A US government shutdown could hamstring the SEC and CFTC—and slow IPOs like Twitter’s
This probably wasn't on Twitter CEO Dick Costolo's pre-IPO risk list. AP Photo/Lionel Cironneau
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US government shutdown is looming and politicians are hardly closer to
averting it. If the shutdown went into effect, dozens of government
agencies would be affected. But some of the most public-facing and
time-sensitive agencies are the two financial market regulators—the
Securities and Exchange Commission and the Commodity Futures Trading
Commission—that make the wheels of US markets spin. If it’s anything
like the shutdown that happened in 1995 to 1996, those agency would
close their doors potentially for weeks, slamming the breaks on
non-urgent government matters like processing IPO filings, investigating
most financial crimes and passing the Dodd-Frank financial reform bill.
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Without
funding, these agencies would essentially run out of money, and any
employee considered “non-essential” would have to go home, without pay.
In practice, both agencies would likely operate with a skeleton staff,
because certain employees would be needed to handle “emergencies
involving the safety of human life or the protection of property,” in
the words of a report released this week (pdf)
from the Congressional Research Service. This means a minimum number of
staff from both agencies would be around to ensure that markets
continue to function and monitor the most egregious violations of
securities law. That said, both agencies would be able to call more
employees back to work in the event of a catastrophe.
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Press releases just released by the agencies paint a picture of what might happen:
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Commodity Futures Trading Commission
As
of April 2011, 28 of the CFTC’s 680 employees (4.1% of its workforce)
count as essential personal. The agency’s executive director clarified the role of these employees in the event of a shutdown on Sept. 25 (pdf):
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The limited contingent of excepted employees has been identified to ensure, to the extent practicable, that a bare minimum level of oversight and surveillance of the futures markets, clearing operations, and intermediaries is maintained. However, the vast bulk of the CFTC’s oversight and surveillance functions will cease during a lapse of appropriations.+
The Securities and Exchange Commission
According to a contingency plan released by the SEC today
(pdf), approximately 252 of its 4,149 employees (6.1%) would stay on
during the shut-down. Although the agency would continue to oversee
day-to-day market activity and be on the watch for technology glitches,
any non-urgent functions would cease. The agency would halt its normal
rule-making procedure (which would drag on implementation of the
Dodd-Frank financial reform act, only 40% of which has gone into effect) and stop working with international authorities on anything but the most pressing of matters.
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For
example, non-essential matters like the IPO filings of high-profile
companies like Twitter or Alibaba would slow. In Twitter’s case, the
company likely filed documents with the SEC that started the IPO process
weeks ago, but SEC officials wouldn’t be able to continue scrutinizing
its financials during a shut-down. Alibaba could likely still file
documents, but they wouldn’t be processed. The SEC wrote that “review
and acceleration of effectiveness of registration statements by issuers
for securities offerings” would be discontinued during the shutdown.
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That’s especially bad news for Twitter, which, as my colleague Zach Seward reported, wants to IPO as quickly as possible.
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The Federal Reserve
Because the Fed is self-funded, it would avoid the shut-down entirely and get to keep its doors wide open. Given that Warren Buffett called it “the greatest hedge fund in history” and that it made $88.4 billion in
2012, mainly from interest payments on the US government bonds it owns,
we’re hardly surprised. (Of note, the Federal Reserve sends its profits
to the Treasury once a year.)
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