The Dodd Frank Act is a movement constructed that purports to provide rigorous standards and supervision to protect the economy and American consumers, investors and businesses, purports to end taxpayer funded bailouts of financial institutions, claims to provide for an advanced warning system on the stability of the economy, creates rules on executive compensation and corporate governance, and eliminates some loopholes that led to the 2008 economic recession. The Act is categorized into sixteen titles and, by one law firm’s count, it requires that regulators create 243 rules, conduct 67 studies, and issue 22 periodic reports.
A few regulators that contributed to this act were the Federal Reserve Bank, Securities and Exchange Commission, Treasury, National Credit Union Administration, Federal Finance Housing Agency Commodity Futures Trading Commission, Federal Deposit Insurance Corporation, and the Office of the Comptroller of Currency. The major contribution in terms of regulation to the financial market is to protect large financial companies, making changes to corporate governance and executive compensation practices.
The Financial Stability Reform, (Title I), expands federal research, evaluation, and oversight of large financial institutions in order to find efficient ways to manage risks to the financial stability of the United States. The Title establishes two new government departments, the Financial Stability Oversight Council, and the Office of Financial Research, an office within the Treasury. Title I also expands the authority of the Board of Governors of the Federal Reserve System to allow for supervision of certain nonbank financial companies and large bank holding companies that could have a substantial impact on the United States economy, but that were not under the purview of the Board of Governors in the past.
The Agencies and Agency Oversight Reform consisted of regulatory failure, which is the legal inability or the unwillingness to regulate large sectors of the financial services industry and their lending and secondary market activities was a major contributor to the financial crisis. In response, the Dodd-Frank Act created several new agencies or offices, eliminated the Office of Thrift Supervision, and modified the jurisdiction of several existing agencies.
The Securitization Reform Act focuses on credit risk retention that would require originators and securitizers of financial assets to retain a portion of the credit risk of securitized financial assets or, in more popular terms, to have “skin in the game.” In addition, the securitization provisions in the Dodd-Frank Act set forth disclosure requirements for the issuer and credit rating agencies who rate the issuer’s securities. Derivatives play an important role in capital markets and the broader economy. Companies in every state use derivatives to protect against operational risks that are inherent in their businesses.
The Act establishes a broad, new regulatory regime that requires numerous rulemakings that are likely to have profound effects on the market, including provisions governing swap dealers, major swap participants, and end-users such as manufacturers, financial institutions, and agricultural concerns. The Securities Industry and Financial Markets Association is working with the Securities and Exchange Commission, the Commodity Futures Trading Commission, and other regulators that are undertaking rulemaking proceedings to implement the derivatives-related provisions of the Act. SIFMA remains committed to educating legislators, regulators, and others about the types and uses of derivatives, as well as the integral role they play in our economy.
The Investor Protection Reform Creates a new independent watchdog, housed at the Federal Reserve, with the authority to ensure American consumers get the clear, accurate information they need to shop for mortgages, credit cards, and other financial products, and protect them from hidden fees, abusive terms, and deceptive practices. Executive compensation and corporate governance matters were always a focus. Prior to Dodd-Frank’s enactment, the SEC was already taking action to enhance certain disclosure rules that focus on providing more information on the role of the board and the voting rights of brokers.
Companies are required to disclose whether a compensation adviser has been engaged, whether any potential conflict of interest exists, and, if so, the nature of that conflict. The Credit Rating Reform s expands the Securities and Exchange Commission’s oversight of credit rating agencies, while at the same time altering the use of credit ratings in a broad range of regulations and impacting the public disclosure of credit ratings in securities offerings.
The Commission has began rulemaking to implement its oversight authority through a series of rules regarding required disclosures in connection with credit ratings, prohibited activities, governance, internal controls and conflicts of interest. Various federal agencies also have identified those rules which reference credit ratings and are in the process of substituting alternative standards of creditworthiness in place of those ratings; however, making alternative standards has proven a difficult task. Under the Volcker Rule, banks can no longer own, invest, or sponsor hedge funds, private equity funds, or any proprietary trading operations for their own profit.
It prevents financial firms from using deposits that are insured by the FDIC to run hedge funds and private equity funds. The Rule also limits the liabilities that the largest banks could hold. These banks changed into commercial banks during the financial crisis just so they could take advantage of taxpayer-funded bailouts. It also seeks to protect depositors in the largest retail banks. The Volcker Rule was designed to prevent large banks from becoming too big to fail.
This means that the failure of the bank would devastate the economy, requiring that it must be bailed out with taxpayer funds. The Capital Requirements Act requires the federal regulators to establish consolidated capital requirements for any type of depository institution holding company that are not less than the federal regulatory capital requirements for depository institutions. These requirements will include minimum leverage and risk-based capital standards.
This Act also applies the “source of strength” doctrine to thrift holding companies and holding companies of industrial loan banks. This doctrine, which has been applied to bank holding companies for many years, requires each holding company to serve as a source of financial strength for its depository institution subsidiary. Through this requirement, the Dodd-Frank Act intends to establish some parity in the capital standards applicable to holding companies of depository institutions, regardless of charter type. Although their intentions might have been honorable, I do not support the Dodd Frank Act.
Based off my research, their lack of understanding of our industry and the consequences of their actions seems to have hurt both people’s ability to perform and the people they serve. I strongly believe that Dodd-Frank not only harms the financial industry as a whole but more importantly it harms the very group it claims to help, the consumer. I think that an independent evaluation should be made and due diligence should be done before any additional initiatives of the Dodd-Frank Act are enforced.
If this is done objectively, our leaders will see that the only true solution is to eliminate Dodd-Frank.