According to SEC spokesman John Nester, “The SEC will be able to stay open in the event of a funding lapse because we [the SEC] have carryover funds available.” ((SEC to stay open in the event of broader government shutdown, Reuters (Sep. 30, 2013), http:// www.reuters.com/article/2013/09/30/us-sec-shutdown-funding-idUSBRE98T10F20130930.)) Nester added “carryover balances are sufficient to allow us to remain open for a few weeks if there is a lapse of appropriations.” ((Id.)) According to Business Insider, “John Nester wouldn’t say how much cash the agency has,” however, the SEC issued a contingency plan for operating in the event of a lapse of appropriations. ((Linette Lopez, Here’s What Happens To Twitter And Other IPOs If The Government Shuts Down, Business Insider (Sep. 30, 2013, 3:48 PM), http://www.businessinsider.com/sec-plan-for-government-shut-down-2013-9.))
According to the contingency plan, on the day following any lapse in appropriations that results in an SEC shutdown (i.e. carryover funds depleted), all SEC employees are to report to work “to conduct shutdown activities.” ((U.S. Sec. & Exch. Comm’n, Plan of Operations During an SEC Shutdown 2 (2013), [hereinafter Plan] http://www.sec.gov/about/sec-plan-of-operations-during-lapse-in-appropriations-2013.pdf.)) These tasks include “only those tasks necessary to shut down and safeguard property.” ((Id.)) Employees who are subject to furlough will be provided notices by the Office of Human Resources. ((Id.)) These employees are not permitted to work on a voluntary basis, as such conduct is a violation of the Antideficiency Act (31 U.S.C. § 1341). ((Id.)) The SEC estimates that of its 4,149 employees, 147 are “to be retained because they are engaged in law enforcement activities”, and another 105 employees are “to be retained to protect life or property”. ((Id.)) That is a combined estimated retention of 6.07% of SEC employees under implementation of its contingency plan.
The SEC, pursuant to the Antideficiency Act, will have to discontinue certain functions. According to the contingency plan, ongoing litigation (other than litigation where there is a threat to property and emergency enforcement matters), investigative work (other than that necessary for the protection of property), and “non-emergency examinations and inspections” will be discontinued. ((Id.)) The SEC will also discontinue review and approval of new entities, new financial instruments, “self-regulatory organizational rule changes”, “registration statements by issuers for securities offerings”, and “periodic reports and other filings”. ((Plan, supra note 4.)) Furthermore, all non-emergency rule making, non-emergency interpretive advice, non-compelling FOIA requests, and oversight of self-regulatory organizations and the PCAOB will be discontinued. ((Id.))
According to the contingency plan, employees retained during the lapse in appropriations will continue various major functions. As mentioned above, litigation and investigative work necessary for the protections of property will continue. Furthermore, EDGAR will remain functional and TCR will continue to be monitored “to identify matters that are emergencies”. ((Id.)) The SEC will also continued to monitor “broker-dealers reported as being in financial distress”, “market technology operations”, money market funds, “international market developments that might impact the US.” ((Id.))
Effect on IPOs
There are many who are questioning the effect of the shutdown on upcoming IPOs. The effect of the shutdown on IPOs depends on the length of the IPO and the stage in the process which the IPO is at. For one, Congress might pass some form of a budget before the SEC’s carryover funds are depleted. In this case, the SEC would continue to function normally, rendering any effects had on IPOs by the shutdown unrelated to the SEC. However, if congress is unable to reach an agreement and the carryover funds are depleted, then the SEC would have to resort to the aforementioned contingency plan. ((Can the government shutdown derail Twitter’s IPO?, Market Watch (Oct. 1, 2013, 5:17 PM), http://blogs.marketwatch.com/thetell/2013/10/01/can-the-government-shutdown-derail-twitters-ipo/.)) In this case, the stage of the IPO process has an effect. David Lynn, a partner at Morrison Foerster and former chief counsel at the SEC’s Division of Corporation Finance, maintains that “[i]f the company is towards the end of the process and trying to price its transactions, it presents a lot of uncertainty and potential difficulties,” because “no one can look at the final versions of the registration statement, and that has to happen before they can price and sell securities.” ((Maggie McGrath, Government Shutdown Could Disrupt Twitter’s IPO Timeline, Forbes (September 30, 2013, 3:32 PM), http://www.forbes.com/sites/maggiemcgrath/2013/09/30/government-shutdown-could- disrupt-twitters-ipo-timeline/ (quoting David Lynn).))