The Securities and Exchange Commission and the Commodity Futures Trading Commission, could both be forced to close if lawmakers don't come to a resolution — potentially hamstringing several interagency efforts, including the Volcker rule and a host of derivatives rules that have yet to be finalized.
The primary banking regulators, including the Federal Reserve Board, the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau and the Federal Deposit Insurance Corporation are all poised to remain open in the event of a shutdown, because none are subject to the federal budget.
The SEC said Monday that it has additional funds to remain "open and operational" on Oct. 1 if a government shutdown occurs, but it's uncertain how long that money would last. The agency remained open during the entirety of the last government shutdown, which lasted for 21 days starting in December 1995.
Still, there is "some distraction inevitable" in the event of a possible shutdown, said David Lynn, a partner at Morrison Foerster and former chief counsel at the SEC's Division of Corporation Finance, who was at the agency in the mid-1990s during the last budget battle. "Human nature kicks in and some of the time you're worried about making your mortgage payment" if the agency does have to close, along with the internal meetings and other procedural work that goes into preparing for a possible shutdown.
The CFTC will implement its shutdown plan on Tuesday if the government is not funded, a spokeswoman confirmed on Monday. Only "essential" employees would be permitted to work in the case of a shutdown — just 6% of SEC staff and 4% of CFTC staff, according to shutdown operating plans the two agencies published last week.
Functions that would remain ongoing "include those related to emergencies involving the safety of human life or the protection of property, including law enforcement functions; those for which there is an express authority to continue during an appropriations lapse; and those for which authority to continue during an appropriations lapse arises by necessary implication," the SEC said in its plan, issued Sept. 27.
Such operations would not include day-to-day work like the writing of regulations, such as the long delayed Volcker rule, which would impose a ban on propriety trading at commercial banks. The rule, first proposed in 2010, is still being drafted by five agencies, including the SEC and CFTC.
Comptroller of the Currency Thomas Curry pledged last week at American Banker's Regulatory Symposium that regulators would issue the rule by the end of the year, a deadline that could be difficult to meet if key staff are delayed for several weeks due to a shutdown.
The rule is now in its final stages and rests in the hands of several dozen staff economists at the SEC to calculate the costs and benefits of its numerous and complex provisions, Bloomberg reported Monday morning.
The SEC and CFTC have also been working to implement a host of key derivatives rules under the Dodd-Frank law, and the SEC is separately pursuing reforms to money market mutual funds — work that would stop in the wake of a government shutdown, in addition to work on pending enforcement actions.
"People are basically prohibited from working — as an employee, you can't take work home and do it from there," said Lynn.
Brian Gardner, an analyst with Keefe, Bruyette & Woods, said that timing delays would become more apparent the longer a shutdown lasts.
"If it goes on for several weeks, then you start to see an effect on the timing of rules that need to be finalized," he said.
Shutdown May Hurt Broader Economy
Analysts also warned that the ongoing budget fight could have wider implications for the economy beyond the impact on specific agencies and programs.
"We see no upside for financials or housing in a shutdown," said Jaret Seiberg, a policy analyst at Guggenheim Securities, in a note to clients Monday. "Any benefit from delayed rules or fewer enforcement actions is greatly offset by the risk that a shutdown could weaken consumer confidence and slow economic growth."
As is the case with more specific issues, the key question is how long the looming shutdown lasts. Estimates range from a few hours to several weeks — a particular cause for concern because the U.S. is expected to reach its debt limit Oct. 17 unless Congress quickly acts to raise it.
"Our sense is that if the government does shutdown at midnight it will last for either a matter of hours or well into mid-October when the impending debt ceiling deadline will force Congressional action," said Isaac Boltansky, an analyst at Compass Point Research & Trading, in a note to clients Monday. "Congress faces a 'must act' deadline in mid-October which we believe would serve as a catalyst to end a government shutdown if it were to last that long."
Still, Seiberg warned in his note that if the two events merge it could create "an even bigger mess."
"Our view remains that the market is underestimating the overall risk with both the budget and the debt limit," he said.