As Congress works on an eleventh-hour plan to end the standoff over the shuttered government and potential default on the federal debt, regulators are laboring to oversee business activities with a skeleton crew.
Even after the federal budgets are restored, regulators such as the Securities and Exchange Commission, the Food and Drug Administration, and the Occupational Safety and Health Administration could take weeks to return to full operations. Meanwhile, new drugs are going unapproved, workplace discrimination claims are going uninvestigated and companies are getting a temporary break from new SEC rules.
The White House's Office of Information and Regulatory Affairs, for example, is not reviewing proposed regulations because of the shutdown. The Federal Register, routinely filled with hundreds of pages of new, proposed, and effective rules, has winnowed to a mere smattering of announcements. Last Monday and Tuesday not a single new regulation was published, a true rarity.
The majority of employees at the OSHA are on furlough. The FDA gutted nearly all staff not funded by industry fees and put product approvals and new drug applications on hold. The Environmental Protection Agency slashed staff by 95 percent, despite a slate of controversial new rules it is administering to reduce power plant emissions and a Presidential order to reduce carbon pollution.
The Equal Employment Opportunity Commission put a hold on all workplace discrimination claims. The National Labor Relations Board furloughed 99 percent of its staff, holding onto only 11 staffers. Aside from “emergency” situations, nearly all hearings and investigations have ground to a halt.
John Epstein, a partner with the law firm Holland & Knight, offers examples of how the shutdown affected the aeronautics and air travel industries. Charter flights on large commercial airlines have been canceled, because a trip prospectus must be approved by the Department of Transpiration, something it will only do now for humanitarian purposes. “A company trying to take an aircraft off their fleet can't get approval to take it out so they can sell it,” he says of another regulatory hazard stemming of the shutdown.
Some companies may even find that they have difficulty hiring new employees during the shutdown. The concern, says Jay Starkman, CEO of the human resources outsourcing firm Engage, is that E-verify, an online service run by the Social Security Administration and Homeland Security to collect I-9 documentation to prove citizenship, is offline for the foreseeable future.
To screen new employees, the government requires that I-9 documentation must be collected within three days of a hire. When its up and running there are more than 500,000 employers using it, Starkman says. To work around the problem, states have stopped requiring it, he adds.
Open for Business
Still, the shutdown hasn't completely slammed the door shut at most regulatory agencies. Bank regulators stayed in business by drawing upon the fees they collect rather than a Congressional appropriation.
At least temporarily, the SEC has also remained mostly open by dipping into its version of a rainy day fund. “It is not uncommon for us to have carryover balances at the end of a fiscal year, and we have determined that our carryover balances are sufficient to allow us to remain open for a few weeks,” the SEC said in a statement.
The Commodity Futures Trading Commission, dependent upon Congressional funding, hasn't fared so well. The number of staffers reporting to work dropped from 680 employees to a mere 28 (just two staffers are currently occupying its Chicago office during the shutdown). It drastically reduced nearly all functions and services, including market monitoring, investigations, and rulemaking mandated by the Dodd-Frank Act.
“We'll have to go back and look at all the tips, and in three to four months we may be able to find something that went wrong in the markets, but that's certainly not going to help anybody who loses money today.”
—Bart Chilton,
Commissioner,
CFTC
The CFTC's staffing woes come at a particularly bad time. The agency is deep into rulemaking to meet Dodd-Frank Act mandates, including oversight of the swaps market and efforts to achieve cross-border harmony on new derivatives trading rules. Lacking staff, there is no clarity, guidance, or no-action letters to accompany newly effective rules pertaining to swap execution facilities and electronic options platforms that began last week.
Prior to the shutdown, the CFTC issued a variety of time-limited no-action letters to offer additional time to meet new reporting and confirmation requirements. Further guidance is on hold, however, as are international demands for clarity on its cross-border reach. Also in limbo is compliance with risk limit rules for futures commission merchants. Intended to begin on Oct. 10, those rules have been pushed off until at least November. “It's horrible,” says CFTC Commissioner Bart Chilton.
Although the CFTC still collects whistleblower information and tips, it doesn't have the manpower to do much with them and the tracking system is currently offline.
“We'll have to go back and look at all the tips, and in three to four months we may be able to find something that went wrong in the markets, but that's certainly not going to help anybody who loses money today,” Chilton said. “The exchanges are there, and they watch out, so there is some oversight, but it is not federal regulators doing the work we do every day,” he says.
Chilton says the inability to shepherd rules for swap execution facilities (effective Oct. 2) and cross-border guidance (effective Oct. 9) is especially problematic. “While some swap execution facilities are very conservative and doing exactly what they think we want, others, because we haven't provided clarification, aren't,” he says. “The folks who are complying to the hilt could lose business. There is a competitive disadvantage for them to comply when others are not.”
