More Than Just Financial Reform: Analysis and Observations on the Dodd-Frank Wall Street Reform and Consumer Protection Act
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Act"). The result of a year-long effort to transform financial supervision in response to the financial crisis, the sweeping legislation affects not only banks and other financial institutions but also has far-reaching consequences for all corporations doing business in the United States. Although Congress has attempted to lay the foundation for long-term financial stability, most of the actual details and implementation of many key provisions of the Act are reserved for regulators to divine in the coming months—the Act explicitly calls for more than 240 rulemaking efforts and nearly 70 studies by 11 regulatory bodies. The Act is essentially a 2,300-page introduction to an eventual new financial regulatory environment—an incomplete roadmap for the regulatory financial future of the United States. Notwithstanding the incomplete character of the Act, the Act will have a significant and immediate impact on all businesses. The Act:
- Devotes much of its detail to addressing public anger over the "bailout" rather than to the actual causes of the financial crisis.
- Delegates most detail and authority to regulatory agencies.
- Goes well beyond traditional financial institutions by mandating changes to corporate governance provisions that negatively affect all public companies.
- Imposes a significantly increased compliance burden on banks and other financial institutions that is likely to further industry consolidation.
- Creates a public market for derivatives that increases the cost of doing business for most corporations.
- Is likely to continue to limit access to capital by causing banks and other financial institutions to lend less to comply with enhanced regulatory requirements.
Despite its shortcomings and the delegation of much of the detail to rulemaking agencies, financial institutions and all other companies must begin to plan for the historic changes to U.S. banking, derivatives trading, corporate governance, consumer financial protection, executive compensation, and securities dealing. It is no secret that adapting to the emerging body of rules will be a challenge for all, but opportunities will appear for those institutions capable of internalizing the Act's most important principles and adjusting to rulemaking and regulatory implementation.
During this uncertain rulemaking period, market participants will distinguish themselves from their competitors not through passivity, but by anticipating the judgment of policymakers and the reaction of markets. To this end, the following analysis is designed to help our clients navigate the Act's substantial ambiguities, understand its complexities, and prepare effective strategies for adapting to this new regulatory environment.
This White Paper analyzes the major topics addressed in the Act. The Sections in this White Paper are as follows:
- The Financial Stability Oversight Council. Describes the membership and powers of this new council of regulators, which is tasked with overseeing the entirety of the financial system, focusing on gaps in the regulatory framework and emerging threats to financial stability.
- Enhanced Bank Regulatory Provisions. Outlines the major themes of depository institution and holding company regulation, including provisions related to capital and liquidity, regulatory supervision, enhanced supervisory requirements for mergers and acquisitions, enhanced regulation of financial institutions with consolidated assets of at least $50 billion, the Collins Amendment, and the Volcker Rule.
- Orderly Liquidation Authority. Analyzes the resolution and liquidation provisions, highlighting the differences between those provisions and the Bankruptcy Code, and examining the potential impact that the new legislation would have on various parties in interest.
- Hedge Fund, Private Equity, and Other Advisers. Describes how the Act will affect many investment advisers to hedge funds, private equity funds, and real estate funds by significantly expanding the requirement for investment advisers to register with the Securities and Exchange Commission (the "SEC").
- Federal Insurance Office. Discusses the creation of the Federal Insurance Office, which will collect information and monitor developments in the state regulation of insurance, but has no authority to regulate or supervise insurance companies.
- Derivatives. Analyzes the Act's bifurcated jurisdictional framework, which submits virtually all swaps to regulation by either the SEC or the Commodity Futures Trading Commission. This section also describes the clearinghouse requirement for swaps, highlighting certain limited exemptions, and explains new regulations and requirements on entities engaging in swap transactions.
- Corporate Governance and Executive Compensation. Discusses the trend toward short-termism resulting from new rules governing corporate America, including say-on-pay voting, shareholder approval of golden parachutes, the prohibition of broker voting in certain instances; the requirement of clawback provisions for exchange-traded companies, requirements for disclosing hedging policies and compensation ratios, and proposed changes to proxy access.
- Investor Protection and Enforcement Provisions. Analyzes enforcement provisions aimed at improving securities laws and strengthening investor protections, which include: adding new whistleblower protections and incentives; establishing aiding and abetting liability in SEC enforcement actions; providing the SEC with the authority to issue industry-wide collateral bars; disqualifying certain "bad actors" from Regulation D offerings; restricting mandatory predispute arbitration provisions; and establishing a deadline for the SEC to file an enforcement action after providing an individual with a Wells Notice.
- Credit Rating Agencies. Describes the increased regulation of credit rating agencies, which include: enhancing the SEC's powers to oversee and regulate certain rating agencies; requiring the adoption of specified internal controls; expanding regulations intended to address conflicts of interest; expanding disclosure obligations to increase competition and add transparency to the ratings process; and exposing credit rating agencies to greater potential liability to SEC enforcement actions, as well as private actions under the securities laws.
- Asset-Backed Securities. Analyzes a number of material changes for the structured finance market, including credit risk retention requirements, which obligates originators/securitizers to retain credit exposure to their securitized assets, and other provisions focused on increased disclosure and reporting requirements.
- Preemption. Discusses new standards and procedural requirements affecting federal preemption of state consumer laws, focusing on the adoption of the legal standard for preemption set forth by the U.S. Supreme Court in Barnett Bank v. Nelson.
- Consumer Protection. Discusses the establishment of the new Consumer Financial Protection Bureau and new mortgage lending standards.