A 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. Those agency could 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.
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.
Press releases just released by the agencies paint a picture of what might happen:
As of this month, 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):
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.
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.
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.
That’s especially bad news for Twitter, which, as my colleague Zach Seward reported, wants to IPO as quickly as possible.
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.)
Update: The SEC has said it will remain “open and operational” on the day of October 1, even if a government shutdown goes into effect. It’s not clear exactly when it would start its official shutdown procedure, though it will be affected and already has contingency plans in place.
Update II: The SEC says it could stay open “for weeks.” More on that here. We also eliminated a clause that could have implied the SEC shut down in 1995 and 1996. It did not.