Dodd-Frank Wall Street Reform and Consumer Protection Act

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H.R. 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act,[1] also known as the financial reform bill, is a U.S. Senate bill that was crafted largely by Senate Banking Committee Chairman Chris Dodd and Chairman of the House Financial Services Committee Barney Frank and signed into law by President Barack Obama on July 21, 2010.[2]

It includes language from Senate Agriculture Committee Chairman Blanche Lincoln (D-Ark.). The measure set up new regulatory bodies and restricted the actions of banks and other financial firms. It was designed to try to make order of the cascading regulatory chaos that ensued in 2008 when mammoth banks and some unregulated financial firms collapsed, and public funds were used to save them.[3]

An earlier version of the bill was referred to as S.3217: Restoring American Financial Stability Act of 2010.[4]

The 2,300-page bill is the most extensive overhaul for the U.S. financial system since the 1930s. Its total cost was estimated at $19 billion. Opponents of the bill were concerned that the government was overreacting and over-regulating the financial industry. They argued that the measures could crimp the free flow of capital in the U.S. economy.

The Chamber of Commerce said the act included 500 required regulatory rulemakings, 81 studies and 93 Congressional Reports, which the group compares to Sarbanes-Oxley's 16 rulemakings and six studies.[5]

The Act consists of 16 sections ("Titles") covering such issues as financial stability, orderly liquidation, and regulation of hedge funds, banks and insurance companies. One titles receiving a lot of attention is Title VII, the Wall Street Transparency and Accountability Act, which is designed to bring transparency and regulation to swaps and over-the-counter (OTC) derivatives markets. For a summary of each of the 16 titles of the Dodd-Frank Act, visit the Dodd-Frank page on MarketsReformWiki.

Goals Of The Legislation[edit]

  • Establish a new council of "systemic risk" regulators to monitor growing risks in the financial system, with the goal of preventing companies from becoming too big to fail and stopping asset bubbles from forming, such as the one that led to the housing crisis.
  • Create a new consumer protection division within the Federal Reserve charged with writing and enforcing new rules that target abusive practices in businesses such as mortgage lending and credit card issuance.
  • Empower the Federal Reserve to supervise the largest, most complex financial companies to ensure that the government understands the risks and complexities of firms that could pose a risk to the broader economy.
  • Allow the government in extreme cases to seize and liquidate a failing financial company in a way that protects taxpayers from future bailouts.

Time Line to Passage[edit]

The Senate on May 20, 2010 approved its version of an overhaul of financial-sector regulation. The legislation passed the Senate 59 to 39 and then had to be reconciled with a similar bill passed by the House of Representatives in December of 2009.[7]

There was pressure to present a finalized bill in time for the G-20 meeting in summer of 2010.[8]

The bill passed the House and Senate conference on June 25, 2010. This version increased the regulation of financial companies but did not include some of the stricter provisions originally proposed. The latest legislation, among other things, did call for most derivatives to be traded on regulated exchanges. A plan that would have had banks paying for the costs of unwinding mortgage giants Fannie Mae and Freddie Mac was not included in the bill that emerged from conference.

Senate Democrats needed at least four Republicans to vote for the bill because the death of Senator Robert Byrd (D-W. Va.) early on June 28 left them with only 56 of the 60 votes needed. Senator Maria Cantwell (D-Wa.) switched to a Yes vote on July 1; Democrats only needed to secure the support of two Republicans to vote in favor of the bill in order to avoid procedural hurdles. Sen. Scott Brown (R-Mass.) decided to support the bill, as did Maine Republicans Susan Collins and Olympia Snowe. Russ Feingold (D-Wis.) voted No.[9]

Democratic negotiators had to briefly reopen the conference negotiations on June 29 after Sen. Scott Brown (R-Mass.) said he would vote against the bill unless a $19 billion tax on big banks that was inserted during the conference committee debate was deleted. Democratic negotiators conceded and removed late on June 29 the $19 billion tax that was designed to help fund the bill and instead opted to fund the bill by ending the Troubled Asset Relief Program (TARP) and by charging an extra premium to large banks by the Federal Deposit Insurance Corp. (FDIC).[10]

The House sailed through a final vote on the bill’s passage late on June 30. After returning from recess, the Senate succeeded in stopping debate on Thursday, July 15, and passed the bill by a 60-39 vote.

Treasury Department[edit]

With the act, a new council of regulators, officially called the Financial Stability Oversight Council (FSOC) and led by the Treasury secretary, was created to identify threats to the financial system. The Council held its first meeting on October 1, 2010.<[11] The FSOC has subsequently met periodically to discuss the state the global macroeconomic environment, and to create a framework for the monitoring of systemic risks via rulemakings.

