Dodd-Frank four years on

October 2014  |  COVER STORY  |  BANKING & FINANCE

Financier Worldwide Magazine

October 2014 Issue

October 2014 Issue

In late July, the Dodd-Frank Wall Street Reform and Consumer Protection Act celebrated its fourth birthday. The Act, which was borne out of the financial crisis, has generated a mixed reaction since it was first signed in 2010. The legislation was designed to increase regulation of the financial sector and prevent any repeat of the great recession. President Obama, upon signing the Act, criticised the “unscrupulous lenders” that “locked consumers into complex loans with hidden costs” as well as the system that “left taxpayers on the hook if a big bank or financial institution ever failed”. Mr Obama pledged that the Dodd-Frank Act would guarantee “transparency” and would “rein in the abuse and excess that nearly brought down our financial system”.

However, despite the rhetoric, many observers have suggested that the law has actually done significantly more harm than good to the US financial system. Indeed, many of the Act’s critics have claimed that, due to the detrimental effect that Dodd-Frank has had on the national economy, it should be repealed immediately. Proponents of the Act, however, have fiercely opposed any proposed changes, including potential improvements, on the grounds that revisiting the legislation could weaken it and perhaps open the door to repeal.

In 2014, the Act occupies a precarious position, according to law firm David Polk. As of 18 July, only 208 – or 52.3 percent – of Dodd-Frank’s 398 rulemaking requirements have been met so far.

Although only half of the Act’s provisions have been implemented, it has made progress in some important areas. Dodd-Frank has arguably improved money markets, with the Securities and Exchange Commission (SEC) agreeing to have money market funds rise and fall based on the value of bonds they hold, rather than trying to mimic bank accounts. Further progress has been made in consumer protection, through the creation of the Consumer Financial Protection Bureau, tasked with defending customers’ interests in their dealings with financial companies.

Despite these improvements, a large chunk of the Act’s requirements are still unknown to the financial services industry. As a result, many market participants are still in the dark regarding how the regulatory landscape will evolve going forward. Congressional implementation of the Act’s clauses has been particularly slow. Out of 280 rulemaking deadlines that have passed so far, 127 (about 45 percent) of them have been missed by regulators.

Criticism of the Act has been strong from both ends of the political spectrum. The left has criticised the Act for not going far enough, claiming that banks should be forced to hold even more capital than is currently required. The right believe the Act is anti-business, and is the financial system’s equivalent of the Affordable Care Act.

Successes and failures

However, the Act has enjoyed a number of successes. The primary role of Dodd-Frank since its inception has been to make the financial services industry safer, and in some ways it appears to be fulfilling this criterion. Under Dodd-Frank, banks are now required to hold more capital, a move which will have an adverse effect on profits but will safeguard the wider banking system as it makes banking failures less likely in the long run. Furthermore, derivatives trading must now occur on exchanges, which will help to foster a greater degree of clarity about banks’ real risk exposure. The Volcker Rule is forcing risky trading out of those financial institutions whose failures could cause significant damage to the wider economy. Furthermore, the Federal Deposit Insurance Corporation (FDIC) has been able to create a “single point of entry” process which can facilitate the winding down of a large failing bank without prompting massive, catastrophic runs.

These perceived successes aside, the Act has provided critics with plenty of ammunition in its first four years. Opponents of Dodd-Frank, including Mark Calabria, director of financial regulation studies at the Cato Institute, have claimed that the Act and its myriad, sweeping regulations have provided an unwelcome distraction to a number of groups, most notably the SEC. “Of the 400 some rules required by Dodd-Frank, almost a hundred involve the SEC. Many of these, such as the Conflict Minerals, compensation ratio disclosure and say-on-pay, are both controversial and unrelated to the financial crisis. Title IX of Dodd-Frank reads like a grab-bag of random items that have little bearing on protecting retail investors or avoiding future crises,” he says. It is certainly true that large sections of the Act have implications for industries and companies outside of the financial sector. There are a number of provisions targeting companies in the energy industry, a number of which are required under Dodd-Frank to disclose every payment they make to foreign governments, for example.

Critics point out that the Act is responsible for burdening the US with compliance costs in the region of $21.8bn and has generated an enormous amount of red tape.

One of the biggest failures of Dodd-Frank to date has been the Act’s inability to bring about the end of ‘too big to fail’. For some observers, the Act has only served to institutionalise this notion by creating “systemically important financial institutions”. A recent report released by House Financial Services Committee Chairman Jeb Hensarling and Oversight and Investigations Subcommittee Chairman Patrick McHenry, entitled ‘Failing to End Too Big to Fail: An Assessment of the Dodd-Frank Act Four Years Later’, claims that the Act has only served to worsen risks within the financial system and has “recklessly handed financial regulators a blank check for taxpayer-funded bailouts”. The report claims that the Financial Stability Oversight Council (FSOC), which was established by the Act, has wholly failed to live up to its statutory mission of identifying and mitigating systemic risk. “Regulators had sufficient tools to resolve failing institutions before Dodd-Frank and simply chose not to use them,” says Mr Calabria. “For instance, a receivership mechanism was in place for Fannie Mae and Freddie Mac that would have resolved those entities with zero cost to the taxpayer. So, yes, Dodd-Frank offers regulators more tools – but the fundamental problem is that regulators have too many options, rather than a lack of options. Unless we tie the hands of the regulators, in the next crisis they are just as likely to engage in ad hoc bailouts as they were in the last one.”

