The Dodd-Frank Act – Background, Highlights and Impact

  • By: Staff Editor
  • Date: July 08, 2009
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The Dodd Frank Wall Street Reform and Consumer Protection Act was enacted as a response to the recession in the late 2000s. It was initially proposed on December 2, 2009 in the House of Representatives by Barney Frank and in the Senate Banking Committee by Chairman Chris Dodd. The aim of the Dodd Frank Act was to “create a sound economic foundation to grow jobs, protect consumers, rein in Wall Street and big bonuses, end bailouts and Too Big to Fail, and prevent another financial crisis.”

The Act is divided into the following sixteen titles:

Title I – Financial Stability
Title II – Order Liquidation Authority
Title III - Transfer of Powers to the Comptroller, the FDIC, and the Fed
Title IV - Regulation of Advisers to Hedge Funds and Others
Title V – Insurance
Title VI – Improvements to Regulation
Title VII - Wall Street Transparency and Accountability
Title VIII – Payment, Clearing and Settlement Supervision
Title IX - Investor Protections and Improvements to the Regulation of Securities
Title X - Bureau of Consumer Financial Protection
Title XI – Federal Reserve System Provisions
Title XII - Improving Access to Mainstream Financial Institutions
Title XIII - Pay It Back Act
Title XIV - Mortgage Reform and Anti-Predatory Lending Act
Title XV - Miscellaneous Provisions
Title XVI - Section 1256 Contracts

Highlights and Impact of the Dodd Frank Act

The Dodd Frank Act strengthens the following key areas:

Increases Consumer Protection: The Act creates a new independent consumer protection watchdog, the Bureau of Consumer. Financial Protection housed within the Federal Reserve. The Bureau has the authority to ensure that American consumers get clear, accurate information when choosing mortgages, credit cards and other financial products. The Bureau will implement rules that protect consumers from hidden fees, abusive terms and deceptive practices.

Ends Too Big to Fail Bailouts: The Dodd Frank Act includes regulatory reform that ends the possibility of taxpayers having to bail out financial firms that threaten the stability of the economy. Financial firms will have to ensure they comply with new capital and leverage requirements that prevent them from growing too big in size.

Identifies and Addresses Systemic Risks: The Act created the Financial Stability Oversight Council that will identify and address systemic risks posed by large, complex companies, products, and activities before they threaten the stability of the economy.

Increases Transparency and Accountability for Exotic Instruments: The Dodd Frank Act eliminates loopholes that allow risky and abusive practices to go on unnoticed and unregulated. This includes loopholes for over-the-counter derivatives, asset-backed securities, hedge funds, mortgage brokers and payday lenders.

Increases Shareholder Role in Corporate Affairs: The Act provides shareholders with an important role in deciding executive pay and golden parachutes.

Protects Investors: The Act provides tough new rules for transparency and accountability for credit rating agencies to protect investors and businesses.

Enforces Regulations on the Books: The Act strengthens oversight and empowers regulators to aggressively pursue financial fraud, conflicts of interest and manipulation of the system that benefits special interests at the expense of American families and businesses.

Impact of the Act
The Dodd-Frank Act effects a profound increase in regulation of the financial services industry. The Act gives U.S. governmental authorities more funding, more information and more power. In broad and sig-nificant areas, the Act endows regulators with wholly discretionary authority to write and interpret new rules.

Area Impact
1. Oversight and Systemic Risk
  • Orderly Liquidation Authority.
  • Regulators will receive new authority under the Act to take control of and liquidate troubled financial firms if their failure would pose a significant risk to the financial stability of the United States.
  • Key Measures to Address Systemic Risk: Under the Act, for the first time, the mitigation of systemic risk and the maintenance of system-wide financial stability will be regulatory objectives.

2. Financial Institutions
  • Regulation of Banking Organizations: The Act effects numerous, significant changes in the regulation of bank-ing organizations. These changes include creation of the Consumer Financial Protection Bureau, enhancement of supervision of large institutions and nonbank affiliates, and establishment of additional capital regulations.
  • Volcker Rule: The “Volcker Rule” is embodied in the Act’s limitations on insured depositary institutions and their affiliates conducting “proprietary trading” and in-vesting in hedge funds and private equity funds. These limitations will force institutions to move much of their derivatives activities to nonbank affiliates and comply with new capital and support standards.
  • Private Fund Investment Advisers: The Act’s impacts on advisers to hedge funds and private equity funds include new requirements for registration, recordkeeping, and reporting, as well as the effect of the “Volcker Rule” on the ability of certain types of firms to sponsor or invest in hedge funds and private equity funds.
  • Insurance Companies: The Act will potentially subject some of the largest and most well-respected insurance companies to the designation of nonbank financial com-panies.
  • Supervision of Payment, Clearing and Settlement: The Act assigns to the Federal Reserve in the supervision of systemically important financial market utilities and payment, clearing and settlement activities conducted by financial institutions.
3. Capital Markets
  • Derivatives and Swaps Clearinghouses: The Act imposes a new regulatory regime on over-the-counter deriva-tives, which includes clearing, exchange trading and other requirements intended to increase transparency, liquidity and efficiency, and to decrease systemic risk.
  • Securitization: Under the Act, issuers or originators of asset-backed securities generally will be required to re-tain at least five percent of the credit risk associated with the securitized assets.
  • Credit Rating Agencies: Credit rating agencies will enter into an entirely new regime of regulation under the Act.
  • Investor Protection and Securities Enforcement: The Act enhances the SEC’s enforcement program and investor protection mission by establishing a new whistleblower bounty program, providing the SEC with new enforce-ment authority, and permitting the SEC to impose a “fi-duciary duty” on broker-dealers that provide retail in-vestment advice.

4. Governance and Compensation
The Act authorizes the SEC to adopt rules giving nominating share-holders access to the company’s proxy. In addition, the Act requires enhanced disclosure of executive compensation and gives share-holders the right to a “say-on-pay” vote on executive compensation.
5. Consumers A new government authority, the Bureau of Consumer Financial Protection, is endowed by the Act with broad power to regulate retail financial products and services. The Bureau and Offices within it supervise and examine specified types of institutions and establish and enforce rules related to consumer finance.


Additional Resources:

Read the full text of the Dodd Frank Act here

Need to get a full understanding of complying with the Dodd Frank Act? Then attend the following ComplianceOnline webinars:

The SEC’s New Whistleblower Rules: Implications for your Company’s Compliance and Fraud Program

Converging Ethics, Governance and Culture


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