Reasons for the Act
- Inspired by the financial meltdown of 2007-2010
- Home market collapsed: total home equity in US dropped from $13 trillion in 2006 to $8.8 trillion by mid-2008, foreclosures
- Over 100 mortgage lenders went bankrupt in 2007-08
- Money market funds experience mass withdrawals ($144.5 billion in a week, compared to $7.1 prior week)
- Major financial institutions fail, go bankrupt or have shot gun mergers: Lehman Bros. Bear Stearns, Washington Mutual, AIG, Fannie Mae, Freddie Mac and Merrill Lynch,
- Dow Jones fell from over 14,000 in Oct. 2007 to 6,600 in March 2009
- US and European Banks lost nearly $3 trillion from bad loans and toxic assets (CDOs etc)
- TARP (signed by Pres. Bush in Oct. 2008) allowed US Treasury to buy or insure up to $700 billion in troubled assets
Dodd Frank at 1 Year Plus
- The Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010) , was signed July 21, 2010 by President Obama
- Dodd Frank requires lots of studies and hundreds of enacting regulations to be enacted by federal agencies. This process has been slow.
- “Federal regulators, badly behind schedule for enforcing the Dodd-Frank financial regulatory overhaul, are now gradually stepping up their rule-writing efforts…Under the Dodd-Frank Act, regulators are required to write some 300 new rules for Wall Street, touching everything from the $600 trillion derivatives market to dubious lending practices.” 9/6/11 NY Times Dealbook
Major Titles of the Act
Title I: Financial Stability
Title II: Orderly Liquidation Authority
Title III: Transfer of Powers from OTS to FRS, FDIC, OCC
Title IV: Regulation of Advisers to Hedge Funds & Others
Title V: Insurance
Title VII: Improvements Reg. of Bank/S&L Holding Cos.
Title VII: Wall Street Transparency and Accountability
Title VIII: Payment, Clearing and Settlement Supervision
Title IX: Investor Prot. & Improvements to Sec Regs
Title X: Bureau of Consumer Financial Protection
Title XIV: Mortgage Reform and Anti-Predatory Lending
Title I – Financial Stability Act of 2010
- The Financial Stability Oversight Council is charged with identifying threats to the financial stability of the United States, promoting market discipline, and responding to emerging risks to the stability of the United States financial system.
- The Voting Members of the Council include the Secretary of the Treasury (who serves as Chair), Comptroller of the Currency, Chairs of the SEC, Federal Reserve, FDIC, CFTC, NCUA, Directors of the Federal Housing Finance Agency and Bureau of Consumer Financial Protection and an independent member appointed by the President.
Title II – Orderly Liquidation Authority
- Dodd-Frank creates a way to liquidate certain financial institutions where Congress felt the Bankruptcy Code would not protect the economy and taxpayers from collateral damage.
- It provides for special liquidation procedures for Covered Financial Companies, which are those that derive most of their revenue from financial activities and are designated as systemically important. The definition excludes banks, which are already subject to FDIC liquidation procedures.
- FDIC acts as Receiver. The Receiver can borrow money from the US Treasury to fund the receivership, but the funds must be repaid in 60 months. Also the Receiver is to remove managers and directors deemed responsible for the company’s condition, who breached fiduciary duties or who engaged in unsafe or unsound practices with the company. The Receiver can initiate suit against officers and directors for gross negligence or intentional misconduct.
- “Living will” provisions requires “systemically significant” financial institutions to provide the Fed , FDIC, and the Financial Stability Oversight Counsel with a plan for the rapid and orderly resolution of their business in the event of material financial distress.
Title III – Transfer of Powers to the Comptroller, the FDIC, and the Fed/ Change in FDIC Insurance Coverage
- The “Enhancing Financial Institution Safety and Soundness Act of 2010” is designed to streamline banking regulation. It abolished the Office of Thrift Supervision (a weak regulator of savings banks and S&Ls) and merged its powers into other bank regulatory agencies.
- The Act also permanently increases deposits insured by the FDIC and National Credit Union Share Insurance Fund from $100,000 to $250,000. All funds in a “noninterest-bearing transaction account” are insured in full by the Federal Deposit Insurance until December 31, 2012.
Title IV – Regulation of Advisers to Hedge Funds and Others
- Increases regulation of & reporting by hedge funds
- Funds w/over $150 mill in assets must register w/SEC and disclose investment/ business policies and hire compliance officer
- Amends definition of accredited investor under Reg D of the 1933 Securities Act, which provides that certain securities offerings are exempt from the Act’s registration requirements. Prior to the Act, natural persons were deemed accredited if they had recent annual income of $200,000 individually or $300,000 joint and a net worth of over $1,000,000. Section 413 of the Act revises the definition of “accredited investor” to exclude the value of a natural person’s primary residence when calculating their net worth.
Title V – Insurance
- The “Federal Insurance Office Act of 2010“ establishes the Federal Insurance Office in the Treasury Department.
- Till now insurance has traditionally been regulated by the states.
- The Federal Insurance Office’s duties include:
◦ Monitoring all aspects of the insurance industry (excepting health insurance, long-term care insurance, and crop insurance), in order to identify problems that could contribute to a systemic crisis
◦ Monitoring the extent to which traditionally underserved communities and consumers, have access to affordable insurance
◦ Making recommendations to the Financial Stability Oversight Council about insurers which may pose a risk, and to help any state regulators with national issues
◦ Administering the Terrorism Insurance Program
◦ Coordinating international insurance matters
◦ Consulting with the States regarding insurance matters of national importance and prudential insurance matters of international importance;
- The Insurance Office can require insurers to provide information or data.
