“Asking the SEC to shut down is a bit like asking someone to hold her breath. You can do it for a while without disastrous consequences, but at some point you turn blue and the effects become quite serious,” said Joseph Grundfest, a professor at Stanford Law School and a former SEC commissioner.
The nearly two-week-old shutdown comes as Wall Street is expecting big companies including Uber, Lyft, Airbnb and Pinterest to conduct IPOs this year, pushing the amount raised in public markets into record territory, said Kathleen Smith of Renaissance Capital.
But to stage those public offerings, the companies first need the SEC to sign off. If the federal government shutdown is prolonged, it could slow down the process of “getting IPOs out the door,” said Smith, a manager of IPO ETFs, exchange-traded funds that track IPOs of various companies. “It is critical. [These companies] want to get reaction from the SEC on their documents."
An extended shutdown would eventually turn into a drag on the economy, said James J. Angel, a Georgetown University finance professor. “The capital markets are the lifeblood of the economy,” he said. “Corporations need to be able to raise money, to invest.”
Even without the partial government shutdown, Wall Street has seen volatile swings in the past year, with markets posting the worst yearly decline since 2008. The Dow Jones industrial average, an index of 30 well-known companies, fell nearly 3 percent Thursday after Apple surprised the markets by lowering its quarterly estimates for the first time in 15 years.
Large parts of the government, including the SEC, have been shuttered since Dec. 22 amid President Trump’s demands for more than $5 billion to build a new wall along the U.S.-Mexico border. With no obvious path to a compromise, congressional leaders have said the shutdown could be lengthy. It could go on “for months and months,” said Sen. Richard C. Shelby (R-Ala.), chairman of the Senate Appropriations Committee.
The effects of the showdown are already being felt throughout the country. Hundreds of thousands of federal government employees have been furloughed and major components of the U.S. immigration system are offline because of the shutdown. It has also left many national parks without most of the rangers and others who staff campgrounds and keep the parks running.
At the SEC, most of the agency’s 4,000 employees are at home. A skeleton crew of a few hundred workers is available for emergencies, including major market disruptions. But most work has stopped, including most ongoing investigations. At the top of the agency’s website, it tells visitors that “SEC has staff available to respond to emergency situations involving market integrity and investor protection, including law enforcement.”
The SEC, of course, has endured shutdowns before. Lynn Turner, a former chief accountant for the SEC, served during a brief shutdown in 1990 but said this time is different. “We were told not to go in for work, but people were not as concerned about it then,” said Turner, a senior adviser at the accounting firm Hemming Morse. “But I don’t think there was the level of uncertainty you have today.”
If the shutdown is brief, the impact on ongoing investigations is likely to be minor, securities experts say, noting that SEC cases tend to take months or years to complete. Still, even a brief halt offers companies targeted by the SEC some breathing room, experts say. It may also make it harder to pursue some cases that are already close to their statutes of limitations.
“Clearly, not having the cops on the beat is going to make it easier for the bad guys,” said Angel, of Georgetown. “Losing hundreds of human years of investigative capacity is going to make it harder to bring cases.”
Also pressing, securities experts say, is the absence of the day-to-day guidance the SEC offers to companies, on matters both complex and mundane. January begins a busy season in which corporate executives are preparing major reports for shareholders, including annual reports and proxy statements. While compiling those documents, executives often ask the SEC for help interpreting complex rules, securities experts say.
“The SEC’s phone rings countless times a day for exactly that type of guidance,” said James Cox, a professor at Duke University who specializes in securities law.
The shutdown has also left some companies in limbo awaiting key decisions. Johnson & Johnson, for example, has asked the agency to weigh in on whether it must allow its shareholders to vote on certain issues. The dispute is being closely watched throughout corporate C-suites and by investors, said Turner, the former SEC chief accountant.
But “there is no one at the SEC to give them that answer,” he said. “Until J&J can get that answer from the SEC, they can’t move forward.”