As the latest federal government shutdown extends into days (and potentially weeks), the regulatory agency overseeing federally-registered RIAs is operating with a skeleton crew. While a government shutdown impacts operations at the Securities and Exchange Commission (SEC) to varying degrees, among those most affected could be new RIAs with significant managed assets looking to register, according to compliance experts.
According to Dan Bernstein, the chief regulatory counsel with MarketCounsel, registrants can still submit filings to the SEC during a shutdown, but the agency won’t review most filings (including those from new firms seeking regulatory approval) until the government reopens. Therefore, if a new advisory firm intends to launch with over $100 million in AUM (the threshold for SEC registration) and has timed its regulatory approvals (and founders’ resignations from their current employers) for a fall 2025 launch, those plans are now in jeopardy.
“You are 100% on hold. You’re not going to be an investment advisor until your firm is approved,” Bernstein said. “So, if you are planning on filing now and being up and running at the beginning of November, then every day (of the shutdown) pushes that back another day.”
The U.S. government shut down this week after the White House and lawmakers failed to pass legislation on extending federal funding (while Republicans hold the White House, the House of Representatives and the U.S. Senate, funding bills failed to hit the 60-vote filibuster-proof threshold in the Senate).
According to NBC News, Democrats demanded assurances about extending health care funding (including Obamacare subsidies set to expire at the end of this year); Republicans said they would only negotiate via the regular federal funding process. It’s the first government shutdown since a 35-day shutdown in late 2018 and early 2019 during Trump’s first term.
Federal agencies have different policies in the event of a shutdown. According to the SEC’s shutdown policies, approximately 9% of SEC staff stay on the job during shutdowns, “to protect life or property, including engaging in law enforcement activities,” while the rest are on furlough.
According to the plan, the minimal staff will be on hand to receive tips and complaints, as well as handle emergency enforcement (such as temporary restraining orders) or continue litigation where there’s a “risk to property.”
However, new registrant filings are directly affected by the shutdown. A new firm’s review process typically takes 30 to 45 days upon filing for registration approval; however, as of the start of the shutdown, there will be no one available to review those submissions.
According to Bernstein, the longer the shutdown lasts, the worse it becomes.
“For every day that nobody will review applications for an advisor, that’s a day those advisors cannot do their business and another day where more have been filed,” he said. “So when the SEC comes back and turns on the lights and computers, rather than coming into five filings, they might come into 500 filings, which will then take longer for them to go through everything.”
According to a spokesperson, the SEC is unable to respond to most press inquiries because of the lapse in appropriations, but reiterated that the commission is currently operating “in accordance with the agency’s plan for operating during a shutdown.”
However, filings through EDGAR, the Commission’s IARD System, and CRD will continue as usual, as they operate under contract with third parties. Stacie Craddock, the CEO and founder of Colorado-based Integrated Compliance Advisors, stressed that filing deadlines for firms remained in place, even though the commission’s response might be delayed.
Craddock said she had one client in the midst of an SEC exam process and cautioned that they were still required to submit information by the mandated time, and that she would not advise firms to expect the commission to grant registrants leeway on those mandates.
Max Schatzow, a partner with RIA Lawyers, didn’t expect much impact on his clients, noting that while RIAs wouldn’t be able to seek informal guidance from the commission during the shutdown, regulators are usually slow to respond to such requests anyway. While Schatzow had one client scheduled for examination this coming week, SEC staff reached out to postpone it.
“If you are notified about an examination or enforcement matter during the shutdown, know that it is an emergency,” Schatzow said.
However, Craddock acknowledged new registrants were “up in the air,” noting she had three new firm clients stuck in a postponed queue and waiting along with everyone else for the government to open up.
For those advisors about to start new firms and weighing when to resign from their current employers, she encouraged them to stay up-to-date on developments related to shutdowns.
“But if it starts going out to two to three weeks, I would heavily advise them to revise the timeline and not resign until they know it is back open, or it’s at least heading there,” Craddock said.
The shutdown could also indirectly impact advisors in a multitude of ways; for example, Samuel Wagner, founder of the Indianapolis-based RIA WealthGuides, is concerned that the Federal Reserve will not receive essential economic data from government agencies like the Bureau of Labor Statistics.
“Now, do I think they’ll find a way to get the rank and file to work and get this data across town to the Fed during the shutdown? I sure do,” Wagner said. “But it’s going to slow down how quickly they can get and act on accurate data.”
But when it comes to advisors’ expectations of regulators during the shutdown, Craddock and Bernstein emphasized that oversight of state-registered advisors by state compliance officers will continue apace, and FINRA remains unaffected.
Craddock urged firms to continue business as usual while expecting delays from federal regulators, and Bernstein stressed that federal furloughs don’t extend into the private sector.
“Just because the regulator might be closed, it doesn’t mean that you’re closed,” Bernstein said.
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