The CFTC's troubles resurrected the occasional push to merge it with the SEC. Chilton says that the debate should instead focus on how the agency fills its coffers. It should be allowed to use settlements and fines, or at least a percentage of them, to fund its operations, a Congressional redress he has thus far unsuccessfully pushed for.
WHO'S ON THE JOB AT THE SEC?
The following is from The Security and Exchange Commission's plan for operations during a government shutdown. It details which activities initially remained operational, and those that didn't.
MAJOR FUNCTIONS THAT WILL BE CONTINUED; SYSTEMS THAT WILL REMAIN FUNCTIONAL
Law Enforcement/Litigation: Handle emergency enforcement matters, including temporary restraining orders and/or investigative steps necessary to protect public and private property; monitor the Commission's “tips, complaints, and referrals” system and web-based investor complaint system and process referrals from self-regulatory organizations and others to identify matters that are emergencies and take follow-up steps relating to such emergencies; ongoing litigation that cannot be deferred where there is a threat to property; and emergency examinations and inspections.
Systems Available for Filings: EDGAR and other filing systems will remain functional.
Market Monitoring and Surveillance: Perform Market Watch activities and monitor market technology operations; monitor any broker-dealers reported as being in financial distress; money market fund surveillance and monitoring; and monitor any international market developments that might impact the United States.
MAJOR FUNCTIONS THAT WILL BE DISCONTINUED
Ongoing litigation, except matters that cannot be deferred as described above; investigative work, including commencing investigations and conducting investigative testimony, except as necessary for the protection of property; pursuing the collection of any delinquent debts or work to distribute funds to harmed investors; and non-emergency examinations and inspections and related follow-up.
Review and approval of applications for registration by entities (e.g., investment advisers, broker-dealers, transfer agents, nationally recognized statistical rating organizations, investment companies, and municipal advisers) and with respect to new financial products; review and approval of self-regulatory organization rule changes; review and acceleration of effectiveness of registration statements by issuers for securities offerings; review of periodic reports and other filings; and non-emergency support to registrants.
All non-emergency rulemaking; non-emergency interpretive advice, staff no-action letters and processing new or pending applications for exemptive relief.
Routine oversight of self-regulatory organizations and the PCAOB.
Non-emergency assistance to foreign authorities under bilateral or multilateral arrangements; and participation in multilateral organizations and working groups.
Source: SEC.
“We are solely dependent upon congressional appropriations,” Chilton says. This is particularly painful because the CFTC collected substantial settlements and civil monetary penalties in recent weeks, notably those related to the LIBOR manipulation scandal. “A week ago Monday, we returned $1 billion to the federal Treasury, he says, “then on Tuesday we had zero, zip, nada, to operate.”
The regulatory talent pool could also suffer if there is a prolonged shutdown. While visiting the CFTC's Chicago office, for example, Chilton says a key employee, with the agency for more than two years, was on the phone to render his resignation. “They just can't take the uncertainty of the government anymore,” he says.
Others will feel the CFTC's pain if the shutdown is prolonged. The SEC runs the risk of burning through those carryover funds and having to furlough staff.
“In many ways it is business as usual,” says John Reed Stark, a managing director at Stroz Friedberg, an intelligence, investigations, and risk services firm. “SEC staff is very used to working under budgetary constraints because Congress has put a lot of pressure on it for the last several years. They are used to fighting for every nickel.”
Stark worked for the SEC for nearly 20 years, and was on the job during the government shutdowns of the 1990s. Enforcement activities, he says, shouldn't be very much affected at all by the shutdown or its aftermath. This is in part because many view themselves as akin to firefighters and police officers, where duty is all that matters. “I don't think the shutdown is going to smolder that enthusiasm,” Stark says. “If anything they are going to be even more motivated.”
A Backlog Coming
There will be disruptions, however. Restrictive travel budgets, for example, could hinder regulatory investigations and other regulatory duties, says Stark. The SEC's Office of International Affairs, which fosters international relationships with regulatory counterparts, is greatly affected. “They build a lot of bridges by going overseas,” he says. “With overseas regulators, it is always useful to have a someone who has a relationship with your agency, understands your mission, and wants to help you.”
Even after the budget impasse is resolved, don't expect an immediate return to normal. Workloads will be overwhelming and systems overloaded. Starkman uses the E-verify system as an example. “When it comes back online, there will be a backlog,” he says. “There's not a magic switch and all of a sudden everything will be smooth sailing. It is still going to be clunky and maybe unavailable for a while.”
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