Essentials of the Dodd-Frank Act

Sanjay Anand

• Publisher: Wiley
• Year: 2011
• Print ISBN: 9780470952337
• eBook ISBN: 9781118028339
• Edition: 1
• Topic: Business
• Subtopic: Finance
• Index: Business

An executive overview of the new Financial Regulations Act

This book provides an executive summary of the newly passed Financial Regulations Act. It examines the most important sections of the Act, how it impacts the financial industry, as well as what executives must know and do in order to comply with the Act.

• One of the first books to provide an executive summary from a compliance perspective
• Presents responsibilities of senior level executives regarding this new Act
• Reveals what has changed within the regulatory environment
• Provides tips and techniques throughout

Describing the government regulation of securities, securities markets, and securities transactions in the United States, this timely book succinctly defines, describes, and explains domestic securities regulation for compliance officers, accountants, and broker-dealers.

Chapter 1

Introduction to the Dodd-Frank Act

The Dodd-Frank Act represents a new regulatory landscape for the financial services industry. As with any newly enacted legislation, it is imperative that organizations quickly get up to speed regarding both the broad strokes and the nuances of the law. When you stay ahead of the curve, you can anticipate your organization's need for new compliance initiatives, adjust your risk management framework to ensure that you do not run afoul of the law, and prepare your corporate governance structure and corporate culture to align with both the letter and the spirit of the law.

This book will provide you with the roadmap for this new landscape. By presenting both the big picture and the details of the Dodd-Frank Act, it better prepares you to lead your organization through a path of compliance and risk mitigation.

We begin with the genesis of the Dodd-Frank Act, examining the events that led up to its introduction, the key players involved, and a review of the legislation's timeline. From there, we take each of the Act's 16 titles and probe their meanings and implications:

• Title I of the Act addresses systemic risk of the economic system and creates two new governmental agencies: the Financial Stability Oversight Council and the Office of Financial Research. The goal of the Financial Stability Oversight Council is to identify systemic risks, promote market discipline, and respond to emerging threats. The purpose of the Office of Financial Research is to provide support to the Council through administrative, technical, and analytical means.
• Title II addresses the orderly liquidation of insolvent financial companies, some of which were already covered by the Federal Deposit Insurance Corporation (FDIC) or Securities Investor Protection Corporation (SIPC), and others—such as insurance companies—and provides for the creation of the Orderly Liquidation Fund, to be funded by certain financial companies.
• Title III abolishes the Office of Thrift Supervision, dispersing its powers among the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency. It also permanently increases the maximum amount of deposits insured by the FDIC and includes provisions for ensuring ethnic and gender diversity within financial regulatory agencies.
• Title IV adds reporting requirements for investment advisors and seeks to increase transparency. It also mandates three studies, two from the Government Accountability Office (GAO) (on defining “accredited investor” and self-regulation for private funds) and one from the Securities and Exchange Commission (SEC) (on short selling and related reporting).
• Title V creates the Federal Insurance Office within the U.S. Treasury to monitor the insurance industry, administer the Terrorism Insurance Program, and identify regulatory gaps that could lead to a financial crisis. It also includes a smattering of consumer protections as well as a mechanism to allocate premium taxes to individual states.
• Title VI addresses the Volcker Rule, which creates a “church and state” separation between banking and other types of financial services, such as hedge funds and private equity funds. It also calls for greater disclosure of proprietary trading and increased capital requirements.
• Title VII regulates over-the-counter swaps and repeals the regulation exemption that existed under the Gramm-Leach-Bliley Act. In addition, the title directs the Commodity Futures Trading Commission, the SEC, and the Federal Reserve to define security swap terms and mandates the creation of a group to oversee the carbon market, spot markets, and derivative markets.
• Title VIII grants the Federal Reserve more authority with regard to systemic risk by requiring it to create uniform standards for risk management for too-big-to-fail financial institutions and to strengthen the liquidity of market utilities.
• Title IX includes a number of investor protections and mandates a variety of studies. It creates the Office of the Investor Advocate, mandates the SEC to develop point-of-sale disclosure rules for investors, and provides for a whistleblower reward program. In addition, it gives the SEC broad power to regulate shareholder proxy materials and withhold information gathered by oversight activities. Further, it regulates asset-backed securities, requires publicly held companies to garner shareholder approval for and disclose executive compensation, and mandates disclosure of incentive-based compensation.
• Title X creates an independent Bureau of Consumer Protection under the auspices of the Federal Reserve and is tasked with five broad objectives: research, community affairs, complaint tracking, fair lending, and financial literacy.
• Title XI amends the Federal Reserve Act, giving the president authority to appoint, subject to Senate confirmation, the New York Federal Reserve president, and creating the position of vice chairman for supervision on the Board of Governors. It also includes provisions for the GAO to audit the Federal Reserve and requirements for the Federal Reserve to create standards (such as risk management and capital requirements) for institutions under their supervision.
• Title XII authorizes incentives that can be used by a variety of organizations to encourage those who do not utilize mainstream financial services to do so. It creates programs to conduct activities such as microloans, financial education, and getting low- and moderate-income people to open accounts in FDIC-insured banks.
• Title XIII reduces the funds available to the Troubled Asset Relief Program and amends the Housing and Economic Recovery Act of 2008, Emergency Economic Stabilization Act of 2008, and the American Recovery and Reinvestment Act of 2009.
• Title XIV contains a number of consumer protections related to mortgages and lending. It regulates mortgage originators, establishes a semblance of underwriting standards for residential loans, defines “high-cost mortgages,” establishes an Office of Housing Counseling within the Department of Housing and Urban Development, amends the Real Estate Settlement Procedures Act, defines property appraisal requirements, and tasks the Department of Housing and Urban Development with designing a mortgage resolution and modification program.
• Title XV includes a number of miscellaneous provisions relating to everything from mine safety and the International Monetary Fund to natural resource licensing and the effectiveness of Inspectors General.
• Title XVI redefines marked to market trades in Section 1256 contracts to exclude derivatives and futures contracts or options other than dealer securities future contracts.

After delving into each title of the Dodd-Frank Act, we move into the kind of actionable information that you need in order to move forward. We cover the effective dates and rule promulgation deadlines that you need to have handy as well as outlining the institutions impacted by the Act. From there, we review related legislation and rulemaking that could impact your industry and your organization, such as the Truth in Lending Act, the Fair Credit Reporting Act, and the Investment Advisers Act.

Then, after a summary of the roles of new and existing governmental agencies as defined by the Act, we analyze the global impact and implications of the Act for the banking and investment industries.

Next, we offer valuable advice for professionals impacted by the Dodd-Frank Act, including those involved with executive management, municipal securities markets, and broker-dealers.

Finally, we examine the Dodd-Frank Act's relationship to the Sarbanes-Oxley Act of 2002 (SOX) as well as its relationship to the Basel Accords. After all, newly minted legislation often leaves imprints on the statutes that preceded it and sometimes has unintended consequences. If your organization is required to be SOX compliant, it is crucial to understand how the Dodd-Frank Act will impact your compliance initiatives.

Although this book is written primarily for senior-level professionals, executives, and board members in the financial services and legal professions, it will also be useful to those in other disciplines, such as accounting, audit, information technology, and ethics. Like SOX, the Dodd-Frank Act will affect those at every organizational level, from the chief executive to middle management and beyond. This book seeks to impart information to anyone who may be impacted by the Act, both to prepare for the regulations that will inevitably follow and to create a roadmap for implementing specific titles and sections of the Act within organizations.

