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Dodd-Frank Wall Street Reform and Consumer Protection Act

The act came into force on 21st July 2010. It was enacted to bring about changes to the American financial regulatory environment that affected all federal regulatory agencies and almost every part of the nation’s financial services industry.

The following is a brief summary of the legislation.

Highlights of the Legislation

Consumer Protection with Authority and Independence
The act created 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.

Ends Too Big to Fail Bailouts
Ends the possibility that taxpayers will be asked to write a cheque to bail out financial firms that threaten the economy by: creating a safe way to liquidate failed financial firms; imposing tough new capital and leverage requirements that make it undesirable to get too big; updating the Fed’s authority to allow system-wide support but no longer prop up individual firms; and establish rigorous standards and supervision to protect the economy and American consumers, investors and businesses.

Advance Warning System
It created a council to identify and address systemic risk posed by large, complex companies, products and activities before they threaten the stability of the economy.

Transparency and Accountability for Exotic Instruments
It aims at eliminating loopholes that allow risky and abusive practices to go on unnoticed and unregulated - including loopholes for over-the-counter derivatives, asset-backed securities, hedge funds, mortgage brokers and pay-day lenders.

Executive Compensation and Corporate Governance
Provides shareholders with a say on pay and corporate affairs with a non-binding vote on executive compensation and golden parachutes.

Protects Investors
It provides tough new rules for transparency and accountability for credit rating agencies to protect investors and businesses.

Enforces Regulation on the Books
It aims to strengthen oversight and empower regulators to aggressively pursue financial fraud, conflict of interest and manipulation of the system that benefits special interests at the expense of American familes and businesses.

Strong Consumer Financial Protection Watchdog The Consumer Financial Protection Bureau

Independent Head
It is led by an independent director appointed by the President and confirmed by the Senate.

Independent Budget
It has a dedicated budget paid by the Federal Reserve System.

Independent Rule Writing
It shall be able to autonomously write rules for consumer protections governing all financial institutions - banks and non banks - offering consumer financial services or products.

Examination and Enforcement
Authority to examine and enforce regulations for banks and credit unions with assets of over $10 billion and all mortgage-related businesses (lenders, services, mortgage brokers, and foreclosure scam operators), payday lenders, and student lenders as well as other non-bank financial companies that are large, such as debt collectors and consumer reporting agencies. Banks and Credit Unions with assets of $10 billion or less will be examined for consumer complaints by the appropriate regulator.

Consumer Protection
Consolidates and strengthens consumer protection responsibilities currently handled by the Office of the Comptroller of the Currency, Office of the Thrift Supervision, Federal Deposit Insurance Corporation, Federal Reserve, National Credit Union Administration, the Department of Housing and Urban Development, and Federal Trade Commission. It will also oversee the enforcement of federal laws intended to ensure the fair, equitable and non-discriminatory access to credit for individuals and communities.

Able to Act Fast
With this Bureau on the lookout for bad deals and schemes, consumers won’t have to wait for Congress to pass a law to be protected from bad business practices.

Educates
Creates a new Office of Financial Literacy. It also creates a national consumer compliant hot-line so that consumers will have, for the first time, a single toll-free number to report problems with financial products and services.

Accountability
It makes one office accountable for consumer protection. With many agencies sharing responsibility, it’s hard to know who is responsible for what, and easy for emerging problems that haven't historically fallen under anyone’s purview, to fall through the cracks.

Works with Bank Regulators
It coordinates with other regulators when examining banks to prevent undue regulatory burden. It consults with regulators before a proposal is issued and regulators could appeal regulations they believe would put the safety and soundness of the banking system or the stability of the financial system at risk.

Clearly defined oversight
It protects small business from unintentionally being regulated by the CFPB, excluding business that meet certain standards.

