Dodd-Frank Act

Dodd-Frank Act

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The Dodd-Frank Act, officially called the Dodd-Frank Wall Street Reform and Consumer Protection Act, is legislation signed into law by President Barack Obama in 2010 in response to the financial crisis that became known as the Great Recession. Dodd-Frank put regulations on the financial industry and created programs to stop mortgage companies and lenders from taking advantage of consumers. The dense, complex law continues to be a hot topic in American politics: Supporters say it places much-needed restrictions on Wall Street, but critics charge Dodd-Frank burdens investors with too many rules that slow economic growth.

Great Recession

The Great Recession, a crisis that left millions of Americans unemployed and sparked worldwide economic decline, began in December 2007 and lasted well into 2009.

In September 2008, financial instability peaked when the fourth largest investment bank in the United States, Lehman Brothers, collapsed.

Stocks plummeted, and the markets froze. Fear and instability paralyzed the country as large companies and small businesses alike struggled to continue operating.

Many experts and politicians attribute the downfall to a lack of oversight and regulation of financial institutions. Banks were permitted to use hidden fees and lend to unqualified consumers.

In addition, many investors were extending their funds and exhausting their financial reserves. The federal government stepped in quickly, proposing legislation for financial reform.

Origins of Dodd-Frank

The administration of President Barack Obama first proposed the legislation that became known as Dodd-Frank in June 2009. The initial version was presented to the House of Representatives in July 2009.

Senator Chris Dodd and U.S. Representative Barney Frank introduced new revisions to the bill in December 2009. The legislation was eventually named after the two men.

The Dodd-Frank Act officially became law in July 2010.

This bill included the government’s most substantial changes in response to the economy since the Great Depression. In fact, it’s considered the most comprehensive financial reform since the Glass-Stegall Act, which was put in place after the 1929 stock market crash.

What is Dodd-Frank?

The Dodd-Frank Act is a comprehensive and complex bill that contains hundreds of pages and includes 16 major areas of reform.

Simply put, the law places strict regulations on lenders and banks in an effort to protect consumers and prevent another all-out economic recession. Dodd-Frank also created several new agencies to oversee the regulatory process and implement certain changes.

Some of the main provisions found in the Dodd-Frank Act include:

  • Banks are required to come up with plans for a quick shutdown if they approach bankruptcy or run out of money.
  • Financial institutions must increase the amount of money they hold in reserve to account for potential future slumps.
  • Every bank with more than $50 billion of assets must take an annual “stress test,” given by the Federal Reserve, which can help determine if the institution could survive a financial crisis.
  • The Financial Stability Oversight Council (FSOC) identifies risks that affect the financial industry and keeps large banks in check.
  • The Consumer Financial Protection Bureau (CFPB) protects consumers from the corrupt business practices of banks. This agency works with bank regulators to stop risky lending and other practices that could hurt American consumers. It also oversees credit and debit agencies as well as certain payday and consumer loans.
  • The Office of Credit Ratings ensures that agencies provide reliable credit ratings to those they evaluate.
  • A whistle-blowing provision in the law encourages anyone with information about violations to report it to the government for a financial reward.

Volcker Rule

An additional provision of the Dodd-Frank Act is known as the Volcker Rule, named after Paul Volcker.

Volcker was chairman of the Federal Reserve under presidents Jimmy Carter and Ronald Reagan, and chairman of the Economic Recovery Advisory Board under President Obama.

The Volcker Rule forbids banks from making certain investments with their own accounts. For example, banks can’t invest, own or sponsor any proprietary trading operations or hedge funds for their own profit, with some exceptions.

Debate Over Dodd-Frank

Like many legislative bills, Dodd-Frank has sparked debate among politicians, financial experts and American citizens alike.

Supporters of the bill believe its regulations can protect consumers and help prevent another financial crisis. They contend that banks and other institutions were taking advantage of the American people for too long without being held accountable.

Others think the regulations are too stringent and put an end to overall economic growth. Critics also say the legislation makes it more difficult for companies in the United States to compete internationally.

Dodd-Frank Today

Today, the “too much regulation” and “not enough regulation” sides of the debate over the Dodd-Frank Act are still a source of contention.

In February 2017, President Donald Trump issued an executive order that instructed regulators to review the provisions in the Dodd-Frank Act and compose a report outlining possible reforms.

