By Anna Yu (PO ’19)
Since the Great Recession in 2008, the Dodd-Frank Act has been a name widely known among the finance world and the public. As a key piece of legislation intended to regulate the financial industry, what exactly does it consist of and what role does it play today?
Sponsored by Senator Christopher J. Dodd (D-CT) and U.S. Representative Barney Frank (D-MA), the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in 2010, stemming from the 2008 crisis and collapse of Lehman Brothers. Some of the key aspects of the legislation include the creation of the FSOC (Financial Stability Oversight Council). Chaired by the Treasury Secretary with other members from the Federal Reserve, the Securities and Exchange Commission, and the new CFPA (Consumer Financial Protection Bureau), it oversees both the financial industry as a whole, as well as non-bank financial firms with at least $50 billion in assets and hedge funds with at least $10 billion.
Other key aspects of the act include the FDIC’s authority to seize, break-up, and wind down any failing financial company that threatens the U.S. financial stability (known as the orderly liquidation authority). The act also establishes a new Office of Credit Ratings to oversee credit rating agencies, requiring them to submit their rating systems for review with the possibility of de-certifying any agency if the ratings are misleading. Further, the act established the Volcker Rule, which prohibits banks from owning, investing, or sponsoring hedge funds, private equity funds, or any trading operations if the profit gained is more than 3% of the bank’s total profit. Additionally, derivatives are also affected in the Dodd-Frank Act. The riskiest ones, like the credit default swaps that contributed to the crisis, are now regulated by the SEC and CFTC (Commodity Futures Trading Commission). Furthermore, the trading of derivatives must now be done in public in a format similar to that of the stock exchange (though the specifics of what platform are unclear and some energy companies and banks are exempt from oversight). The legislation also created the new Federal Insurance Office (FIO) to regulate insurance companies like AIG, which needed to be bailed out by $85 billion in taxpayer money. The creation of the Consumer Financial Protection Bureau (CFPB) was also made to protect consumers from bad business practices by banks, working to stop transactions like risky lending that would hurt consumers.
With all of these parts passed in 2010, just recently this past June the House passed legislation to undo many of these key aspects to the Dodd-Frank Act. Republicans argue that the regulation is stifling the economy and the Financial Choice Act would help the economy grow faster with more jobs. This legislation is not out of line, as many of Trump’s administration appointments are banking industry veterans themselves (ie: Goldman Sachs, SEC head). The Choice Act would exempt certain companies and institutions from the restrictions Dodd-Frank imposes on risk taking, as well as replace the orderly liquidation authority that was established against the mantra of “too big to fail.” The Choice Act also undermines the Consumer Financial Protection Bureau by giving the president the ability to fire its director at will. It would also erase a rule that “requires brokers to act in the best interest of their clients when providing investment advice about retirement” (NY Times).
The Dodd-Frank Act is not perfect, even its original sponsor admits to that. Senator Frank thinks the law was too regulatory on small banks and that the threshold to identify banks as “too big to fail” should be higher (NPR). Yet the Choice Act to him seems to be a complete overhaul of any regulation whatsoever. Though the legislation has yet to pass through the senate, it raises an important question with regards to how extensive the regulation on Wall Street should be. Amid the chaos of healthcare, world politics, and the current administration, the issue of Wall Street regulation should not be forgotten as it is still prevalent and pertinent today.
Sources:
https://corpgov.law.harvard.edu/2010/07/07/summary-of-dodd-frank-financial-regulation-legislation/
