Provisions of the Dodd–Frank Wall Street Reform and Consumer Protection Act

Overview

The Dodd–Frank Wall Street Reform and Consumer Protection Act was created as a response to the financial crisis in 2007. Passed in 2010, the act contains a great number of provisions, taking over 848 pages. It targets the sectors of the financial system that were believed to be responsible for the financial crisis, including banks, mortgage lenders, and credit rating agencies. Ostensibly aimed at reducing the instability that led to the crash, the act has the power to force these institutions to reduce their risk and increase their reserve capital. The Financial Stability Oversight Council and the Orderly Liquidation Authority were created to monitor the financial stability of major financial firms, 'deemed too big to fail'. The Consumer Financial Protection Bureau was created to prevent predatory mortgage lending. The Volcker Rule restricts how banks can invest, and the Office of Credit Ratings was charged with ensuring reliable credit ratings. The act also strengthened the existing whistleblower program. Under the Trump administration, many of the more stringent provisions were rolled back in 2018 due to pressure from critics and the affected industries.

Title I: Financial Stability

Title I, or the "Financial Stability Act of 2010", outlines two new agencies tasked to monitor systemic risk and research the state of the economy and clarifies the comprehensive supervision of bank holding companies by the Federal Reserve. Title I creates the Financial Stability Oversight Council (FSOC) and the Office of Financial Research (OFR) in the U.S. Department of the Treasury. These two agencies are designed to work closely together. The council is formed of 10 voting members, 9 of whom are federal regulators and 5 nonvoting supporting members, to encourage interagency collaboration and knowledge transfer. The treasury secretary is chairman of the council, and the head of the Financial Research Office is appointed by the president with confirmation from the Senate. Title I introduced the ability to impose stricter regulations on certain institutions by classifying them as SIFI's (systemically important financial institutions); according to Paul Krugman, this has resulted in institutions reducing risk to avoid such classification. Under section 165d, certain institutions must prepare resolution plans (so-called living wills), the first round of which was rejected by the Federal Reserve System in 2014. The process can be seen as a way to regulate and reduce shadow banking activities by banking institutions.

Financial Stability Oversight Council

The Financial Stability Oversight Council is tasked to identify threats to the financial stability of the United States, promote market discipline, and respond to emerging risks in order to stabilize the United States financial system. At a minimum, it must meet quarterly. The Council is required to report to Congress on the state of the financial system and may direct the Office of Financial Research to conduct research. Notable powers include

With a two-thirds vote, it may place nonbank financial companies or domestic subsidiaries of international banks under the supervision of the Federal Reserve if it appears that these companies could pose a threat to the financial stability of the United States. Under certain circumstances, the council may provide for more stringent regulation of a financial activity by issuing recommendations to the primary financial regulatory agency, which the primary financial agency is obliged to implement—the council reports to Congress on the implementation or failure to implement such recommendations. The council may require any bank or nonbank financial institution with assets over $50 billion to submit certified financial reports. With the approval of the council, the Federal Reserve may promulgate safe harbor regulations to exempt certain types of foreign banks from regulation.

Office of Financial Research

The Office of Financial Research is designed to support the Financial Stability Oversight Council through data collection and research. The director has subpoena power and may require from any financial institution (bank or nonbank) any data needed to carry out the functions of the office. The Office can also issue guidelines to standardizing the way data is reported; constituent agencies have three years to implement data standardization guidelines. It is intended to be self-funded through the Financial Research Fund within two years of enactment, with the Federal Reserve providing funding in the initial interim period. In many ways, the Office of Financial Research is to be operated without the constraints of the Civil Service system. For example, it does not need to follow federal pay-scale guidelines (see above), and it is mandated that the office have workforce development plans that are designed to ensure that it can attract and retain technical talent, which it is required to report about congressional committees for its first five years.