The Republican-led Congress made several efforts in 2017 and 2018 to roll back some of the consumer-protection provisions found in the Dodd-Frank Act.

While the Dodd-Frank Act has undoubtedly changed the way financial institutions operate in the United States, it’s uncertain just how long the law will stay in full effect.


Dodd-Frank Act, U.S. Commodity Futures Trading Commission.
Dodd-Frank Act: CNBC Explains, CNBC.
H.R.4173 – Dodd-Frank Wall Street Reform and Consumer Protection Act,
Wall Street Reform: The Dodd-Frank Act, The White House.
The Great Recession, Federal Reserve History.
Senators Want to Roll Back Bank Regulations on the 10-Year Anniversary of the 2008 Financial Crisis. Newsweek.

Dodd-Frank Wall Street Reform and Consumer Protection Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act was created as a response to the financial crisis of 2008. Named after sponsors Senator Christopher J. Dodd (D-Conn.) and Representative Barney Frank (D-Mass.), the act contains numerous provisions, spelled out over roughly 2,300 pages, that were to be implemented over a period of several years.

Key Takeaways

  • The Dodd-Frank Wall Street Reform and Consumer Protection Act targeted the sectors of the financial system that were believed to have caused the 2008 financial crisis, including banks, mortgage lenders, and credit rating agencies.
  • Critics of the law argue that the regulatory burdens it imposes could make United States firms less competitive than their foreign counterparts.
  • In 2018, Congress passed a new law that rolled back some of Dodd-Frank's restrictions.

1 Comment

Tom Nguyen

Do you know anything about the new laws that would make it easier to open a small size hedge fund? Are the legal, and compliance fee less expensive to run a small size hedge fund ( under $10million) that only requires state registration?

How Does the Dodd-Frank Wall Street Reform Act Work?

Here are some of the ways in which the Dodd-Frank Act sought to make the financial system safer for consumers and taxpayers.

Keeps an Eye on Wall Street

The Financial Stability Oversight Council identifies risks that affect the entire financial industry. If any firms become too big, the FSOC will turn them over to the Federal Reserve for closer supervision. For example, the Fed can make a bank increase its reserve requirement. That will make sure they have enough cash on hand to prevent bankruptcy. The chair of the FSOC is the Treasury secretary. The council has 10 voting members and five nonvoting members. Voting members include the Securities and Exchange Commission, the Fed, the Consumer Financial Protection Bureau (CFPB), the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation (FDIC), the Federal Housing Finance Agency, and the Consumer Financial Protection Agency. Dodd-Frank also strengthened the role of whistleblowers protected under Sarbanes-Oxley.

Keeps Tabs on Giant Insurance Companies

Dodd-Frank created a new Federal Insurance Office under the Treasury Department. It identifies insurance companies that create a risk for the entire system. It also gathers information about the insurance industry. In December 2014, for example, it reported on the impact of the global reinsurance market to Congress. The FIO makes sure insurance companies don't discriminate against minorities. It represents the U.S. on insurance policies in international affairs. The FIO works with states to streamline regulation of surplus lines insurance and reinsurance.

Stops Banks From Gambling With Depositors' Money

The Volcker Rule bans banks from using or owning hedge funds for their own profit. It prohibits them from using your deposits to trade for their profit. Banks can only use hedge funds at a customer's request. However, this aspect of the Dodd-Frank Act has been a prominent target for rollback, including multiple proposed and finalized rule changes from agencies like the Fed and the FDIC.

Reviews Federal Reserve Bailouts

The Government Accountability Office can review future Fed emergency loans, and the Treasury Department must approve the new powers. This provision addressed critics who thought the Fed went overboard with its emergency loans and other "bailouts" to the banks during the Great Recession.

Monitors Risky Derivatives

The Securities and Exchange Commission and the Commodity Futures Trading Commission regulate the most dangerous derivatives. They are traded at a clearinghouse, which is similar to a stock exchange. That makes the trading function more smoothly. The regulators can also identify excessive risk and bring it to policy-makers' attention before a major crisis occurs.

Brings Hedge Fund Trades to Light

One of the causes of the 2008 financial crisis was that hedge fund trades had become so complex that they were increasingly difficult for even experienced traders to understand. When housing prices fell, so did the value of the derivatives traded. But instead of dropping a few percentages, their prices fell to zero.

