The Dodd-Frank Act

International Association of Risk and Compliance Professionals (IARCP)

The Dodd-Frank Act, Dodd-Frank bill, or Dodd-Frank financial regulatory reform bill, was named after its two chief authors, Sen. Chris Dodd (D., Conn.) and Rep. Barney Frank (D., Mass.).

In the fall of 2008, a financial crisis of a scale and severity not seen in generations left millions of Americans unemployed and resulted in trillions in lost wealth.

The financial regulatory system was a principal cause of that crisis.

It was fragmented, antiquated, and allowed large parts of the financial system to operate with little or no oversight.

And it allowed some irresponsible lenders to use hidden fees and fine print to take advantage of consumers.

To make sure that a crisis like this never happens again, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law.

The most far reaching Wall Street reform in history, Dodd-Frank will prevent the excessive risk-taking that led to the financial crisis.

The law also provides common-sense protections for American families, creating new consumer watchdog to prevent mortgage companies and pay-day lenders from exploiting consumers.

These new rules will build a safer, more stable financial system—one that provides a robust foundation for lasting economic growth and job creation.

Consumer Protections with Authority and Independence: 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.

At the signing ceremony, President Obama laid out the historical perspective as well as the perspective focused on our common future:

"Passing this bill was no easy task. To get there, we had to overcome the furious lobbying of an array of powerful interest groups and a partisan minority determined to block change.

So the members who are here today, both on the stage and in the audience, they have done a great service in devoting so much time and expertise to this effort, to looking out for the public interests and not the special interests.

And I also want to thank the three Republican senators who put partisanship aside  judged this bill on the merits, and voted for reform.

We’re grateful to them. And the Republican House members. Good to see you, Joe.

Now, let’s put this in perspective.

The fact is, the financial industry is central to our nation’s ability to grow, to prosper, to compete and to innovate.

There are a lot of banks that understand and fulfill this vital role, and there are a whole lot of bankers who want to do right -- and do right -- by their customers.

This reform will help foster innovation, not hamper it.

It is designed to make sure that everybody follows the same set of rules, so that firms compete on price and quality, not on tricks and not on traps.

It demands accountability and responsibility from everyone.

It provides certainty to everybody, from bankers to farmers to business owners to consumers.

And unless your business model depends on cutting corners or bilking your customers, you’ve got nothing to fear from reform.

Now, for all those Americans who are wondering what Wall Street reform means for you, here’s what you can expect.

If you’ve ever applied for a credit card, a student loan, or a mortgage, you know the feeling of signing your name to pages of barely understandable fine print.

What often happens as a result is that many Americans are caught by hidden fees and penalties, or saddled with loans they can’t afford.

That’s what happened to Robin Fox, hit with a massive rate increase on her credit card balance even though she paid her bills on time.

That’s what happened to Andrew Giordano, who discovered hundreds of dollars in overdraft fees on his bank statement –- fees he had no idea he might face.

Both are here today. Well, with this law, unfair rate hikes, like the one that hit Robin, will end for good.

And we’ll ensure that people like Andrew aren’t unwittingly caught by overdraft fees when they sign up for a checking account.

With this law, we’ll crack down on abusive practices in the mortgage industry.

We’ll make sure that contracts are simpler -– putting an end to many hidden penalties and fees in complex mortgages -– so folks know what they’re signing.

With this law, students who take out college loans will be provided clear and concise information about their obligations.

And with this law, ordinary investors -– like seniors and folks saving for retirement –- will be able to receive more information about the costs and risks of mutual funds and other investment products, so that they can make better financial decisions as to what will work for them.

So, all told, these reforms represent the strongest consumer financial protections in history.

And these protections will be enforced by a new consumer watchdog with just one job: looking out for people -– not big banks, not lenders, not investment houses -– looking out for people as they interact with the financial system."

Highlights of the Dodd-Frank Act:

  1. Ends Too Big to Fail Bailouts: Ends the possibility that taxpayers will be asked to write a check 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 establishing rigorous standards and supervision to protect the economy and American consumers, investors and businesses.
  2. Advance Warning System: Creates a council to identify and address systemic risks posed by large, complex companies, products, and activities before they threaten the stability of the economy.
  3. Transparency & Accountability for Exotic Instruments: Eliminates loopholes that allow risky and abusive practices to go on unnoticed and unregulated -including loopholes for over-the-counter derivatives, assetbacked securities, hedge funds, mortgage brokers and payday lenders.
  4. 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.
  5. Protects Investors: Provides tough new rules for transparency and accountability for credit rating agencies to protect investors and businesses.
  6. Enforces Regulations on the Books: Strengthens oversight and empowers regulators to aggressively pursue financial fraud, conflicts of interest and manipulation of the system that benefits special interests at the expense of American families and businesses.

Bringing Transparency and Accountability to the Derivatives Market

  1. Closes Regulatory Gaps: Provides 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.
  2. Central Clearing and Exchange Trading: 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.
  3. Market Transparency: 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.
  4. Financial safeguards: Adds safeguards to system by ensuring dealers and major swap participants have adequate financial resources to meet responsibilities. Provides regulators the authority to impose capital and margin requirements on swap dealers and major swap participants, not end users.
  5. Higher standard of conduct: Establishes a code of conduct for all registered swap dealers and major swap participants when advising a swap entity. When acting as counterparties to a pension fund, endowment fund, or state or local government, dealers are to have a reasonable basis to believe that the fund or governmental entity has an independent representative advising them.

Gives Shareholders a Say on Pay and Creating Greater Accountability

  1. Vote on Executive Pay and Golden Parachutes: Gives shareholders a say on pay with the right to a non-binding vote on executive pay and golden parachutes. This gives shareholders a powerful opportunity to hold accountable executives of the companies they own, and a chance to disapprove where they see the kind of misguided incentive schemes that threatened individual companies and in turn the broader economy.
  2. Nominating Directors: Gives the SEC authority to grant shareholders proxy access to nominate directors. These requirements can help shift management’s focus from short-term profits to long-term growth and stability.
  3. Independent Compensation Committees: Standards for listing on an exchange will require that compensation committees include only independent directors and have authority to hire compensation consultants in order to strengthen their independence from the executives they are rewarding or punishing.
  4. No Compensation for Lies: Requires that public companies set policies to take back executive compensation if it was based on inaccurate financial statements that don’t comply with accounting standards.
  5. SEC Review: Directs the SEC to clarify disclosures relating to compensation, including requiring companies to provide charts that compare their executive compensation with stock performance over a fiveyear period.