Federal regulators were given new authority to seize and break up large troubled financial firms without taxpayer bailouts in cases where the firm’s collapse could destabilize the financial system. Upon enactment, the Council was authorized to approve a Federal Reserve decision to require a large, complex company to divest some of its holdings if it posed a grave threat to the financial stability of the United States.[12]

For more information, visit the FSOC page on MarketsReformWiki.

Federal Reserve[edit]

The Fed's emergency lending powers became more transparent and subject to greater oversight. During the crisis, the Fed used this authority to craft huge bailouts behind closed doors. It withheld details about programs that rescued individual companies. The overhaul banned lending programs designed to save individual companies. The Fed must also disclose details of the programs, typically a year after they expire. And the Fed can't invoke its emergency powers without the Treasury secretary's permission.


Banks can continue to use derivatives to hedge their own risk, but other derivatives business must be conducted in separately capitalized subsidiaries of the holding company. Banks are able to retain operations for interest-rate swaps, foreign-exchange swaps, and gold and silver swaps as well as credit derivatives relative to investment grade entities; banks must push trading in agriculture, uncleared commodities, most metals, energy swaps, equities and non-cleared CDS to their affiliates.[13]

Originally a provision by Sen. Blanche Lincoln (D-Ark.) would have barred commercial banks from the swaps trading business, a huge activity for the top five banks. After intense negotiating, the Lincoln provision was watered down to allow for interest rate and foreign exchange swaps, nearly 90 percent of the swaps market, to remain inside a commercial bank.[14]

Capital requirements standards will be raised at the regulatory council's discretion. Capital requirements can also be influenced by international negotiations.[15]

U.S. banking regulators took some cues from the Basel committee, a forum of 27 countries’ central banks and regulators that creates global rules that aim to prevent banks from seeking out countries with the most lenient regulation. The Basel committee, which in December 2009 proposed a set of new guidelines for leverage, capital and liquidity, came under attack by financial companies and some governments who thought the limits would curb lending and hamper an economic recovery.[16]

The Institute of International Finance, an industry group representing more than 400 firms, released a report in June 2010 that said the proposed rules would erase 3.1 percent of gross domestic product in the U.S., euro region and Japan by 2015.[17]

The Basel committee agreed in July 2010 to give banks more leeway in the types of assets they can count as capital. Treasury's Geithner said in an early August 2010 speech that delaying capital rules will make it easier for banks to earn the money they use as capital.

Volcker Rule[edit]

In January 2011, the Financial Stability Oversight Council released an 81-page study and recommendations on proprietary trading by financial institutions, and on these institutions’ relationships with hedge funds and private equity funds. The study, which discussed how the Volcker rule should be implemented by regulators, gave general direction to regulators, but left specific approaches for defining proprietary trades for later rule proposals.[18]

On October 12, 2011, the U.S. Securities and Exchange Commission (SEC), the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board, and the Office of the Comptroller of the Currency issued its proposed regulation to implement Section 619 of the Dodd-Frank Act, the so-called "Volcker Rule," which would prohibit banking entities from engaging in proprietary trading of derivatives and limit the ownership or sponsorship of hedge funds and other private funds to three percent of Tier 1 capital.[19]

On December 10, 2013, several regulators, including the CFTC, FDIC, Federal Reserve, OCC, SEC and Treasury Department, released a set of final rules on the prohibition of proprietary trading. One major change from proposed rules, and a big reason for the delay in putting out final rules, has been the rules regarding hedging. At issue is the concept of "portfolio hedging," or large-scale trades designed to mitigate risk but could give banks a loophole with which to engage in proprietary trading, such as with the case of JPMorgan's "London Whale."[20]

In January of 2014, federal regulators revised the Volcker Rule to permit banks to continue to hold on to a specific type of collateralized debt obligation.[21]

For more information, visit the Volcker Rule page on MarketsReformWiki.


The Office of the Comptroller of the Currency (OCC) has become the only regulator for U.S.-based banks with branches in more than one state. Prior to Dodd-Frank, the Office of Thrift Supervision (OTS) oversaw some such banks. Title III of the Act eliminates the OTS and transfers its responsibilities primarily to the OCC. The change in favor of a lone regulator is meant to prevent "regulator shopping" for looser rules by making the OCC the sole regulator for national banks and thrifts.[22] As has been the case, no one regulator will monitor the entire banking system. Plus, different standards apply to different types of companies; credit unions and thrifts will continue to be treated differently, for example. Regulation of state-chartered banks will continue to be split between the Federal Deposit Insurance Corp. and the Federal Reserve.

