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A Translation of the Dodd-Frank Wall Street Reform and Consumer Protection Act

Joel Redmond, CFP By Joel Redmond, CFP

If you spend any time looking at financial legislation in the US, it’s no secret to you that financial abuses beget market disruptions, and market disruptions beget new laws. Regulation of IPOs began in 1933 after the Great Depression. Regulation of the exchanges followed a year later. Insiders made enormous profits in the 80s; their activities were outlawed in 1987.

And the subprime crisis erupted in 2007-2009; we now have the Dodd-Frank Wall Street Reform and Consumer Protection Act. I began reading a summary of the law on Wikipedia; but, only being fluent in English, I thought I would attempt a comprehensible version. Since there are sixteen major segments, I also thought I would try and describe them each in about one sentence.

I – Financial Stability

The government appointed a 10-member council of directors and an office of analysts to find any impending risks to the US financial system. These councils have great power and virtually unlimited budget.

II – Orderly Liquidation Authority

When financial firms meet criteria for liquidation, 2/3 votes by the SEC, FDIC, Federal Reserve, and Federal Insurance Office can compel them to file for bankruptcy; banks with $50 billion+ have to pay assessments to help the FDIC liquidate filers within 5 years.

III – Transfer of Powers to the Comptroller, the FDIC, and the Fed

The Office of Thrift Supervision is dissolved and its powers are given to these three entities; the FDIC-insured limits are raised to $250,000 at banks and credit unions; and regulators have to establish offices for the inclusion of women and minorities.

IV – Regulation of Advisers to Hedge Funds and Others

Rich people (accredited investors) are redefined to be those with a net worth of $1MM+ exclusive of primary residence over the past 4 years; most hedge funds and venture capital firms have increased reporting requirements to regulators.

V – Insurance

The Federal Insurance Office is created as a part of the Treasury, largely to diagnose regulatory gaps that could lead to financial crisis.

VI – Improvements to Regulation

Banks can’t own more than 3% of the total interests in hedge funds or private equity pools; nor can the bank’s interests in these vehicles exceed 3% of Tier 1 capital.

VII – Wall Street Transparency and Accountability

Swaps (basically two series of cash flows traded for each other, such as fixed-for-floating rate) must be cleared through clearinghouses or exchanges. Certain types of these instruments must also be SEC-regulated now, for the first time since 1999.

VIII – Payment, Clearing, and Settlement Supervision

This title is to make sure that sellers exist for buyers and buyers for sellers. It creates uniform risk management standards for institutions, critical in a free-flowing market system.

IX – Investor Protections and Improvements to the Regulation of Securities

This title:

  • creates an SEC ombudsman
  • rewards whistleblowers
  • tightens the rules for credit ratings agencies
  • more clearly defines asset-backed securities
  • delists companies with executives that don’t comply with detailed compensation rules
  • tightens internal SEC controls
  • makes companies explain to investors why someone should be both chairman and CEO at the same time, or not
  • and, remakes the Municipal Securities Rulemaking Board (MSRB).

X – Bureau of Consumer Financial Protection

The Bureau of Consumer Financial Protection is formed; this group’s mandate is to regulate consumer financial products and services in compliance with federal law.

XI – Federal Reserve System Provisions

  1. The Fed Chairman gets a vice-president
  2. The Fed itself must be audited by the Government Accountability Office (GAO) for various criteria
  3. The Fed must outline prudent risk management standards for the institutions they manage and enjoin supervised companies to maintain specific amounts of capital.

XII. Improving Access to Mainstream Financial Institutions

This title provides incentives (grants) for low and medium-income people to open bank accounts, receive financial education, and receive micro-loans ($2,500 or less).

XIII. Pay it Back Act

This reduces the Troubled Asset Relief Program (TARP) from $700 billion to $475 billion and forbids companies from using TARP money for any new programs.

XIV. Mortgage Reform and Anti-Predatory Lending Act

This title expands mortgage underwriting considerably. It redefines what a mortgage loan originator is, what minimum standards are for qualified mortgages, and what “high-cost” mortgages (e.g. reverse mortgages) are. It also creates a Housing and Urban Development (HUD) subsidiary called the Office of Housing Counseling, redefines escrow accounts, creates additional mandates for housing valuation, and discloses time-value-of money and net-present-value-type calculations to homeowners.

XV. Miscellaneous Provisions

This title restricts loans to nations if the loan is more than their GDP, creates disclosure requirements about conflict diamonds in the Congo, and commissions an FDIC study of core deposits.

XVI. Section 1256 contracts

This title removes swaps and securities futures contracts/futures options from special IRS treatment.

The Dodd-Frank Wall Street Reform and Consumer Protection Act reads 848 pages in its entirety, so I hope this summary eased things for you (somewhat). Markets can get tired – first they get arbitraged to death, as clever souls skirt the rules, and then, they get regulated to death, as evinced by this more-than-comprehensive set of rules. Hopefully, the additional burden this regulation creates for Wall Street will be offset by the good it ends up doing for Main Street.


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