Since the inception of Dodd-Frank, JPMorgan Chase, Citibank and Bank of America have become the three largest banks in the world, and Wells Fargo has gone on to become the world’s sixth largest bank. The combined assets of the four largest US banks now amount to 97 percent of the US’ 2012 GDP. Therefore, since the Act was signed into law, a number of banks which could be considered ‘too big to fail’ have managed to grow larger. Some analysts and activists have suggested that ‘too big to fail’ firms should be downsized and broken up, but the global nature of these banks makes that proposition highly unlikely. The only way in which a group would be split up under Dodd-Frank is if it were to fail, at which point the FDIC would take over the firm and begin the liquidation process. This process would likely be limited to the dismissal of the board and a number of senior executives; the FDIC would not liquidate the institution as a going concern. Instead, the FDIC’s plan would call for the recapitalisation of the holding company by converting debt to equity and then use new capital to support existing subsidiaries. While the holding company’s legal identity would change, and holders of bonds issued by that entity would suffer losses, existing contracts with creditors to the operating subsidiaries would remain in place. While this process is designed to minimise the risk and disruption potentially posed to the financial services industry, it simply serves to put in place another protective layer for failing firms. Should a big bank fail, the Act will allow for that bank to be bailed out one way or another. “We still have almost 200 rulemaking items to go under Dodd-Frank,” notes Mr Calabria. “Many are minor but several will have a major impact, and of course the costs of all the minor ones do add up. Despite all the costs, the benefits will be few. I do not believe Dodd-Frank has ended bailouts, nor do I believe Dodd-Frank has fundamentally helped either consumers or investors. Its legacy will be one of distraction. Ultimately, much of it will be softened or repealed, although its major structures will remain. Perhaps its worst legacy will be setting our financial system up for another crisis. Unfortunately, it has also had the legacy of making financial regulation far more political than it need be,” he adds.


Dodd-Frank has had a profound effect on whistleblowing in the US. Under the Act’s whistleblower provisions, the SEC can protect the identity of whistleblowers and reward them for their efforts in highlighting illegal activity. As a result, the SEC has handed out approximately $16m to 13 whistleblowers to date. However, there are many within the financial services industry that are dissatisfied with the Act’s whistleblower provisions, and have been from the outset. Some have suggested that congressional republicans might try to repeal a number of Dodd-Frank’s whistleblowing provisions, though this seems unlikely, especially considering the SEC’s move to establish an Office of the Whistleblower, along with a dedicated whistleblowing website.

Despite the encouraging progress that has been made by the Act in clamping down on illegal activity, Dodd-Frank’s whistleblower provisions remain extremely contentious. Since the Act was ratified, federal courts have regularly disagreed over the scope of its anti-retaliation provisions. Most notably, the courts have varied on their interpretation of the provisions relating to those employees who report alleged violations of federal securities laws to their employers, without also providing that information to the SEC. The continued uncertainty over the Act’s anti-retaliation provisions has had significant consequences for employers, both in terms of the potential volume and expense of defending against retaliation claims, as well the impact that anti-retaliation protections may have on employees’ willingness to cooperate with their employers’ internal compliance procedures. Thankfully, it would appear that some degree of clarification could soon be forthcoming. The Federal Court of Appeals for the Eighth Circuit, in the case of Bussing v Legent Clearing LLC et al, is set to offer some explanation on the issue. However, if the court comes down in the affirmative, it will directly contradict the ruling of the Court of Appeals for the Fifth Circuit, which ruled in 2013 in the case of Asadi v GE Energy (USA), LLC that reporting to the SEC is required. Responsibility for a final answer on the subject may eventually fall to the US Supreme Court.


The Dodd-Frank Act is by no means perfect, and it would be foolhardy to suggest otherwise. Its vast size and complex nature has made it very different to any similar legislation in American history. While some supporters of the Act believed that its myriad provisions could be enacted within 18 to 24 months, four years later those predictions look naïve. The Act’s primary aim was to increase accountability and transparency in the US financial system. Dodd-Frank hoped to curtail the excessive Wall Street risk-taking that nearly decimated the global financial system. Since its inception, the Act has subjected the $600 trillion global derivatives market to increased levels of regulation. It has also increased banking oversight and created a new consumer protection bureau. Dodd-Frank has undoubtedly created a great number of new jobs in the financial services industry and a number of cottage industries associated with the sector. Most notably, compliance departments have seen a great surge in recruitment over the last four years. Critics point out that the Act is responsible for burdening the US with compliance costs in the region of $21.8bn and has generated an enormous amount of red tape. These onerous costs and compliance regulations have fallen on both multinational and smaller community banks alike. Accordingly, they have had a particularly negative impact on companies that are in no way prepared or able to carry this increased regulatory burden.

Although the Act has scored a number of victories and has made progress in certain areas, due to its numerous failings, particularly around the institutionalisation of the ‘too big to fail’ principle, the first four years of Dodd-Frank can hardly be considered an undisputed success.

© Financier Worldwide


Richard Summerfield

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