Investors at Risk: Government Shutdown, SEC Closure Opens Door to Fraud

As the government shutdown nears the end of its third week, the U.S. Securities and Exchange Commission is still largely inoperable. Amid the partisan sparring, financial experts are concerned the continued lack of market oversight and regulatory enforcement are creating conditions ripe for misconduct.

As noted in a statement posted on the SEC website, the agency is adhering to plans for bare bones operations during the lapse in appropriations. As of December 27, and until the shutdown ends, the SEC will have only a “very limited number of staff” available.

Though the agency functions as a conduit for investor protection and market integrity, it does not currently have the manpower to perform all its essential functions. Instead, the SEC states it’s using what little staff it has to respond to emergency situations, and continue the operation of certain systems, such as EDGAR, its public database of SEC filings.

The statement, which is brief, does little to instill confidence or detract from the fact that investors are less protected now than they were prior to the shutdown.

Why the SEC Shutdown Matters

Since 1976, there have been more than 20 gaps in federal government funding, 10 of which also involved furloughed federal employees. While shuttering the government may seem like a way to save taxpayers money, it can cause far more harm than good, both in the short and long-term. Sending workers home, not paying debts, and not collecting fees all comes with a cost – and that cost escalates each day federal agencies remained closed.

That’s objectively bad from a broad number of perspectives, whether it’s placing strain on employees and families or covering interest, back pay, and increased costs when all is said and done. As reported by Investment News, it’s also a downright dangerous situation for investors, especially with investment fraud on the rise.

Here are a few reasons why the SEC shutdown puts investors at risk:

• Big-time fraud without borders – Per its website, the SEC hasn’t filed an enforcement action against a broker or brokerage firm since December 26. That’s despite having charged 13 people in a single $1.2 billion Ponzi scheme just last month. Massive schemes like that have been on the rise recently, according to Investment News. A lack of enforcement and filings means any massive fraud the SEC may have been able to bring down will continue business as usual, harming investors and piling on the losses.
• Bad actors see their spotlight – The government shutdown has resulted in the furlough of nearly 95% of the SEC’s workforce, leaving only a skeleton crew of less than 300 staff. Whoever those workers may be, there simply is not enough of them to effectively oversee the 26,000+ advisors, brokers, and exchanges currently registered with the SEC. That lack of oversight creates an immediate opportunity for bad actors to swindle investors and small businesses.
• Preventing relief for wronged investors – Without the resources, time, and manpower to investigate fraud, the SEC has little means of helping investors obtain relief after they do suffer losses as a result of misconduct. That can place a significant strain on the wronged and weary, whose damages may exacerbate the longer wrongdoers are held unaccountable and the longer they go without initiating the process for relief.
• Long-term risks – With the shutdown soon to assume the title for longest government shutdown in U.S. history (the record being 21 days in 1996), concerns over the long-term impact of lax oversight are growing. While reopening the agency in the coming days or weeks would still have already created risks for investors and opportunities for bad actors, those repercussions would pale in comparison to the broad breakdown in market integrity that could accompany a longer closure. Historically, government shutdowns haven’t had an inordinately bad impact on market mood, but experts believe that would change the longer agencies decrease or cease reporting on market data and keep investors in the dark, IPOs remain in limbo, and securities markets go without a watchdog.

It’s an unfortunate reality that as we wait for a deal to reopen the government and fund important agencies, risks for investment fraud and losses, among many other problematic issues, only increase. Our team at Meyer Wilson, however, will continue to do what we do each day, every day: protect investors who’ve suffered losses as they seek justice following fraud, misconduct, much more. If you have questions about our services or a potential case, contact us online or call (614) 532-4576. Our firm serves clients nationwide.