1st July 2014
What is the Dodd-Frank Act?
Dodd-Frank eliminated ineffective regulatory agencies, introduced new agencies, and merged others. The US Office of Thrift Supervision, for example, was eliminated, with its responsibilities transitioned to the Federal Deposit Insurance Corporation (FDIC). Similarly, Dodd-Frank created a number of new agencies: the Consumer Financial Protection Bureau (CFPB) was created to provide oversight for credit card and mortgage crimes, while the Financial Stability Oversight Council (FSOC) and the Office of Financial Research (OFR) were created to ensure that financial institutions would not need to be bailed out by the US government.
Under new rules, all regulatory agencies are required to submit annual reports to Congress detailing their accomplishments over the past 12 months, and setting out their goals for the next
In addition to reporting requirements, Dodd-Frank also introduced a requirement for banks and financial institutions to conduct annual stress tests in order to prepare for unforeseen adverse situations and crises. The stress tests entail hypothetical financial scenarios that allow firms to explore their ability to maintain stability when facing challenges.
Where the stress tests reveal weaknesses or vulnerabilities, the Federal Reserve may take certain actions, such as capping share dividends, to ensure the firm in question can weather any sustained negative effects.
High Risk Derivatives:
Under Dodd-Frank, the Securities and Exchange Commission (SEC) was given the authority to regulate the trade of derivatives which, in practice, includes the exchange of stocks, bonds, commodities, and currencies.
Where those instruments are found to present high levels of risk, the SEC can take action to prevent financial institutions from creating new crises.
Federal Reserve Act:
The Dodd-Frank Act strengthened the Sarbanes-Oxley Act which sets out rules regarding CEOs’ personal responsibilities for accounting errors, and for the protection of corporate whistleblowers.
Under Dodd-Frank, the statutory limit for an employee submitting a claim against their employer was increased to 180 days (from 90). The Act also established a bounty reward program, entitling whistleblowers to up to 30% of the settlement proceeds of successful litigations against companies that violate financial regulations.
The Volcker Rule:
Dodd-Frank introduced the Volcker Rule which prevents banks from engaging in the kind of speculative trading that created the 2008 crisis. The rules prohibited banks from using or owning hedge funds for profit, and prevented the purchase and sale of securities, derivatives, commodity futures, and options.
Under the Volcker rule, banks may only trade with these instruments with the permission of their customers.
Hedge Fund Registration:
Criticism and Roll-Back:
Under the Trump administration, certain aspects of Dodd-Frank were rolled back. In 2018, President Trump signed a bill that exempted smaller and regional banking institutions from the Volcker Rule, and increased the amount of assets that certain financial institutions could hold before becoming ‘too big to fail’ and requiring government bailouts.
Despite efforts to amend the scope of Dodd-Frank, as of 2021 major aspects of the Act remained in place.