Looking out for the next big problem: Addressing systemic risks The Financial Stability Oversight Council

Expert Members
It is made up of 10 federal financial regulators and an independent member and 5 nonvoting members. The Financial Stability Oversight Council (FSOC) will be charged with identifying and responding to emerging risks throughout the financial system. The council will be chaired by the Treasury Secretary and include the Federal Reserve Board, SEC, CFTC, OCC, FDIC, FHFA, NCUA, the new Consumer Financial Protection Bureau, and an independent appointee with insurance expertise. The five non-voting members include OFR, FIO, and state banking, insurance and securities regulators.

Tough to Get Too Big
It makes recommendations to the Federal Reserve for increasing strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity, with significant requirements on companies that pose risks to the financial system.

Regulates Non bank Financial Companies
It has authorisation, provided with a 2/3rd vote and vote of the chair, to regulate non-banking financial company by the Federal Reserve, if the council believed that there would be negative effects on the financial system if the company failed or its activities would pose a risk to the financial stability of the US.

Break-up Large, Complex Organisations
It has the power to approve, with a 2/3rd vote and vote of the chair, a Federal Reserve decision to require a large, complex company, to divest some of its holdings if it poses a grave threat to the financial stability of the United States - but only as a last resort.

Technical Expertise
Creates a new Office of Financial Research within Treasury to be staffed with a highly sophisticated staff of economists, accountants, lawyers, former supervisors, and other specialists to support the council’s work by collecting financial data and conducting economic analysis.

Make Risks Transparent
Though the Office of Financial Research and member agencies the council will collect and analyse data to identify and monitor emerging risks to the economy and make this information public inperiodic reports and testimony to Congress every year.

No Evasion
Large bank holding companies that have receipt TARP funds will not be able to avoid Federal Reserve supervision by simply dropping their banks (the “Hotel California” provision).

Capital Standards
Establishes a floor for capital that cannot be lower than the standards in effect today and authorizes the Council to impose a 15-1 leverage requirement at a company if necessary to mitigate a grave threat to the financial system.

Ending Too Big to Fail Bailouts

Limiting Large, Complex Financial Companies and Preventing Future Bailouts

No Taxpayer Funding Bailouts
It clearly states that taxpayers will not be on the hook to save a failing financial company or to cover the cost of its liquidation.

Discourage Excessive Growth and Complexity
The Financial Stability Oversight Council will monitor systemic risk and make recommendations to the Federal Reserve for increasing strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity, with significant requirements on companies that pose risks to the financial system.

Volcker Rule
It requires regulators to implement regulations for banks, their affiliates and holding companies, to prohibit proprietary trading, investment in and sponsorship of hedge funds and private equity funds, and to limit relationships with hedge funds and private equity funds. Non-bank financial institutions supervised by the Fed also have restrictions on proprietary trading, hedge funds and private equity investments. The council will study and make recommendations on implementation to aid regulators.

Extends Regulation
The Council will have the ability to require non-bank financial companies that pose a risk to the financial stability of the United States to submit to supervision by the Federal Reserve.

Payment, Clearing and Settlement Regulation
It provides a specific framework for promoting uniform risk management standards for systemically important financial market utilities and systemically important payments, clearing and settlement activities conducted by financial institutions.

Funeral Plans
It requires large, complex financial companies to periodically submit plans for their rapid and orderly shutdown should the company go under. Companies will be hit with higher capital requirements and restrictions on growth and activity, as well as divestment, if they fail to submit acceptable plans. Plans will help regulators understand the structure of the companies they oversee and serve as a road-map for shutting down if the company fails. Significant costs for failing to produce a credible plan creates incentives for firms to rationalize structures or operations that cannot be unwound easily.

Liquidation
It creates an orderly liquidation mechanism for FDIC to unwind failing systemically significant financial companies. Shareholders and unsecured creditors bear losses and management and culpable directors will be removed.

Liquidation Procedure
It requires that the Treasury, FDIC and the Federal Reserve all agree to put a company into the orderly liquidation process to mitigate serious adverse effects on financial stability, with an upfront judicial review.

