Most SEC employees are furloughed. In the agency's shutdown plan posted on its website, it said "all non-emergency rule-making, non-emergency interpretive advice, staff no-action letters, and processing new or pending applications for exemptive relief" will be halted during the shutdown.
That could lead to a delay in the SEC's rule-making agenda, Gail Bernstein, general counsel for the Investment Adviser Association, said in an email. "The agency will need to play catch-up once it gets back to work and, at the very least, rule-making initiatives will probably have lost some momentum," she said.
The SEC has a host of proposed rules currently under consideration, including the standards of conduct package, also known as Regulation Best Interest, that's slated to be finalized by September. The proposal has three legs: the best-interest standard, which compels brokers to put clients' financial interests ahead of their own and requires them to mitigate financial conflicts; the client relationship summary, or Form CRS, which necessitates that firms disclose to retail investors the nature and scope of their services, the types of fees incurred, conflicts of interest faced by the firm and the firm's disciplinary history; and a proposed standard of conduct for investment advisers that requires them to act and provide advice that is in the best interest of the client.
Ms. Bernstein said whether the package gets delayed depends on "how close it was to going out the door at the time of the shutdown. If it was close to ready, the shutdown likely won't derail it."
David G. Tittsworth, a Washington-based lawyer at Ropes & Gray LLP, said the SEC's rule-making operation is losing at least a month and likely will cause timelines to slide, although there are no exact deadlines that must be met.
"It is disruptive," Mr. Tittsworth said of the shutdown. "It isn't like at these agencies, once the shutdown is over, that you walk in the door and nothing has changed. It takes a little time for them to get back up and running."
Clients who have filed applications with the SEC to become registered investment advisers, like private equity firms and hedge fund managers, also don't know where they stand, Mr. Tittsworth said. Since the SEC isn't currently reviewing applications, those applicants would be taking a risk in launching their operations before the shutdown is over. "It just puts people in a really difficult situation."
There's also uncertainty for some businesses planning to go public through an initial public offering. For those that have largely completed the SEC review process, the process should be straightforward once the SEC staff to return to work, according to Andrew L. Fabens, New York-based co-chair of Gibson, Dunn & Crutcher LLP's capital markets practice. But those that are in the beginning stages of an IPO filing are subject to the staff working through a growing backlog, he added. Private equity general partners seeking to use an IPO to exit investments will also face a delay.