Out of Commission: The Shutdown’s Impact on the SEC

By: Esmat Hanano, IAC Student Intern Spring 2019

With the partial government shutdown continuing to drag on, investors and the financial markets are having to deal with unforeseen consequences that could complicate the financial outlook for the year. Undoubtedly, the most glaring impact of the shutdown is the loss of income for hundreds of thousands of federal workers that have now missed two paychecks. However, an overlooked consequence of the shutdown is the limited operational capability of the Securities and Exchanges Commission (SEC). For retail investors, the SEC’s diminished operational capacity is a highly important bit of news to watch as the shutdown fight continues on Capitol Hill. The SEC’s work is critical to protecting retail investors from bad actors and others who look for ways to defraud the average investor. With the shutdown impacting the SEC, investors must be more cautious when dealing with financial markets and investment opportunities.

Another complication stemming from the impact of the shutdown on the SEC is the backlog of initial public offerings (IPOs) for companies. 2019 is shaping up to be a blockbuster year for IPOs, with Uber, Lyft, and Pinterest all set to go public after being “nurtured for more than a decade by private capital.” Before any of these companies can commence their IPO, however, they must register with the SEC. When a company registers for an IPO, the SEC will review their registration statement and other relevant factors to ensure that the offering contains all the necessary legal information for potential investors. The SEC’s vetting process for IPOs helps stem potential litigation after an offering by anticipating problems on the front end. The SEC’s limited capability currently prevents it from conducting any reviews of IPOs—pushing off a substantial portion of the IPO market until March. Some companies are looking for ways around the SEC’s review process. Recently, a biopharmaceutical company filed for an IPO even though no one at the SEC can review the registration statement. The biopharma company did this because of a quirk in the Securities Act of 1933. Under the Act, a company’s registration statement becomes automatically effective 20 days after filing. This process allows the company to forgo the usual input and vetting from the SEC but could also prove risky in the future. If other companies begin to skirt the SEC’s process, a large number of IPOs could come to market without the proper vetting that protects retail investors.

As the shutdown enters uncharted territory, retail investors need to keep the lack of government oversight of financial markets in mind as they make their investment decisions. The SEC is out of commission and investors will have to fend for themselves for a little while longer.