Costs to Financial Firms, not Taxpayers
Taxpayers will bear no cost for liquidating large, interconnected financial companies. FDIC can bor- row only the amount of funds to liquidate that it expects to be repaid from the assets of the company being liquidated. The government will be first in line for repayment. Funds not repaid from the sale of the company’s assets will be repaid first through the claw back of any payments to creditors that exceeded liquidation value and then assessments on large financial companies, with the riskiest paying more based on considerations included in a risk matrix.

Federal Reserve Emergency Lending
Significantly alters the Federal Reserve’s 13(3) emergency lending authority to prohibit bailing out an individual company. Secretary of the Treasury must approve any lending program, and such programs must be broad based and not aid a failing financial company. Collateral must be sufficient to protect taxpayers from losses.

Bankruptcy
Most large financial companies that fail are expected to be resolved through the bankruptcy process.

Limits on Debt Guarantees
To prevent bank runs, the FDIC can guarantee debt of solvent insured banks, but only after meeting serious requirements: 2/3rd majority of the Board and the FDIC board must determine that there is a threat to the financial stability; the Treasury Secretary must approve terms and conditions and sets a cap on overall guarantee amounts; the President activates an expedited process for Congressional approval.

Reforming the Federal Reserve

Federal Reserve Emergency Lending
It limits the Federal Reserve’s 13(3) emergency lending authority by prohibiting emergency lending to an individual entity. Secretary of the Treasury must approve any lending program; programs must be broad based, and loans cannot be made to insolvent firms. Collateral must be sufficient to protect taxpayers from losses.

Audit of the Federal Reserve
U.S. Government Accountability Office (GAO) will conduct a one-time audit of all Federal Reserve 13(3) emergency lending that took place during the financial crisis. Details of all lending will be pub- lished on the Federal Reserve website by December 1, 2010. In the future, GAO will have one-going to audit 13(3), emergency lending, and discount window lending, and open market transactions.

Transparency - Disclosure
It requires the Federal Reserve to disclose counterparties and information about amounts, terms and conditions of 13(3) emergency lending and discount window lending, and open market transactions on an on-going basis, with specified time delays.

Supervisory Accountability
It created a Vice-Chairman for Supervision, a member of the Board of Governors of Federal Reserve designated by the President, who will develop policy recommendations regarding supervision and regulation for the Board, and will report to Congress semi-annually on Board supervision and regu- lation efforts.

Federal Reserve Bank Governance
GAO will conduct a study of the current system for appointing Federal Reserve bank directors, to examine whether the current system effectively represents the public, and whether there are actual or potential conflicts of interest. It will also examine the establishment and operation of emergency lend- ing facilities during the crisis and the Federal Reserve banks involved therein.
The GAO will identify measures that would improve reserve bank governance.

Election of Federal Reserve Bank Presidents
Present of the Federal Reserve banks will be elected by Class B directors - elected by district member banks to represent the public - and Class C directors - appointed by the Board of Governors to rep- resent the public. Class A directors - elected by member banks to represent member banks - will no longer vote for presidents of the Federal Reserve Banks.

Creating Transparency and Accountability for Derivatives

Bringing Transparency and Accountability to the Derivatives Market

Closes Regulatory Gaps
Proves the SEC and CFTC with authority to regulate over-the-counter derivatives so that irresponsible practices and excessive risk-taking can no longer escape regulatory oversight.

Central Clearing and Exchange Trading
It requires central clearing and exchange trading for derivatives that can be cleared and provides a role for both regulators and clearing houses to determine which contracts should be cleared.

Market Transparency
It requires data collection and publication through clearing houses or swap repositories to improve market transparency and provide regulators important tools for monitoring and responding to risks.

Financial Safeguards
It adds safeguard to system by ensuring dealers and major swap participants have adequate financial resources to meet responsibilities. It provides regulators the authority to impose capital and margin requirements on swap dealers and major swap participants, not end users.

Higher standard of conduct
It establishes a code of conduct for all registered swap dealers and major swap participants when advising a swap entity. When acting as a counterparty to a pension fund, endowment fund, or state or local government, dealers are to have a reasonable basis to believe that the fund or government entity has an independent representative advising them.

