By Emily Stephenson and Sarah N. Lynch
WASHINGTON (Reuters) - The U.S. Securities and Exchange Commission would continue reviewing IPO applications and monitoring markets as normal in the early weeks of a government shutdown, but market players are increasingly anxious about the prospect of a prolonged funding gap.
The U.S. Securities and Exchange Commission expects to stay open on October 1 and to continue operating fully for a few weeks, a spokesman said, even if the rest of the federal government starts shutting down when funding runs out at midnight.
"The SEC will be able to stay open in the event of a funding lapse," spokesman John Nester said, explaining that the SEC has funds that are not available to most other U.S. agencies.
"We have determined that our carryover balances are sufficient to allow us to remain open for a few weeks if there is a lapse of appropriations," Nester said.
Even if the SEC did run out of funds and was forced to scale back operations, securities regulators would still keep an eye on exchange activity, potential insider-trading and money funds.
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However, at that point the SEC would have to discontinue some operations, such as processing applications, which could include the initial public offering for Twitter Inc and plans from Cameron and Tyler Winklevoss to launch a Bitcoin-tracking exchange-traded product.
"Volatility as a result of a potential shutdown is a big issue," said Jonathan Crane of KeyBanc Capital Markets. "It's the enemy of pricing transactions."
Federal government funding runs out at midnight, the end of the 2013 fiscal year. Members of the House of Representatives and the Senate would need to agree on a plan to pay for the government, even temporarily, to keep the doors open on Tuesday.
Lawmakers have averted several such crises in the past. They have been unable to agree so far, in large part because a number of Republicans want to delay President Barack Obama's signature health reform law as part of any deal to fund the government.
If they do not reach a deal this time, most U.S. agencies would start shuttering all but the most critical operations, keeping only skeleton staffs at work.
A shutdown would not mean a financial free-for-all.
In fact, some experts say shutting down the government would be a minor blip for markets compared with what would occur later this month if lawmakers do not raise the debt ceiling.
"The conventional wisdom is this is a precursor for the debt ceiling fight, which will have immediate and substantial ramifications for the economy," said Jason Rosenstock, head of government relations at ML Strategies in Washington.
JPMorgan Chase & Co has set up a working group to monitor the potential consequences of a federal government shutdown or debt default on the company's customers, which include state and local governments, as well as businesses, according to a person familiar with the matter who declined to be identified or provide additional details.
MARKET JITTERS
Several big-name IPOs are possible in the next few months, including household names such as Twitter and Chrysler Group. Those offerings are not likely to be called off overnight, but a shutdown could create problems later on.
At a certain point, the SEC likely would not be able to review applications to register shares with regulators, including IPOs, or offer new financial products, according to an agency memo.
"If I'm an underwriter, I'm nervous about this situation because the IPO market has windows opening and closing all the time," said David Lynn, a partner at Morrison & Foerster who previously worked at the SEC.
"If a shutdown drags on a for a few weeks, then it may cause a lot more companies to rethink their IPOs," Lynn said.
Large companies that need to quickly offer securities to raise cash would face smoother sailing during a prolonged shutdown because they can file "short form" registration statements that go into effect automatically, said David Martin, a partner at Covington and Burling LLP who previously led the SEC's division that reviews security offerings.
Smaller and mid-sized companies, he said, would likely face more trouble. "I think where it would be much more problematic is for a company that wasn't doing an IPO that didn't qualify for a short form of registration that's effective automatically and was trying to go to the capital markets," he said. "In those situations, it would be dicey."
OTHER REGULATORS BRACE FOR SHUTDOWN
Bank regulators, including the Federal Reserve and the Consumer Financial Protection Bureau, would stay open during any government shutdown because they do not rely on Congress for funding.
The SEC, which does rely on government appropriations, was still able to stay open during shutdowns in the 1990s.
Other regulators, including the Commodity Futures Trading Commission, do not have access to extra funds during a shutdown and would have to quickly scale back operations.
CFTC Chairman Gary Gensler said last week his agency was rushing to approve a new type of trading platform because such reviews would have to stop if the government shut down.
The Justice Department's antitrust division, which is preparing to litigate to stop American Airlines from merging with US Airways , would keep working on merger investigations, but stop any activities that could be delayed.
The Federal Trade Commission would suspend all but its merger investigations. That is because the agencies have a limited window during which they can challenge mergers.
Some market-sensitive data also could be delayed, including the monthly employment report.
The U.S. Energy Information Administration said on Monday it did not know if it would publish its weekly inventory data if the government shut down. That data lists U.S. supplies of crude and fuels, including gasoline, and is closely watched by markets.
"The view is that the longer it goes on, the worse it becomes," said Izzy Klein, a financial services lobbyist with the Podesta Group. "Is one day just a hiccup or does it have some reverberations? I don't know." (Reporting by Emily Stephenson, Sarah N. Lynch and Olivia Oran; Editing by Karey Van Hall, Dan Grebler and Cynthia Osterman)