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US SEC rushes back to work as another shutdown looms on the horizon

Wall Street's chief securities regulator is racing to address a backlog of submissions ahead of a February deadline that could once again partially close the agency's doors.

With the U.S. federal government reopened after the longest shutdown in its history, the SEC resumed normal operations Jan. 28. Now, the agency's staffers will have to sift through the hundreds of largely untouched registration statements, whistleblower tips and other filings that were submitted while most of the SEC's roughly 4,400 employees were furloughed.

"Thirty days is a long time for the SEC to not be at work, and the volume of materials that have probably flowed in during that period would be somewhat overwhelming," said Michael Liftik, a partner with Quinn Emanuel Urquhart & Sullivan LLP who previously served as deputy chief of staff for former SEC Chair Mary Jo White. "There's clearly going to be a massive triaging exercise."

To handle the backlog of filings, the SEC plans to tackle each one based on when it was submitted, several of the agency's divisions said in statements posted to the SEC's website. The SEC's Divisions of Investment Management, Trading and Markets and Corporation Finance said they would be willing to circumvent those plans in cases of "compelling circumstances."

But the SEC may only have a few weeks to take on the lion's share of those filings with its full staff.

On Jan. 25, President Donald Trump approved a plan to reopen the government for three weeks amid continued negotiations over funding for his proposed border wall. If a deal is not reached by Feb. 15 though, the government could again shutter, and the SEC could once again face a massive reduction to its staffing levels. The December 2018 shutdown forced roughly 94% of the SEC's staff to be furloughed, leaving the regulator with only 285 individuals.

"There's a real risk that things are going to be closing down again in the middle of February," said Gary Goldsholle, a partner at Steptoe & Johnson LLP and former deputy director of the SEC's Division of Trading and Markets. "If people are concerned about what might be happening on February 15th, they're going to rush to get things in as well."

One of the biggest points of contention on Wall Street about the shutdown surrounded the SEC's Division of Corporation Finance and its inability to provide insights to companies preparing for initial public offerings. That, several industry experts said, posed a threat to the handful of potentially historic IPOs slated for 2019.

Now, companies may try to accomplish as much of the IPO process as possible in the brief window of time the SEC is guaranteed to be open.

The rush to the public markets could also be accelerated by an approaching Feb. 14 deadline for companies to price their IPOs using third-quarter 2018 results. If they are unable to meet that deadline, those companies would have to refile updated financial statements with the SEC, which can be an "exhaustive" process, said John Reed Stark, a former SEC official who led the agency's Office of Internet Enforcement and now operates a cybersecurity consultancy business.

The shutdown also raised questions among lawmakers who worried that lacking resources at the SEC would infringe on the regulator's ability to properly monitor markets.

The SEC's Enforcement Division did have some employees on hand during the monthlong shutdown, but staffers will still likely need some time to build their investigations back up and explore recently filed whistleblower tips, complaints and referrals. Enforcement attorneys will also need to unfreeze the cases and investigations that were in process before the shutdown, which Stark said is "unprecedented" in the SEC's history.

"It's a tremendous, almost herculean, task that they have ahead of them with respect to the backlog," Stark said.

The SEC's staffers will likely be working with some degree of urgency in the coming weeks as they near another potential shutdown in February, said Quinn Emanuel's Liftik, who also worked as an enforcement attorney at the SEC. While the government shut down on various occasions during Liftik's nearly 10 years at the SEC, the agency never fully ran out of funding.

"Typically, the attitude of the staff was to put their heads down, do their work and not worry about the politics," he said of the times the SEC was facing a potential shutdown while he worked at the agency. "With this shutdown, that's probably harder to do. But I think the leadership will be signaling to their staff: Do the work that's on your plate, three weeks is a long time [and] don't worry about what's going on."