New Offices of Minority and Women Inclusion

At federal banking and securities regulatory agencies, the bill establishes an Office of Minority and Women Inclusion that will, among other things, address employment and contracting diversity matters. The officers will coordinate technical assistance to minority-owned and women-owned business and seek diversity in the workforce of the regulators.

Mortgage Reform

Requires Lenders Ensure a Borrower’s Ability to Repay
It establishes a simple federal standard for all home loans. Institutions must ensure that borrowers can repay the loans they are sold.

Prohibit Unfair Lending Practices
It prohibits the financial incentives for sub prime loans that encourage lenders to steer borrowers into most costly loans, including the bonuses known as “yield spread premium” that lenders pay to brokers to inflate the cost of the loans. It prohibits pre-payment penalties that trapped so many borrowers into unfordable loans.

Establishes Penalties for Irresponsible Lending
The lenders and mortgage brokers who don’t comply with new standards will be held accountable by consumers for as high as three-years of interest payments and damages plus attorney’s fees (if any). It protects borrowers against foreclosure for violation of these standards.

Expands Consumer Protection for High-Cost Mortgages
It expands the protections available under federal rules on high-cost loans by lowering the interest rate and the points and fee triggers that define high cost loans.

Requires Additional Disclosure for Consumers on Mortgages
The lenders must disclose the maximum a consumer could pay on a variable rate mortgage, with a warning that payments will vary based on interest rate changes.

Housing Counseling
It establishes an Office of Housing Counseling within HUD to boost homeownership and rental housing counseling.

Hedge Funds

Fills Regulatory Gaps
It ends the “shadow” financial system by requiring hedge funds and private equity advisors to register with the SEC as investment advisors and provide information about their trades and portfolios necessary to assess systemic risks. This data will be shared with the systemic risk regulator and the SEC will report to Congress annually on how it uses this data to protect investors and market integrity.

Greater State Supervision
It raises assets threshold for federal regulation of investment advisors from $30 million to $100 million, a move expected to significantly increase the number of advisors under state supervision. States have proven to be strong regulators in this area and subjecting more entities to state supervision will allow SEC to focus its resources on newly registered hedge funds.

Credit Rating Agencies

New Office, New Focus at SEC
It creates an Office of Credit Ratings at the SEC with expertise and its own compliance staff and the authority to fine agencies. The SEC is required to examine Nationally Recognized Statistically Ratings Organisations at least once a year and make key findings public.

Disclosure
It requires Nationally Recognised Statistically Ratings Organisations to disclose their methodologies, their use of third parties for due diligence efforts, and their ratings track record.

Independent Information
It requires agencies to consider information in their ratings that comes to their attention from a source other than the organisations being rated if they find it credible.

Conflicts of Interest
It prohibits compliance officers from working on ratings, methodologies, or sales; installs a new requirement for NRSROs to conduct a one-year look-back review when an NRSTO employee goes to work for an obligor or underwriter of a security or money market instrument subject to a rating by that NRSRO; and mandates that a report to the SEC when certain employees of the NRSRO go to work for an entity that the NRSRO has rated in the previous twelve months.

Liability
Investors can bring private rights of action against rating agencies for a knowing or reckless failure to conduct a reasonable investigation of the facts or to obtain analysis from an independent source. NRSROs will not be subject to “expert liability” with the nullification of Rule 436(g) which provides an exemption for credit ratings provided by NRSROs from being considered a part of the registration statement.

Right to De-Register
It gives the SEC the authority to de-register an agency for providing bad ratings over time.

Education
It rquires rating analysts to pass qualifying exams and have continuing education.

Eliminates many statutory and regulatory requirements to use NRSRO ratings
It reduces over-reliance on ratings and encourages investors to conduct their own analysis.

Independent Boards
It requires at least half the members of NRSRO boards to be independent, with no financial stake in credit ratings.

Ends Shopping for Ratings
The SEC shall create a new mechanism to prevent issuers of asset backed securities from picking the agency they think will give the highest ratings, after conducting a study and submission of the report to the Congress.

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