Title II: Orderly Liquidation Authority

Before Dodd–Frank, federal laws to handle the liquidation and receivership of federally regulated banks existed for supervised banks, insured depository institutions, and securities companies by the FDIC or Securities Investor Protection Corporation (SIPC). Dodd–Frank expanded these laws to potentially handle insurance companies and nonbank financial companies and changed these liquidation laws in certain ways. Once it is determined that a financial company satisfied the criteria for liquidation, if the financial company's board of directors does not agree, provisions are made for judicial appeal. Depending on the type of financial institution, different regulatory organizations may jointly or independently, by two-thirds vote, determine whether a receiver should be appointed for a financial company:

In General—FDIC and/or the Federal Reserve Broker Dealers—SEC and/or the Federal Reserve Insurance Companies— Federal Insurance Office (part of the Treasury Department and established in this Act) and/or the Federal Reserve Provided that the secretary of treasury, in consultation with the president, may also determine to appoint a receiver for a financial company. Also, the Government Accountability Office (GAO) shall review and report to Congress about the secretary's decision. When a financial institution is placed into receivership under these provisions, within 24 hours, the secretary shall report to Congress. Also, within 60 days, there shall be a report to the general public. The report on recommending to place a financial company into receivership shall contain various details on the state of the company, the impact of its default on the company, and the proposed action.

FDIC liquidation

Unless otherwise stated, the FDIC is the liquidator for financial institutions who are not banking members (such as the SIPC) nor insurance companies (such as the FDIC). In taking action under this title, the FDIC shall comply with various requirements:

Determine that such action is necessary for purposes of the financial stability of the United States, and not for the purpose of preserving the covered financial company Ensure that the shareholders of a covered financial company do not receive payment until after all other claims and the Funds are fully paid Ensure that unsecured creditors bear losses in accordance with the priority of claim provisions Ensure that management responsible for the failed condition of the covered financial company is removed (if such management has not already been removed at the time at which the corporation is appointed a receiver) Ensure that the members of the board of directors (or body performing similar functions) responsible for the failed condition of the covered financial company are removed, if such members have not already been removed at the time the corporation is appointed a receiver Not take an equity interest in or become a shareholder of any covered financial company or any covered subsidiary

Orderly Liquidation Fund

To the extent that the Act expanded the scope of financial firms that may be liquidated by the federal government, beyond the existing authorities of the FDIC and SIPC, there had to be an additional source of funds, independent of the FDIC's Deposit Insurance Fund, used in case of a non-bank or non-security financial company's liquidation. The Orderly Liquidation Fund is to be an FDIC-managed fund, to be used by the FDIC in the event of a covered financial company's liquidation that is not covered by FDIC or SIPC. Initially, the fund is to be capitalized over a period no shorter than five years, but no longer than 10; however, in the event the FDIC must make use of the fund before it is fully capitalized, the secretary of the treasury and the FDIC are permitted to extend the period as determined necessary. The method of capitalization is by collecting risk-based assessment fees on any "eligible financial company"—which is defined as ". . . any bank holding company with total consolidated assets equal to or greater than $50 billion and any nonbank financial company supervised by the Board of Governors." The severity of the assessment fees can be adjusted on an as-needed basis (depending on economic conditions and other similar factors), and the relative size and value of a firm is to play a role in determining the fees to be assessed. The eligibility of a financial company to be subject to the fees is periodically reevaluated; or, in other words, a company that does not qualify for fees in the present will be subject to the fees in the future if it crosses the 50 billion line, or become subject to Federal Reserve scrutiny. To the extent that a covered financial company has a negative net worth and its liquidation creates an obligation to the FDIC as its liquidator, the FDIC shall charge one or more risk-based assessment such that the obligation will be paid off within 60 months of the issuance of the obligation. The assessments will be charged to any bank holding company with consolidated assets greater than $50 billion and any nonbank financial company supervised by the Federal Reserve. Under certain conditions, the assessment may be extended to regulated banks and other financial institutions. Assessments will be implemented according to a matrix that the Financial Stability Oversight Council recommends to the FDIC. The matrix shall take into account

