
The likely much fiercer fight then will be over a measure the Republican House approved earlier this month that would cut $61 billion from the budget over the next seven months. Democrats have called that approach “irresponsible.”
The House and Senate are expected to vote on the two-week funding proposal by Friday.
The SEC has been operating on its fiscal year 2010 funding level since Oct. 1, when fiscal 2011 started without Congress' passing a budget.
Congress hasn't yet appropriated budget increases included in the Dodd-Frank financial reform law. SEC Chairman Mary Schapiro has warned that the situation is undermining the commission's “core mission” and could make it impossible to implement the 100 or so regulations called for by Dodd-Frank.
The Dodd-Frank workload, coupled with a government shutdown and furloughs, could undermine the mental attitude of the SEC's staff, according to Mr. Goldsmith.
“It will have an effect on morale at a time when they're being asked to do more and more,” he said.
One bright spot is that a shutdown would give SEC employees a sabbatical of sorts to re-imagine their mission.
“I hope the SEC staff comes back with a renewed sense of passion for protecting investors and providing prudent regulations,” Mr. Hamburger said. “Some time off will allow them the peace to understand what's important and what needs to be done.”
E-mail Mark Schoeff Jr. at mschoeff@investmentnews.com.
