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.
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.
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
The law also provides common-sense
protections for American families, creating new consumer watchdog to
prevent mortgage companies and pay-day lenders from exploiting
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.
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
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
Bringing Transparency and Accountability to the
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
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
Gives Shareholders a Say on Pay and Creating Greater
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.
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.
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