Title VI – Improvements to Regulation
- Title VI , the “Bank and Savings Association Holding Company and Depository Institution Regulatory Improvements Act of 2010, amends the Bank Holding Company Act of 1956 by imposing financial limits on the ability of certain banks and related entities to participate in proprietary trading or investing in hedge funds. This is the so called “Volcker Rule“.
- It limits a covered entity’s investment in proprietary trading (trading securities, derivatives etc for its own account rather than for those of customers) to no more than 3% of the firm’s regulatory capital. The Act also limits firms’ ability to sponsor and invest in hedge funds and private equity funds.
Title VII – Wall Street Transparency and Accountability
- The “Wall Street Transparency and Accountability Act of 2010” concerns regulation of derivatives including credit default swaps markets.
- Title VII gives the Commodities Futures Trading Commission and the SEC authority to regulate the swaps market.
- The purpose of these provisions is to reduce risk, increase transparency, and promote market integrity within the financial system by, among other things: (1) providing for registration and regulation of swap dealers and large end users, termed “major swap participants;” (2) imposing clearing and trade execution requirements on OTC derivative products; (3) creating recordkeeping and reporting requirements; and (4) imposing margin, capital, and position limits requirements on market participants.
- No federal assistance may be provided to any swaps entity, except to insured depository institutions that limit their swaps activities to hedging and other risk reduction actions.
Title IX – Investor Protections and Improvements to the Regulation of Securities
- Sections 901 to 991 broadly cover a number of areas including:
(a) The structure and authority of SEC
(b) Conduct of credit rating organizations
(c) Brokerage firms and investment advisers and
(d) Executive compensation and corporate governance for public companies
Title IX – Fiduciary Standard For Stockbrokers
- Section 913 required the SEC to study whether there should be a fiduciary duty for brokers when they offer “personalized investment advice to a retail customer.”
- Investment advisors are already under this standard of care which requires putting the client’s interest first.
- The SEC issued a study in January 2011 that recommended a uniform fiduciary standard for brokers and investment advisors.
Title IX- Mandatory Arbitration
- Section 921 gives the SEC authority to limit or ban mandatory arbitration between customers and securities brokers (Section 1414 prohibits mandatory arbitration in mortgage and home equity loans).
Title IX – Whistleblower Bounties & Protection
- Sections 922 and 748 gives monetary incentives for whistleblowers who voluntarily report securities or commodities violations. (If information leads to sanctions over $1 million, SEC pays bounty of 10-20%).
- Can be paid even if the whistleblower is a violator unless they are criminally convicted.
- The Act gives whistleblowers protection from retaliation. These include back pay, damages, reinstatements and legal fees and costs.
- Section 1057 prohibits making employee arbitration a whistleblower claim.
Title IX-Credit Rating Agencies
- Subtitle C of Title IX, entitled “Improvements to the Regulation of Credit Rating Agencies,” institutes reforms in the regulation, oversight and accountability of nationally recognized statistical rating organizations (“NRSROs”).
- Creates Office of Credit Ratings in SEC
- Requires transparency of ratings
- Reduce conflicts of interest
- Reduces required reliance on ratings per laws & regs
- Allows SEC to bring fraud cases against NRSROs
- Raters must consider info from sources besides ratings
Title IX – Executive Compensation
- Subtitles E and G contain regulations of executive compensation and corporate governance for public companies.
- Shareholder “advisory” votes on comp. every 3 years for top officers
- Rulemaking may require detailed disclosure of golden parachutes
- Claw back of CEO/CFO comp earned in year before restatement of earnings due to misconduct
- Requires independence of compensation committees
Title X – Bureau of Consumer Financial Protection
- Title X establishes the Bureau as part of the Federal Reserve, but it operates independently.
- The Bureau is supposed to protect consumers from abusive practices in the financial services market—practices like predatory lending which Congress believed that bank regulators had overlooked.
Title XIV – Mortgage Reform and Anti-Predatory Lending Act
- This is to be administered by the Bureau of Consumer Financial Protection. It calls for setting standards for originating mortgages, prohibiting predatory lending practices and regulating high cost loans. Key provisions include:
◦ Requiring that borrowers meet “ability to repay” standards which are verified in good faith by lenders
◦ Requiring lenders to retain at least 5% of the risk of mortgages they write unless the mortgages are deemed “qualified”
◦ Requiring new disclosures for home mortgages
◦ Prohibiting certain onerous loan provisions, including prepayment penalties on some loans
◦ Prohibiting high cost mortgages from having balloon payments that are more than twice the average of earlier scheduled payments
◦ Setting standards for certain appraisals, including a physical visit to the property
Will Dodd Frank Avert Another Disaster?
History says no. So does human nature.
- “The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version. All financial innovation involves, in one form or another, the creation of debt secured in greater or lesser adequacy by real assets.” John Kenneth Galbraith
- “The four most dangerous words in investing are, ‘It’s different this time.’” Sir John Templeton
- When Wall Street tells you that it has invented a better mousetrap, just remember that you are the mouse.