Having lived through government shutdowns as a lawyer in the
Block, now a partner in the securities enforcement and litigation division in Morgan Lewis's Washington, D.C. office, said enforcement officials at the
"They're going to be looking at who's coming into work," said Block, who worked in the SEC's division of enforcement from 2007 to 2022. "And that can rotate from day to day. They'll be asking: What do you have that's an emergency that will let people come into work?"
Block's comments came a day after SEC Chairman Gary Gensler warned members of the U.S. House Financial Services Committee that a government shutdown would force his agency to furlough more than 90% of its staff. Gensler said the "skeletal" crew that remained would still take complaints and tips about possible misdeeds by advisors and others in the financial services industry.
The chances that large portions of the federal government will shut down have been growing ever greater in recent weeks as lawmakers have fallen short time and again of passing needed stopgap funding bills. U.S. House Speaker Kevin McCarthy, a Republican from California, has rejected a plan passed by the Senate while also struggling to come to terms with debt-hawks in his own party.
Block, who was at the SEC for three shutdowns, said there are several reasons advisors would be foolish to take any pause in government supervision as an opportunity to try something untoward. For one, there's no foretelling how long the government will remain closed.
"Nobody knows how long this is going to last," Block said. "But any smart registrant would know that would be taking a huge risk, knowing they might be back on the job on Wednesday."
The most recent shutdown, in late 2018, lasted nearly five weeks. But the two before that were over after just a few days.
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Second, Block said, the SEC will still be able to place a priority on enforcement actions it deems necessary to prevent an imminent loss of property. Regulators, for instance, will still be going to court to obtain emergency temporary restraining orders in cases in which they think time is of the essence for protecting investors.
And the SEC isn't the only cop on the beat. A spokesman for the Financial Industry Regulatory Authority, which oversees the broker-dealer industry, confirmed that a federal shutdown wouldn't affect his agency's enforcement. And then there are state securities regulators.
Massachusetts Secretary of the Commonwealth William Galvin said he and other state watchdogs can still pursue firms for alleged violations, even ones that are registered only at the federal level.
"Clearly we would be better if federal enforcement opportunities were there as well," Galvin said. "That would be the best case. And that's what we'd like to see preserved."
Compliance experts at a couple of advisory firms agreed that a government shutdown might be hard to notice at first. Chris Casdia, the chief compliance officer at Atlanta-based Gratus Capital, said most SEC enforcement actions stem not from public complaints or tips but rather referrals made by the agency's own examination officers. Since much of the examination staff would be furloughed during a shutdown, the number of cases coming to regulators' attention could dip.
"Examinations are planned well in advance," Casdia said. "If I'm an examination team leader and it's January, I might already have a schedule for the rest of the year. So a furlough could really throw off that schedule."
That said, Casdia added, there's no reason to believe the spigot won't open up again once government operations resume as normal. The longer the shutdown, the lengthier the backlog will become. But regulators will eventually get around to any unattended business, Casdia said.
The SEC estimates it examines each of the more than 15,000 investment advisors it regulates once every six or seven years — a figure that Casdia said he thinks is actually closer to once a decade. Federal regulators have floated the idea of
Rather than a break in enforcement actions, Casdia said he's worried about an impending halt in the SEC's market surveillance. That's the daily monitoring of stock trading and similar activities that regulators conduct to prevent insider trading and other msideeds.
"That's really on the frontline monitoring all that data," Casdia said. "That's a different animal altogether."
Carrie King, a partner and chief compliance officer at Ullmann Wealth Partners in Jacksonville Beach, Florida, agreed that a short shutdown is unlikely to be of much consequence to the majority of firms. If anything, there could be "delays in processing applications, reviewing compliance, and providing guidance to financial advisors," she said in an email.
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In his testimony before the House Financial Services Committee on Wednesday, Gensler said a shutdown would be most immediately felt at companies that had been planning to do things like offer their shares on the market for the first time. "If a company were deciding to go public or raise offerings, they'd want to go effective before Friday if they're ready to," he said.
David Tutor, who joined the law firm WilmerHale's New York office after seven years in the SEC's enforcement division, agreed that effects of any partial shutdown will really depend on how long it lasts. If it's just a few days, it might be hardly noticed by most people outside the government. But if it stretches into weeks or months, he said, "that will create something of a backlog."
Block said regulators who are running up against a statute of limitations for filing a particular enforcement action might ask a firm to sign what's known as a "tolling agreement," giving them more time to file charges. In a partial government shutdown, SEC enforcement officers might want to wait until normal operations have resumed before pursuing a case.
Advisors presented with such an option will have to decide if they want to cooperate. Block said they're fully within their rights to not sign a tolling agreement. But those who don't will be running a risk.
"The question," Block said, "is: Does that create the conditions for an emergency and give regulators a chance to say that they have to file a lawsuit?"
