The Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA), signed into law on 5th January 2010, describes its purpose as “to promote the financial stability of the United States by improving accountability and transparency in the financial system…”

The DFA is the result of what is widely perceived to be the worst financial crisis since the Great Depression and can be seen as trying to correct and address the excesses, abuses and weaknesses that led to that crisis. It will affect every financial institution operating in the United States, as well as many that operate from outside the US, and it will have a significant effect on non-financial companies.

The DFA strengthens and reforms regulatory agencies, imposes new leverage requirements on collateralized debt obligations (CDOs), increases transparency for over-the-counter derivatives (OTC Swaps) and hedge funds, provides new rules for credit rating agencies, restricts proprietary trading by banks, addresses corporate governance and the compensation of executive officers in public companies and imposes new capital requirements on “Systematically Important Financial Institutions” (SIFIs).

The DFA also mandates the undertaking of numerous studies including those on short selling, fiduciary duties, Federal Reserve Bank governance, holding company capital requirements, secured creditor haircuts, bankruptcy for financial institutions, accredited investors, enhancing investment advisor examinations and financial literacy among investors. These studies may, of course, lead to the implementation of more rules.

Among (many) other things, the DFA created the Financial Stability Oversight Council to oversee financial institutions and an independent Bureau of Consumer Financial Protection within the Federal Reserve.

The DFA requires originators to retain some of the risk associated with CDOs and requires OTC Swaps to be centrally cleared and Swap dealers and Major Swap Participants to be registered (and subject to oversight).

Credit Rating Agencies will need to make additional disclosures, add independent directors to their boards and make periodic reports to the Securities and Exchange Commission (SEC). The so-called ‘Volker Rule’ (Section 619 of the DFA) contains certain prohibitions and restrictions on banks, and non-banks, to engage in proprietary trading or have certain interests in, or relationships with, a hedge fund or private equity fund.

Finally, stock exchanges must adopt standards requiring listed companies to have policies providing for the recoupment of compensation in the event of an accounting restatement, and the Federal Reserve must establish prudential standards for SIFIs, including risk-based and contingent capital requirements.

For more information on what the US Commodity Futures Trading Commission (CFTC) and the US SEC are doing as a result, click on the following links:

CFTC List of Rulemaking Areas

SEC Rulemaking

Last updated 7th September 2012

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