The Dodd-Frank Act: Financial Reform Update Index

The U.S. Senate on July 15 approved a sweeping financial industry reform bill with a stated purpose of preventing a repeat of the financial crisis that has shaken the global economy. President Barack Obama signed the bill on July 21.

The Dodd-Frank Wall Street Reform and Consumer Protection Act is the most extensive piece of financial services legislation since the 1930s. It creates a Financial Stability Oversight Council headed by the Treasury Secretary, establishes a new system for liquidation of certain financial companies, provides for a new framework to regulate derivatives, establishes new corporate governance requirements, and regulates credit rating agencies and securitizations. The Act also establishes a new consumer protection bureau and provides for extensive consumer protection in financial services.

Once signed by the President, work on the final product will begin in earnest. The Act requires extensive rule-making by agencies to flesh out and implement various provisions of the law and provides for numerous studies and reports.

Given the length of the Act, as well as its heavy reliance on rulemaking, it is not yet feasible to fully assess its impact. It is clear, however, that banks will face many new obligations and restrictions. Other financial companies will likely need to adapt to a heavier regulatory and compliance burden. And certain organizations that have not considered themselves financial in nature will be subject to significant new federal scrutiny.

Below you will find short summaries of some of the most significant provisions of the Act along with links to more detailed analyses. 

Financial Institutions

• Enhancing Financial Institution Safety and Soundness Act of 2010. Eliminates the Office of Thrift Supervision and transfers its authorities to other federal banking regulators. Increases standard maximum deposit insurance amount from to $250,000, extends for two years the FDIC's Transaction Account Guarantee Program regarding unlimited insurance for noninterest-bearing transaction accounts, and makes substantial revisions to regulatory agency assessment authority.
• Improvements to Regulation of Bank and Savings Association Holding Companies and Depository Institutions. Expands authority of state and national banks to establish de novo interstate branches and to pay interest on business demand deposit accounts. Imposes new restrictions on certain entities owning or controlling industrial banks, credit card banks, and trust banks and places limitations on relationships banks may have with hedge funds and private equity funds.

Systemic Risk, Financial Stability and "Too Big to Fail"

• Federal Reserve System Provisions. Places limits on the ability of the Board of Governors of the Federal Reserve System and the FDIC to respond in times of financial distress. Requires that the Board and the FDIC establish policies and procedures designed to effectuate emergency financial stabilization programs, including expanded regulations related to emergency lending and debt guarantee programs. Establishes priority of claims in bankruptcy arising from realized net losses from emergency lending programs and authorizes the FDIC to become the receiver in the event of bankruptcy of a participant in a debt guarantee program.  
• Financial Stability Oversight Council. Creates a new interagency council called the Financial Stability Oversight Council to identify risks to the financial stability of the U.S., promote market discipline by eliminating expectations that the government will shield large companies from failure, and respond to emerging threats to the stability of the financial system.
• Orderly Liquidation of Large Financial Companies. Authorizes the FDIC to wind down and liquidate large, failing financial companies (other than banks, insurance companies and farm credit lenders). Allows FDIC to charge large financial institutions for one or more risk-based assessments to help pay for the expenses and other obligations incurred by the FDIC in liquidating covered financial companies.

Capital Markets, Securities, and Rating Agencies

• Miscellaneous Corporate and Securities Regulations. Addresses a number of additional corporate and securities matters, including: exemption from Sarbanes-Oxley Act 404(b) for non-accelerated filers, changes to Regulation D and the accredited investor definition, issues related to derivates and beneficial ownership reporting, and expanding the authority of the Public Company Accounting Oversight Board.  
• Credit Rating Agencies. Creates an Office of Credit Ratings within the SEC, requires additional oversight of Nationally Recognized Statistical Ratings Organizations (NRSROs), creates new penalties and potential liabilities for credit rating agencies and NRSROs, attempts to reduce reliance on credit ratings, and requires the SEC to conduct numerous studies and prescribe a number of rules.
• Payment, Clearing, and Settlement Supervision. Establishes a framework for the Board of Governors, the CFTC, the SEC and other agencies to impose and enforce risk management standards for designated financial market utilities and a broad range of financial institutions engaged in systemically important payment, clearing or settlement activities related to financial transactions.

Corporate Governance and Executive Compensation

• Corporate Governance. Addresses several high-profile areas of corporate governance, including: proxy access, separation of Chairman and CEO, and brokers' discretionary voting. However, the Act does not include a provision mandating the election of directors by majority vote in uncontested elections, a provision that had been included in earlier drafts of the law.
• Executive Compensation. Requires rulemaking on a variety of executive compensation topics, including: say-on-pay, compensation committee independence, clawbacks of incentive compensation, enhanced compensation disclosure, disclosure of hedging policies, and compensation design at financial institutions.

Bureau of Consumer Financial Protection

• Bureau of Consumer Financial Protection. Establishes within the Federal Reserve System a new Bureau of Consumer Financial Protection to regulate and oversee consumer financial products and services. Gives Bureau broad regulatory and enforcement powers, including power to prohibit use of arbitration agreements regarding future disputes between consumers and "covered persons" under the Act. 

Implications for Private Litigation

• Implications for Private Litigation. Provides that investors who purchase rated securities can sue credit rating agencies, potentially nullifies arbitration provisions in certain contracts, empowers SEC to promulgate rules to impose heightened fiduciary duty on brokers and dealers who give personalized investment advice.

Regulation of Advisers to Hedge Funds and Others

• Regulation of Advisers to Hedge Funds and Others. Eliminates broad exemption from SEC registration and examination previously relied on by advisers to hedge funds and private equity funds, creates new exemptions from registration for advisers to certain types of private funds, and subjects advisers of private funds to new disclosure requirements. Raises the SEC's investment adviser registration threshold by generally prohibiting investment advisers with between $25 and $100 million in assets under management from registering with the SEC. Requires SEC to study effectiveness of existing legal and regulatory standards of care for broker-dealers when providing personalized investment advice and recommendations to retail customers.

Structured Products, Derivatives, and Clearing

• Derivatives Market Regulatory Overhaul. Alters the legal environment in which derivative markets operate by establishing a complex regulatory regime under which the SEC, the CFTC and other regulatory agencies will issue extensive regulations governing derivatives and participants in derivatives markets, including over-the-counter derivatives markets that are largely unregulated under current law.  
• Asset-Backed Securitizations. Requires retention of certain percentages of credit risk related to underlying assets and disclosure of asset-level information to potential investors. 
• Swap Spin-Off. Prohibits federal assistance to "swaps entities" to ensure federally insured depository institutions cease engaging in certain derivatives activities or isolate those activities in affiliated entities under rules to be promulgated by the CFTC, the SEC, and the Board of Governors of the Federal Reserve System.