Whether you like it or not, the Dodd-Frank Wall Street Reform and Consumer Protection Act is now law. Passed by the Senate finally last week and signed by President Obama yesterday, financial reform will have wide-ranging implications for the financial services sector (including the insurance industry), the rest of corporate America and, really, just the whole country.
The most immediate effect will be the creation of new regulatory groups.
The National Law Review published a great breakdown. Here are the four more interesting additions.
Consumer Financial Protection Bureau
Will write consumer protection rules for banks and nonbank financial firms offering consumers financial services or products and ensure that consumers are protected from “unfair, deceptive, or abusive” acts or practices.Federal Insurance Office
Will monitor all aspects of the insurance agency and identify issues or gaps in regulation that could lead to systemic risk. Based upon its findings, the FIO will make recommendations to the FSOC regarding insurance institutions that pose a systemic risk and should be subject to greater regulatory oversight.Financial Stability Oversight Council
Will identify risks and emerging threats to the financial stability of the United States arising from large bank holding companies and systemically important nonbank financial companies and respond with appropriate regulation to reduce the risk from their size and activities.Office of Financial Research
Will have the power to subpoena financial information from institutions under the supervision of the Fed. The OFR may require periodic and other reports from any nonbank financial company or bank holding companies.
The law also includes provisions surrounding “too big to fail,” the “Volker rule,” derivatives, hedge funds and “predatory” lending, but the regulatory changes are the most significant. And while it will be interesting to see how these new agencies take shape, the expanded mission of the SEC is the real story here.
I don’t think it’s a stretch to say that the SEC has been an abject failure since (at least) the turn of the millennium. I’m sure there was some good work done by the agency during this time, but if its core mission is to safeguard Americans from being duped by the unintelligible complexity masking the activity of Wall Street, the financial watchdog could not have performed more miserably. On its watch, complex, risk-laden transactions proliferated and — once the mirage of risk-free mortgage securities disappeared — ran the global economy head first into a brick wall. And this failure to check the financial institutions culpable was so great that, more than two years after Bear Stearns collapsed, nearly 10% of Americans still can’t find a job.
The Washington Post details the SEC’s expansion.
The SEC is required to issue 95 new regulations governing a wide swath of the financial sector, dozens more than the Federal Reserve, the new Consumer Financial Protection Bureau or other federal agencies. The SEC is also slated to complete 17 one-time studies and five new ongoing reports, according to a tally by the law firm Davis Polk & Wardwell.
The SEC will serve on the new Financial Stability Oversight Council, a new interagency body meant to spot emerging risks to the overall financial system. It will have to write rules to supervise the multibillion-dollar market of derivatives linked to stocks and bonds. It will begin examining the activities of hedge funds and private equity firms and tighten oversight of credit-rating agencies. And it will do studies of short selling and whether brokerage and investment firms must meet higher standards.
Perhaps only the Office of Thrift Supervision can compete with the SEC in terms of the new law’s impact. But in contrast to the SEC, which is gaining so many new responsibilities, OTS, which regulated home lenders, is being abolished.
Indeed, the SEC is coming out of the financial regulatory overhaul far stronger than many observers of the agency might have anticipated.
While in some ways it seems counterintuitive to task what some have perceived to be a failed agency with greater authority, I suppose some body has to do it. And change — for the better — is theoretically what reform is all about.
So … Enter a new stage of regulation, as John Lester and John Bovenzi succinctly point out.
Enactment of Dodd-Frank … marks only a new stage of financial reform, as the debate shifts to the rulemaking efforts of federal agencies. The complexity of the law and the many decisions delegated to regulators makes it difficult to predict which of the law’s many provisions will come to be the most significant. Ultimately, it will be regulators who determine the true impact of the law.
And that’s what has so many people scared — including business leaders who think regulators will be too draconian and SEC critics who think regulators will be too inept.