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The effects of the government shutdown may have far-reaching implications for both new fund launches and pending mutual fund/ETF dual share applications if it continues for an extended period, according to multiple financial industry sources. That, in turn, might hit financial advisors’ bottom line, as investment decisions get postponed and advisory fee revenue is lost.
On Sept. 30, the SEC Division of Investment Management posted an announcement on its website noting that while investment companies can continue making filings on EDGAR during the shutdown period, the division will be operating with a reduced staff and therefore will be unable to answer pending questions, act on requests for acceleration of pending registrations or qualify pending offering statements.
“The SEC is operating under a plan for ‘lapse in appropriations,’ under which only an extremely limited staff is available to respond to emergency situations. Given this, new filings that need approval will get delayed and could result in a backlog for ETFs like alternative crypto ETFs,” wrote Aniket Ullal, senior vice president and head of research and analytics at research firm CFRA.
While the shutdown will not completely stop fund launches, if it continues for some time, it will create a considerable slowdown in the pipeline, most likely to impact proposals pursuing novel strategies and those operated by less established asset managers, according to Aisha Hunt, principal at Kelley Hunt, an ETF and ’40 Act law firm.
It will also likely delay the granting of exemptive relief for asset managers seeking to create mutual fund/ETF dual shares, which seemed close to approval earlier this fall. Since exemptive relief requires resolving more complex issues than regular fund launches, such as cross-class cost sharing, liquidity treatment and tax impacts, it would be challenging to grant with a limited SEC staff, wrote Salvatore Faia, president and CEO of Vigilant Compliance, a Chadds Ford, Pa.-based compliance provider, in an email. The asset managers involved in those applications “will find themselves in a stand-still, unable to respond to comments or secure final effectiveness until full staff review resumes,” he noted.
Even before the federal shutdown started on Oct. 1, the SEC was dealing with staff reductions resulting from DOGE cuts made earlier this year, wrote Kimberly Flynn, president of consulting firm XA Investments, in an email. Those reductions were already having an impact on the length of time it took the agency to review new interval funds, Flynn noted.
Now, with the staff reduced to the bare minimum, she expects the length of time interval funds spend in the registration period to rise from roughly 6 to 7 months to 8 to 9 months. This is happening at a time when the number of new interval and tender offer funds in the SEC registration pipeline has risen considerably. XA Investments data indicate that 41 such funds are currently in the registration process, compared to 50 funds that launched during the full year of 2024. In addition, over 100 interval fund sponsors are seeking or planning to seek co-investment relief from the SEC.
“This is a much higher volume of requests than the SEC anticipated,” Flynn wrote. “Accordingly, the co-investment relief process will be significantly slowed down and therefore, firms without exemptive relief will be significantly limited in how their interval funds invest.”
Meanwhile, ETFs that are compliant with SEC rule 6c-11 and don’t require any complex new procedures will likely still be able to launch, wrote Hunt. However, asset managers won’t be able to discuss disclosure nuances or get interpretive feedback from the SEC as long as the shutdown lasts, she noted.
“For some issuers, that interaction is an extra layer of confidence; for others, it’s a step they’re comfortable streamlining if the structure and disclosures are straightforward,” she added.
In practical terms, it will likely mean that established asset managers with extensive experience and “repeatable templates” will be able to launch, while ETF issuers who are new to the field will likely prefer to wait for the SEC staff review.
For financial advisors, such delays will disrupt asset allocation plans and create new challenges in communicating with clients about why funds they had previously previewed and planned to commit to are suddenly not available, according to Faia.
Moreover, the uncertainty can stall inflows, affecting revenue tied to advisory fees or platform participation,” Faia wrote. “Ultimately, while the shutdown is a regulatory issue, its consequences ripple through the entire advisory ecosystem, creating timing mismatches, missed market opportunities, and operational inefficiencies that only resolve once the SEC resumes normal oversight.”