By Emily Stephenson
WASHINGTON (Reuters) - If a budget stalemate in the U.S. Congress leads to an extended federal government shutdown, investors can expect potential interruptions to financial product approvals and new rules, though market oversight would not grind to a halt.
Most U.S. agencies would start shuttering all but the most critical operations, keeping only skeleton staffs at work, if lawmakers cannot reach a deal on a spending bill by midnight.
That means the U.S. Securities and Exchange Commission would still have an eye on exchange activity, potential insider trading and money market funds. But if a shutdown lasts more than a few days, it would not be able to review applications to register shares with regulators, including initial public offerings, or offer new financial products, according to an agency memo.
The exact timing of when the SEC would cease some functions is unclear. The agency says it will remain open and operational on October 1, even if a budget deal is not reached. But industry watchers say a more extended shutdown would impair the SEC's ability to foster capital raising.
"There's been a huge recovery in the number of IPOs this year relative to the last few years," said Izzy Klein, a financial services lobbyist with the Podesta Group. He said an SEC slowdown in approvals could hurt that recovery.
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.
A shutdown would not mean a financial free-for-all.
Bank regulators, including the Federal Reserve and the Consumer Financial Protection Bureau, would stay open because they do not rely on Congress for funding.
The SEC and the Commodity Futures Trading Commission, on the other hand, do rely on government appropriations for funding. But they plan to maintain some market-monitoring activities.
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.
But markets could see some impact from a government shutdown, particularly if it dragged on more than a few days.
The CFTC said it would stop reviewing victim complaints and assisting other law enforcement agencies. 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.
Work on new rules, including those required by the 2010 Dodd-Frank Wall Street oversight law, would pause at those two agencies. The SEC is due to release rules related to asset-backed securities but they could face delays.
Agencies besides the two regulators also would be affected.
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," Podesta Group's Klein said. "Is one day just a hiccup or does it have some reverberations? I don't know."
(Reporting by Emily Stephenson, Sarah N. Lynch and Douwe Miedema; Editing by Karey Van Hall and Dan Grebler)