Nation & World

Extended shutdown of SEC could delay IPOs, affect rest of market, experts warn

An American flag flies outside the headquarters building of the U.S. Securities and Exchange Commission in Washington on Dec. 22, 2018. CREDIT: Bloomberg photo by Zach Gibson
An American flag flies outside the headquarters building of the U.S. Securities and Exchange Commission in Washington on Dec. 22, 2018. CREDIT: Bloomberg photo by Zach Gibson

The shuttering of the Securities and Exchange Commission during a prolonged government shutdown could ripple throughout the markets, including slowing some highly anticipated stock offerings by companies such as Uber and Lyft, securities experts say.

The agency provides day-to-day guidance to companies weighing what to disclose to shareholders and must sign off on most initial public stock offerings, or IPOs. Without this advice, companies may have to delay mergers, public offerings or even annual meetings, experts note.

“Asking the SEC to shut down is a bit like asking someone to hold her breath. You can do it for a while without disastrous consequences, but at some point you turn blue and the effects become quite serious,” said Joseph Grundfest, a professor at Stanford Law School and a former SEC commissioner.

The nearly two-week old shutdown comes as Wall Street is expecting big companies including Uber, Lyft, Airbnb and Pinterest to conduct IPOs this year, pushing the amount raised in public markets into record territory, said Kathleen Smith of Renaissance Capital.

But in order to stage those public offerings, the companies need the SEC to sign off first. If the federal government shutdown is prolonged, it could slow down the process of “getting IPOs out the door,” said Smith, a manager of IPO ETFs, an exchange-traded fund that tracks IPOs of various companies. “It is critical. [These companies] want to get reaction from the SEC on their documents.”

An extended shutdown of this part of the Wall Street would eventually turn into a drag on the economy, said James Angel, a Georgetown University finance professor. “The capital markets are the lifeblood of the economy, corporations need to be able to raise money, to invest,” he said.

Even without the partial government shutdown, Wall Street has seen volatile swings in the past year, with markets posting the worst yearly decline since 2008. The Dow Jones industrial average, an index of 30-well known companies, fell another 2 percent Thursday after Apple surprised the markets by lowering its quarterly estimates for the first time in 15 years.

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Large parts of the government, including the SEC, have been shuttered since Dec. 22 amid President Trump’s demands for more than $5 billion to build a new wall along the U.S.-Mexico border. With no obvious path to a compromise, congressional leaders have said the shutdown could be lengthy. It could go on “for months and months,” said Sen. Richard Shelby, R-Ala., chairman of the Appropriations Committee.

The effects of the showdown are already being felt throughout the country. Hundreds of thousands of federal government employees have been furloughed and major components of the U.S. immigration system are offline due to the shutdown. It has also left many national parks without most of the rangers and others who staff campgrounds and keep the parks running.

The SEC, of course, has endured shutdowns before. Lynn Turner, a former chief account for the SEC, served during a brief shutdown in 1990 but says this time is different. “We were told not to go in for work but people were not as concerned about it then,” said Turner, a senior adviser at accounting firm Hemming Morse. “But I don’t think there was the level of uncertainty you have today.”

But, for now, the existing crew of a few hundred workers will not continue work on ongoing investigations or start news ones. At the top of the agency’s website, it tells visits that “SEC has staff available to respond to emergency situations involving market integrity and investor protection, including law enforcement.”

If the shutdown remains brief, the impact on investigations is likely to be minor, securities experts say, noting that SEC cases tend to take months or years to complete. Still even a brief halt t offers companies targeted by the SEC some breathing room, they say. It may also make it harder to pursue some cases that are already close to their statutes of limitations.

“Clearly not having the cops on the beat is going to make it easier for the bad guys,” said Angel, of Georgetown. “Losing hundreds of human years of investigative capacity is going to make it harder to bring cases.”

Also pressing, securities experts say, is the absence of the day-to-day guidance the SEC offers to companies on matters both complex and mundane. January begins a busy season in which corporate executives are preparing major reports for shareholders, including an annual report and a proxy statement. While compiling those documents, executives often ask SEC for help interpreting complex rules, securities experts say.

“The SEC’s phone rings countless times a day for exactly that type of guidance,” said James Cox, professor at Duke University School of Law.

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The shutdown has also left some companies in limbo awaiting key decisions. Johnson & Johnson, for example, has asked the agency to weigh in on whether it must allow its shareholders to vote on certain issues. The dispute is being closed watched throughout corporate c-suites and by investors, said Turner, the former SEC chief accountant.

But “there is no one at the SEC to give them that answer,” he said. “Until J&J can get that answer from the SEC, they can’t move forward.”

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