Chapter 2

History and Background

After reading this chapter, you will be able to

• Understand the events that led to the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
• Grasp the scope of the Dodd-Frank Act.
• Recognize Christopher Dodd and Barney Frank, the architects of the Act.
• Understand the timeline during which the legislation was crafted and enacted.
• Pinpoint the key goals of the Act.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) is a federal statute that was signed into law by President Barack Obama on July 21, 2010. Before signing the Act, President Obama remarked that although many factors influenced the severity of the recession, the primary cause of the breakdown of the U.S. financial system was the failure of responsibility from certain corners of Wall Street and the halls of power in Washington.¹ President Obama stated that the old and poorly enforced laws had facilitated a few to take risks that endangered the entire U.S. economy. This setback in the rules helped them take advantage of the financial system.

In 1933, the National Industrial Recovery Act (NIRA) was signed by President Franklin D. Roosevelt. Although the Act was unable to contribute much to the economy, it was still considered to be a major financial sector takeover by the U.S. government at that time. Until the Dodd-Frank Act, no other legislation had attempted such a large-scale financial reform. The Dodd-Frank Act brings many changes to the legislation that supervises the financial industry and is one of the most ambitious regulated reforms that has governed the financial industry since the Great Depression era.

The Dodd-Frank Act is the product of the financial regulatory reform agenda of the 111th U.S. Congress. The Act was first proposed on December 2, 2009, in the House by Chairman Barney Frank and in the Senate Banking Committee by Chairman Chris Dodd. This Act has the capacity to affect every single financial institution and commercial company in the country. It focuses on both large and small financial institutions, but the regulations imposed on small institutions have relatively expensive frameworks. The Act also affects both domestic and foreign financial institutions.

The passage of the Act shifted the approach of commercial companies and financial institutions toward banking, derivatives, securities, private equity funds, credit rating agencies, debit card interchange fees, consumer protection, executive compensation, and corporate governance.

Financial Instability

The Dodd-Frank Act was an initiative taken by the U.S. government to reform the disorders that resulted from the Great Recession of 2008. The recession caused a collapse of the stock market, higher levels of borrowings in the credit market, escalation of oil prices due to geopolitical uncertainties, more hidden risks in hedge funds, insufficient flow of capital, an increase in unemployment, and a rise in the United States' foreign debts and deficits in its current accounts.

The markets became inefficient due to the complexity of the information shared with investors and lack of transparency. Too many financial organizations offered risky products. Companies focused more on short-term profits than on the long-term interests of their shareholders. Executive compensation, which was topping the graphic scale, was mostly unjustifiable. There was an overall failure of capitalism in the U.S. stock markets and economy.

Bank depositors' money was used for proprietary trading. Commercial institutions sold risky loans in markets separate from where they sold prime loans and public company executives participated in risk-prone activities. There was underfunding even in the cases of pension obligations. The derivatives market saw multiple complexities. The procedures involved in clearings, settlements, and the evaluations of risks and instruments administration were not managed properly and suitably.

Scope

The U.S. government realized that the economic bust was caused by the failure of capitalism and the inefficiency of previously passed regulations. The first step was to bring about financial reform by recognizing the factors causing problems and then finding ways to solve them. The Dodd-Frank Act was proposed to address the causes that brought market failure.

The Act has a wide scope. Its regulati...

Table of contents

• Cover
• Essentials Series
• Title Page
• Copyright
• Dedication
• Foreword
• Preface
• Acknowledgments
• Chapter 1: Introduction to the Dodd-Frank Act
• Chapter 2: History and Background
• Chapter 3: Key Titles and Sections
• Chapter 4: Institutions Impacted
• Chapter 5: Dodd-Frank Act Rulemaking
• Chapter 6: Role of New and Existing Agencies
• Chapter 7: Global Impact and Implications
• Chapter 8: Advice for Specific Professions
• Chapter 9: Relationship with SOX and the Basel Accords
• Appendix A: Contents of the Dodd-Frank Act
• Appendix B: Effective Dates and Deadlines
• Glossary of Key Acronyms
• About SOX Institute and the GRC Group
• Index