Earnings Impact[edit]

Barclays Capital bank analyst Jason Goldberg concluded that the reforms impact big banks’ earnings via customer fee reductions, higher costs, new restrictions and tied-up capital.[23] In a late-June 2010 research note, Goldberg said JP Morgan Chase, Bank of America and Citigroup would be most affected by a ban on proprietary trading. Taken together with the rest of the regulatory reform bill, Goldberg estimated that the White House and Congressional response to the financial crisis could cut earnings at 26 leading banks by 14% in 2013, eliminating nearly $18 billion of profit.[24]

Hedge Funds[edit]

Under the new law, hedge funds must register as investment advisers. Retirement funds, money managers and wealthy individuals often invest in hedge funds, which use complex trades to seek big returns. Once hedge funds have registered with the SEC, they'll undergo periodic examinations and be required to disclose more information about their trades.[25]

In 2011, the CFTC and SEC finalized five rules concerning hedge funds, including registration, exemptions, systemic risk reporting, family offices, and accredited investor net worth standards. For more information, visit the hedge fund regulation page on MarketsReformWiki.


A provision in the act, lobbied for by CBOE, Nasdaq OMX Group Inc., Deutsche Boerse's International Securities Exchange and other exchanges, tightens up the time line for regulators to approve or deny rule filings by self-regulatory organizations and lets them more quickly match rivals' fees.[26]

Exchanges sought the new guidelines after being frustrated by the sometimes lengthy process of getting new trading rules approved by the Securities and Exchange Commission, which will get even busier with the Dodd-Frank Act. The new guidelines allow exchanges to publish new rules to their websites, which starts the clock for the SEC to review the rule and any comments to be filed. In the past, rules had to be published to the Federal Register for the process to begin. If regulators don't object to a new rule upon its web posting, it must be sent to the Federal Register within 15 days, at which point the SEC has another month to approve it or begin disapproval proceedings. Should the SEC not publish the rule within 15 days, the process moves ahead anyway.[27]

Market operators will also be able to immediately implement fee changes affecting non-members of exchanges, after filing with the SEC.

The Securities Industry and Financial Markets Association, representing securities trading firms, raised concerns that the provision could remove regulatory checks on what exchanges charge their customers.[28]


The Senate and House conference compromise on fiduciary duty requires that the SEC take six months to study advisor and broker obligations toward retail customers. The SEC can then put brokers under the same fiduciary standard of care that applies to investment advisors, putting firms with retail-brokerage and wealth-management operations under new rules.[29]

Ratings Agencies[edit]

The law is intended to reduce the influence of the three big rating agencies, Moody's, Standard & Poor's and Fitch Ratings. Regulators and government agencies have used their ratings to decide which investments are appropriate for banks and pension funds, which enjoy some government backing. But the overhaul lets the SEC and others develop new ways to grade investment risk.

With the new law, investors will have more power to claim that agencies recklessly ignored risks associated for an entity assigned ratings. For starters, the agencies now must explain more fully how they assign ratings. If an agency performs poorly over time, the Securities and Exchange Commission could cancel its registration.[30]

As of the July 21, 2010 enactment of the law, addressing the agencies' perceived conflict of interest was unresolved. The agencies are paid by the banks whose investments they rate. One option up for consideration is randomly assigning investments to agencies to rate.[31]

In early August 2010, the Federal Deposit Insurance Corp. board voted to take public comment for 60 days on alternatives to relying on credit rating agencies to assess the risk of investments. The Federal Reserve and the Treasury's Office of the Comptroller of the Currency published the document requesting comment with the FDIC.[32]

"Finding an alternative is going to be very, very difficult," FDIC Chairman Sheila Bair said before the 5-0 vote at the August 10, 2010 meeting. Banking analysts said implementing and enforcing a new system can be expensive and cumbersome.[33]


The SEC plans to hire an additional 800 people, expanding its staff by around a fifth, to cover its new regulatory responsibilities. The agency has already requested $1.3 billion from Congress for the 2011 financial year, allowing for 374 new staff, to 4,200; the 800 new hires would be on top of that.[34]

SEC Chairman Mary Schapiro told a congressional committee in mid-July 2010 that over the next 12 months, the SEC will have to write more than 100 rules affecting most aspects on the capital markets, and conduct numerous studies. Some work will be done with the Commodity Futures Trading Commission (CFTC).[35]

The SEC will have new power to deny any public request for information under the Freedom of Information Act, which critics said undermines transparency. The SEC stresses the update is necessary "to provide more sophisticated and effective Wall Street oversight," and the "success of these efforts depends on our ability to obtain documents and other information from brokers, investment advisers and other registrants. Because registrants insist on confidential treatment of their documents, this new provision also removes an opportunity for brokers, investment advisers and other registrants to refuse to cooperate with our . . . requests." [36]