Economic conditions—higher assessments during more favorable economic conditions Whether the institution is An insured depositary institution that is a member of the FDIC A member of the SIPC An insured credit union An insurance company, assessed pursuant to applicable state law to cover costs of rehabilitation or liquidation Strength of its balance sheet, both on-balance sheet and off-balance sheet assets, and its leverage Relevant market share Potential exposure to sudden calls on liquidity precipitated by economic distress with other financial companies The amount, maturity, volatility, and stability of the liabilities of the company, including the degree of reliance on short-term funding, taking into consideration existing systems for measuring a company's risk-based capital The stability and variety of the company's sources of funding The company's importance as a source of credit for households, businesses, and state and local governments and as a source of liquidity for the financial system The extent to which assets are simply managed and not owned by the financial company and the extent to which ownership of assets under management is diffuse The amount, different categories, and concentrations of liabilities, both insured and uninsured, contingent and noncontingent, including both on-balance sheet and off-balance sheet liabilities, of the financial company and its affiliates

Obligation limit and funding

When liquidating a financial company under this title (as opposed to FDIC or SIPC) there is a maximum limit of the government's liquidation obligation, i.e., the government's obligation can not exceed

10 percent of the total consolidated assets, or 90 percent of the fair value of the total consolidated assets In the event that the Fund and other sources of capital are insufficient, the FDIC is authorized to buy and sell securities on behalf of the company (or companies) in receivership to raise additional capital. Taxpayers shall bear no losses from liquidating any financial company under this title, and any losses shall be the responsibility of the financial sector, recovered through assessments:

Liquidation is required for all financial companies put into receivership under this title All funds expended in the liquidation of a financial company under this title shall be recovered from the disposition of assets or assessments on the financial sector

Orderly Liquidation Authority Panel

Established inside the U.S. Bankruptcy Court for the District of Delaware, the panel is tasked with evaluating the conclusion of the secretary of treasury that a company is in (or in danger of) default. The panel consists of three bankruptcy judges drawn from the District of Delaware, all of whom are appointed by the chief judge of the United States Bankruptcy Court for the District of Delaware. In his appointments, the chief judge is instructed to weigh the financial expertise of the candidates. If the panel concurs with the secretary, the company in question is permitted to be placed into receivership; if it does not concur, the secretary has an opportunity to amend and refile his or her petition. In the event that a panel decision is appealed, the United States Court of Appeals for the Third Circuit has jurisdiction; in the event of further appeal, a writ of certiorari may be filed with the U.S. Supreme Court. In all appellate events, the scope of review is limited to whether the decision of the secretary that a company is in (or in danger of) default is supported by substantial evidence.

Title III: Transfer of Powers to the Comptroller, the FDIC, and the Fed

Title III, or the "Enhancing Financial Institution Safety and Soundness Act of 2010," is designed to streamline banking regulation. It also is intended to reduce competition and overlaps between different regulators by abolishing the Office of Thrift Supervision and transferring its power over the appropriate holding companies to the board of governors of the Federal Reserve System, state savings associations to the FDIC, and other thrifts to the office of the Comptroller of the Currency. The thrift charter is to remain, although weakened. Additional changes include:

The amount of deposits insured by the FDIC and the National Credit Union Share Insurance Fund (NCUSIF) is permanently increased from $100,000 to $250,000. Each of the financial regulatory agencies represented on the Council shall establish an Office of Minority and Women Inclusion that shall be responsible for all matters of the agency in relation to diversity in management, employment, and business activities.

Title IV: Regulation of Advisers to Hedge Funds and Others

Title IV, or the "Private Fund Investment Advisers Registration Act of 2010," requires certain previously exempt investment advisers to register as investment advisers under the Investment Advisers Act of 1940. Most notably, it requires many hedge fund managers and private equity fund managers to register as advisers for the first time. Also, the act increases the reporting requirements of investment advisers as well as limiting these advisers' ability to exclude information in reporting to many of the federal government agencies.

Title V: Insurance

Title V—Insurance is split into two subtitles: A - Federal Insurance Office, and B - State-Based Insurance Reform.