The federal government partial shutdown, now entering its second month, has had a severe impact upon the Securities and Exchange Commission, and its Division of Enforcement in particular, with enforcement activity coming to nearly a complete halt.
Funding for the SEC lapsed in December 2018. During a lapse of appropriations, the Anti-deficiency Act (31 USC §1341, et seq.) restricts the conduct of agencies’ staff except in very limited circumstances, including “emergencies involving the safety of human life or the protection of property.” Accordingly, the SEC immediately furloughed the majority of its personnel, leaving only a skeleton staff of supervisors to attend to ongoing emergency matters. Furloughed staff are prohibited from working until an appropriation has been enacted, and cannot even respond to email or voice mail messages.
The result is that the Division of Enforcement has virtually gone dark. All pending administrative proceedings pending before either an administrative law judge or the Commission have been stayed. The Division also has halted: (1) all investigative work, including commencing investigations and conducting investigative testimony, except as necessary for the protection of property; (2) pursuing the collection of any delinquent debts or work to distribute funds to harmed investors; and, (3) nonemergency examinations and inspections and related follow-up.
A small number of (unpaid) Division of Enforcement supervisory staff remain on duty to handle emergency enforcement matters, including temporary restraining orders and/or imminent deadline concerns, or investigations of ongoing fraud or misconduct that poses a threat of imminent harm to investors. The Division of Enforcement also continues to monitor for submissions to its Tips, Complaints, and Referrals system that appear to allege conduct that may pose a risk of imminent harm. The only litigation actions that appear to be proceeding are those necessary to comply with schedules that have been set by domestic and foreign courts and/or to avoid a delay that would prejudice the Commission’s litigation position (such as the running of a statute of limitation).
While the Division in a busy month might commence or settle several dozen enforcement actions a month, only a single action has been commenced in 2019. If the shutdown drags on for an extended period of months, risks to market participants from bad actors could increase. As the old proverb goes, when the cat is away, the mice will play.
