As the federal government shutdown grinds on, advisors may notice they haven’t heard much from the SEC.
That's because at the moment, the industry's chief regulator is operating with a bare-bones crew primarily occupied with handling ongoing litigation and responding to emergencies.
As a result, routine functions like advisor exams and rulemaking proceedings are effectively halted.
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When the SEC published its shutdown plan in December, it reported it had 4,436 employees. Once its appropriation lapsed and the plan took effect, the regulator said it would keep on about 110 employees focused on law enforcement functions, and about 175 employees whose jobs are exempted from the shutdown to "protect life or property." It is likely that there is some overlap among those two personnel categories, according to Michael Liftik, a former deputy chief of staff at the SEC who helped craft the shutdown plans during previous fights over the federal budget.
The present impasse stems from a dispute between the White House and congressional Democrats over President Trump's insistence on funding a border wall. On Wednesday, incoming House Speaker Nancy Pelosi reiterated her opposition to the proposal,
It’s anyone's guess when a deal will be struck to re-fund the government, but until that happens, the SEC will focus its efforts on trial litigation that has not been stayed and efforts to stop active, ongoing fraud.
Of the roughly 110 law-enforcement employees still on the job, the “vast majority” likely work in the SEC’s Division of Enforcement, Liftik says. However, when fully staffed, the division maintains 11 offices and a workforce of some 1,300 throughout the country. "It really is skeleton crews," says Liftik, a partner in the Washington office of the law firm Quinn Emanuel Urquhart & Sullivan.
Based on necessity, the commission will prioritize actions to halt ongoing fraud where intervention could prevent investors from losing money — rather than the more commonplace investigations that penalize advisors and other regulated entities for conduct that occurred in the past.
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The regulator says it will keep an eye on issues like cybersecurity and cryptocurrencies.
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What should advisors expect from the upcoming regulation?
May 18
"If a complaint comes in about an ongoing Ponzi scheme, you would want to be able to respond to it," Liftik says. "Most enforcement investigations don't fall into that territory, and most enforcement staff are furloughed."
That means less sensational but more frequent cases involving advisors' fee disclosures, books and records or violations of the advertising rule are unlikely to advance until the SEC is back to full staff.
"From a financial advisor perspective, if you think about the vast majority of IA rules or investment company rules, they're obviously very important, but they don't get directly at protecting property," Liftik says.
"They would keep a skeleton crew of examiners available again to go in for a for-cause investigation," he says, but "it would have to be a fairly extreme situation."
During the shutdown, the SEC also will not be able to process new or pending applications for advisor registrations.
The SEC's advisor registration database — the IARD system — is administered by a contractor.
The system will continue to operate during the shutdown as long as the commission has the appropriated funds to pay the vendor. That means that advisors are still expected to file their annual Form ADV and periodic amendments.
Likewise, the SEC's CRD system for brokers will remain operational. But, the commission is halting its routine oversight of FINRA and the other self-regulatory organizations under its purview. The commission says that it will not be able to evaluate and approve rule proposals from those groups until the shutdown ends.
So, too, the commission's own rulemaking proceedings will be on hold, potentially delaying the eventual adoption of Regulation Best Interest and the other investment-advice rules Chairman Jay Clayton
"You're just hitting pause on the vast majority of the work on the agency," Liftik says. "I don't think things get lost or dropped as a result of the shutdown, but no work is going to happen [until it ends]."
