On 1 October, the US government failed to reach an agreement on appropriate budget levels and a nationwide shutdown of federally funded entities ensued. Clearly enforcement actions are going to take a hit. But what effect will this have on the rulemaking process, especially given that we are in the middle of a delicate balancing act between EU and US rules?
Amidst the ranks of affected government bodies are the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC), and others which have experienced large furloughs of employees (roughly 90% of the SEC and 94% of the CFTC are cut). Here’s how the relevant agencies’ operational capacity breaks down:
Agencies Under Budget Restrictions and Who is Staying
- Securities and Exchange Commission (10% of its 4,100 person staff)
- Commodities and Futures Trading Commission ( 6% of its 680 person staff)
- Internal Revenue Service (9% of its 94,500 person staff)
- Financial Crimes Enforcement Network (9% of its 345 person staff)
- FDIC Inspector General (7% of its 121 person staff)
Not Covered under Congressional Budget
- Federal Deposit Insurance Corporation (self-funded)
- Office of the Comptroller of the Currency (self-funded)
- Consumer Financial Protection Bureau (funded through Fed)
- Federal Reserve System (self-funded)
The shutdown has severely limited the number of activities both of these entities are capable of engaging in, but the SEC can still monitor the market, handle emergency enforcement, referrals, and several other functions while the CFTC can maintain bare minimum trading, exchange, and clearing monitoring. Both agencies are capable of recalling essential employees in the state of an emergency. The SEC can operate at this level up to around three weeks, and one should suspect that the CFTC can as well. However, the lack of personnel and funding has started to cause issues within the market, and real problems will develop if the funding faucet isn’t turned back on in the next month.
Despite the fact that both agencies are technically operational, the lack of oversight and ability has caused market turmoil and heavy delays of Dodd-Frank implementation. Filing of new IPOs this year have been substantial, but with the shutdown in effect the SEC is incapable of reviewing new applications, leading to problems with new registrants, like Twitter, who recently filed (Twitter has just barely come in under the wire before the appropriations did not allow new application processing). Additionally, rules enactment and agenda processing from agencies like the SEC and CFTC have been delayed. A rule pertaining to municipal advising as mandated through the Dodd-Frank Act was supposed to be imposed by the SEC, but has since been cut due to the shutdown. It is safe to say that other Dodd-Frank rule implementation is put on hold indefinitely between both regulators
The real problems start if the government cannot pass a budget within the next three weeks, as funding allocations will run out between the SEC and CFTC, leading to their near absolute closure (with the exception of some computer monitoring and absolute emergency handling capabilities). What does this mean exactly though? No one knows for sure, but when markets become essentially unregulated due to lack of oversight, the potential for market abuse and crime could increase substantially, according to analysis from Bloomberg Businessweek. Expect severe issues with compliance reporting, rule enforcement, and potential difficulties with new regulations, like the SEF filing with the CFTC.
While no one can tell for sure, speculations about the shutdown length are wide-ranging. In a best case scenario, we can expect business as usual. However, if this drags on, be prepared for some potential major setbacks to rulemaking and international standards-setting, especially around OTC trading which is in the middle of a fierce transatlantic negotiation. But the worst case scenario comes in the unprecedented event that the looming debt ceiling crisis does not get resolved.