Shutdown and the SEC: Expect headaches but no reprieve for fraudsters

If you're already in investigators' crosshairs because of a big Ponzi scheme, the current government shutdown won't bring you a reprieve, despite the SEC and other agencies operating with skeleton crews.

But if you're an advisor filing registration paperwork or seeking help with a compliance matter, you may be in for some delays and headaches. Those were regulatory and legal experts' general reactions to the federal government shutdown that took hold Wednesday morning following lawmakers' failure to reach consensus on spending legislation.

Like many federal agencies, the Securities and Exchange Commission moved ahead with plans to furlough much of its staff while keeping a minimal number of employees around to perform essential functions. According to an operations plan the SEC issued in August, only 393 of its 4,289 employees, about 9%, would continue to work during a shutdown.

Those who remain are prioritizing cases that present imminent dangers to investors, said Fred Block, a former SEC lawyer and current partner in the securities enforcement and litigation division in Morgan Lewis's Washington, D.C. office. Enforcement staff may be trying to prevent embezzled money from leaving the country, or trying to thwart an ongoing Ponzi scheme, for example. The agency will also still be taking tips and likely still investigating cases where investor protections are a stake.

"If you are working on that type of matter, you would be definitely coming in to work," Block said. "But if it involves people who lost money three years in the past, unless they are getting near the statute of limitations, that may be delayed."

The longer it goes, the worse it gets

Block knows whereof he speaks, having worked for the SEC's enforcement division from 2007 to 2022. That period included the longest shutdown in the federal government's history, when employees were sent home for 35 days starting in December 2018.

Like many compliance experts and former SEC attorneys, Block said the consequences of the current impasse will grow the longer the shutdown lasts. The federal court system, for instance, has suggested it has enough money to continue operating as usual until the middle of the month. Past that, district courts will have to set priorities in much the same way as the federal agencies.

"They will have to start triaging," Block said. "They will be deciding what's an emergency, and that's most likely going to be criminal cases. Civil cases will be slowed down, and that's what the SEC does."

Not that the SEC's reduction to a skeleton crew leaves a regulatory vacuum in the U.S. The Financial Industry Regulatory Authority, the self-regulatory organization for the broker-dealer industry, is technically a private entity and remains fully operational. And state securities regulators retain their ability to police the financial firms within their jurisdiction.

Don't skip regulatory deadlines

For most of the registered investment advisors coming directly under the SEC's supervision, the most notable consequence may be bureaucratic delays. Amy Lynch, the founder and president of the regulatory consultant FrontLine Compliance, said the SEC has fortunately managed to automate a good deal of its filing requirements.

A firm that needs to register a new chief compliance officer, for instance, can still submit the needed information to the SEC's Investment Adviser Registration Depository website. No human intervention is needed on the SEC's side for the update to take place.

But if an advisor has a firm that needs to be registered with the SEC for the first time, that's a different matter, Lynch said. 

"That filing would be on hold, because those types of filings need to be reviewed by a person," she said.

Lynch said firms should still plan to meet any SEC-imposed deadline just as they would were the federal government fully operational.

"Let's say they were getting ready to file or send in a bunch of documents by Oct. 2," she said. "Firms should still file those documents because the portal will most likely remain open."

Halted examinations and delayed regulatory guidance

The compliance firm ACA Group notes on its website that other SEC actions likely to come to halt during the shutdown include the routine regulatory examinations the federal watchdog tries to subject firms to once every six to seven years. Again, the one likely exception will be for investigations into matters threatening investor harm.

ACA Group also said the SEC won't be responding to the requests for guidance firms often submit when seeking advice on how to avoid violations of industry regulations. Robert Baker, managing director of ACA Group, said chief compliance officers should remember that although a shutdown may lead to delays, it doesn't change the rules.

"Firms should continue to operate with the same rigor and discipline they always do," Baker said. "Compliance doesn't pause just because the government does. Staying the course is the best strategy. Investors will continue to maintain their regulatory compliance expectations during the pause."

Others see the shutdown as part of a worrying trend toward less regulation. Adam Gana, the president of the Public Investors Advocate Bar Association, noted the SEC has already undergone staff and budget cuts as part of President Donald Trump's push to shrink the federal government.

And Trump has threatened further staff reductions if the shutdown impasse isn't resolved soon.

"I can't see how this is going to be good for the investing public," Gana said. "The question eventually becomes: Who is going to respond?"

The government always picks itself back up

Christina Zaroulis Milnor, a lawyer who served in various enforcement capacities at the SEC from 2013 to 2024, agreed that a lot depends on how long the shutdown lasts. If it's only a few days, then the SEC will have no more trouble returning to work than if they were coming back from a long weekend. If it goes on for weeks, then picking up where they left off will be considerably harder, said Milnor, now at the firm Mincey Bell Milnor in Washington, D.C.

"A greater length of time is more damaging," she said. "That period of getting back up to speed becomes a greater loss for the taxpayers."

The good news, Block said, is that the government has shown time and again it's capable of resuming its business once lawmakers finally reach an agreement. That happened after the 35-day shutdown in 2018 and 2019 and he expects this time will be no different.

"It's disruptive, but we dig out of the hole," he said. "It takes time, especially if you miss something like 35 days of work. But it is surmountable. You just have to triage when you get back to the office."