As a result of the Dodd-Frank Act, the CFTC will write rules to regulate the over-the-counter derivatives marketplace. The CFTC has identified 30 areas where rules will be necessary and is taking public input on each area.[37] The rule-writing areas have been divided into eight groups: Comprehensive Regulation of Swap Dealers & Major Swap Participants; Clearing; Trading; Data; Particular Products; Enforcement; Position Limits; and Other Titles.[38]

After the bill's passage, Chairman Gary Gensler said: "...derivatives dealers will be subject to robust oversight. Standardized derivatives will be required to trade on open platforms and be submitted for clearing to central counterparties. The Commission looks forward to implementing the Dodd-Frank bill to lower risk, promote transparency and protect the American public."[39]

The CFTC and the SEC will coordinate on some new regulation. They also must determine which agency has oversight over particular derivatives markets and which OTC products will require clearing. Some analysts say these processes could take a year or longer -- six to 12 months for the rule-writing process and another six to 12 months for implementation -- causing a possible backlog of new products.[40]

The CFTC and the SEC will issue draft derivatives rules by December 2010, Goldman Sachs Group analyst Daniel Harris said in a mid-August 2010 note to clients, reported by Bloomberg News.[41]

Harris attended a forum for officials from each agency sponsored by the Futures Industry Association (FIA). The CFTC, which may release its proposals as soon as mid-November, has identified 30 rule-making areas and the SEC has pinpointed 26 for its part in regulating swaps markets, Harris said.[42]

Swaps Markets[edit]

One hurdle for the CFTC and SEC is defining terms that will have wide consequences for swaps users, Goldman Sachs analyst Daniel Harris said in a mid-August 2010 note to clients.[43] One definition is "major swap participant," which isn’t a dealer in the market but a firm that "maintains a substantial position in swaps" using leverage that creates "substantial counterparty exposure," according to language in the bill.

Whether large hedge funds, asset managers or other investors qualify under this definition will be up to the regulators over the next year. Clarification is also needed for securities-based swap dealers, those banks that trade some types of credit-default swaps and will be under SEC regulation.


The SEC’s new Office of Investor Advocate will act as an ombudsman and assist investors in resolving significant problems dealing with the SEC and SROs and will identify problems that investors have with financial service providers and investment products. The OIA must submit its first annual report to Congress no later than June 30, 2011.[44]

Consumer Financial Protection Bureau[edit]

The Consumer Financial Protection Bureau is housed at the Federal Reserve, and became operational within a year of enactment. [45] Five yeas later, the CFPB had gone from a concept in statutory language to a full-fledged agency with nearly 1,500 people on staff. It has returned billions of dollars to consumers treated unfairly in the financial marketplace.[46]

Bureau staff oversee consumer products and services, from mortgages to credit cards to check cashing. The bureau regulates many nonbank companies, such as payday lenders. It can distinguish and ban use of language in lending documents deemed confusing to consumers. The agency's rules apply to community banks, but regulation is outside the scope of the bureau. Auto dealers that provide their customers loans financed by banks do not fall under the bureau's watch; mobile-home sellers, real estate brokers, accountants and insurers are also exempt. The agency does not have jurisdiction over companies that the SEC regulates, such as stockbrokers.[47]

The White House had originally intended that Elizabeth Warren, chairman of a congressional panel overseeing the Troubled Asset Relief Program, is one of the candidates to head up the bureau. Others, including FDIC Chair Sheila Bair and Assistant Treasury Secretary Michael Barr had also been reported to be on the short list, although Bair was subsequently reported to be uninterested.[48]

After the Republican Party regained control of the U.S. House of Representatives in November 2010, the CFPB nomination process was slowed considerably. Since House and Senate Republicans vowed to block Warren's nomination, on July 17, 2011 Obama instead nominated former Ohio attorney general Richard Cordray to head the agency.[49]


The law now requires lenders to verify that borrowers can afford their mortgages. Any company that pools loans into mortgage investments must keep at least 5 percent of the investments on its books. Comparatively low-risk mortgages, such as 30-year fixed-rate loans, will be exempt and lenders can resell those loans in their entirety.

Mortgage brokers can no longer receive bonuses linked to the cost of a mortgage.[50]

Fannie Mae and Freddie Mac[edit]

In a late-July report on the state of the U.S. financial system, the International Monetary Fund renewed its call for the Obama administration to push ahead with changes to the government-sponsored enterprise housing companies. The report suggested a partial privatization strategy, in which the government would take over the GSEs’ public housing mission while privatizing investment operations.[51]



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