To address this issue, Dodd-Frank requires all hedge funds to register with the SEC. They must provide data about their trades and portfolios so the SEC can assess overall market risk. This gives states more power to regulate investment advisers.

Oversees Credit Rating Agencies

Dodd-Frank created an Office of Credit Ratings at the SEC. It regulates credit-rating agencies like Moody's and Standard & Poor's. Critics of these agencies say they helped fuel the crisis by inaccurately reporting on the safety of some derivatives. Under Dodd-Frank, the SEC can require them to submit their methodologies for review. It can deregister an agency that gives faulty ratings.

Regulates Credit Cards, Loans, and Mortgages

Dodd-Frank created the Consumer Financial Protection Bureau, which consolidated many watchdog agencies and put them under the Treasury Department. It oversees credit reporting agencies and credit and debit cards. It also oversees payday and consumer loans, except for auto loans from dealers. Banking fees are also under the purview of the CFPB. These include fees associated with credit, debit, mortgage underwriting, and more.

Although Dodd-Frank didn't ban risky mortgage loans, such as interest-only loans, it sought to protect homeowners by requiring better disclosure of what the loans actually were. Banks have to prove that borrowers understand the risks. They also have to verify the borrower's income, credit history, and job status.

CFPB also played a role in increasing the FDIC insurance on bank deposits to $250,000.

Calling out the Wolves of Wall Street

Lastly was the extension of the Whistleblower Program, which aimed to encourage employees to provide evidence against their employers in cases of corruption and misconduct. Dodd-Frank introduced monetary incentives, giving whistleblowers 10-30% of the settlement cost paid by the liable company in the legal dispute. Furthermore, it also extended the range of employees eligible for this reward, including those of subsidiaries and affiliates of the liable company. Finally, it enlarged the statute of limitations, allowing employees to bring forward a claim against the employer from 90 to 180 days after a violation.

Dodd-Frank And Deregulation: Some Lessons From History

The 2008 financial crash was the worst since the great crash of 1929 and caused the worst economy since the Great Depression. It has cost the United States more than $20 trillion in lost GDP and tens of millions of Americans are still recovering from lost homes, jobs, savings, stagnant wages and crushing student loan debts. In addition to diverting trillions of dollars to bailouts for the financial industry, the crash caused massive deficits and debt, which have resulted in the ongoing underfunding of all of America’s priorities from education and health care to science and job creation.

The causes of the crash and the economic crisis it created will be debated for decades, if not longer. They were indeed multifaceted and complex. But make no mistake: the primary culprits were Wall Street’s too-big-to-fail financial institutions that engaged in an almost unprecedented binge of risk-taking, irresponsible lending and, at times, massive illegal conduct.

Some of this behavior was legal. Some of it illegal. Some of it was criminal. Some of it was just unethical, irresponsible or stupid. Much of it was a mix of all of that. Some of it contributed directly to the financial crisis, some of it indirectly. But Wall Street’s reckless, high-risk behavior was all too representative of the unregulated, freewheeling, anything-goes, money-soaked, bonus-driven culture that existed throughout too much of the financial industry before 2008.

Wall Street and its allies have been trying to shift the blame for the financial crisis to someone or something — anything — since the crash. They blamed regulators at the U.S. Securities and Exchange Commission and the Fed. They blamed indebted homeowners, the very victims of their scams, frauds and predatory activities. They even blamed Jimmy Carter and a 40-year old law designed to expand credit to underserved communities.

But the facts show that for years prior to the crisis, the biggest financial firms gorged themselves on short-term debt and left themselves critically undercapitalized and without sufficient liquidity originated poorly underwritten mortgages that they knew would never be repaid and packaged those mortgages into deceptively valued securities, derivatives and structured products that they sold to unsuspecting investors around the world, often fraudulently. The big banks and bankers did these things because they were focused on maximizing short-term profits to pocket huge annual bonuses — at the expense of their clients, customers and counterparties, as well as the long-term viability of their firms, the financial system and the U.S. economy.

Many, if not most of them, knew exactly what they were doing. In 2007, Citigroup’s then-CEO Chuck Prince famously said, “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

In other words, “we know this risk-taking binge isn’t sustainable and will end in disaster. But, in the meantime, as long as others are doing it, we’re going to keep doing it too and keep making as much money as fast as we can.” Thus, legal or illegal, Wall Street’s biggest firms irresponsibly maximized their short-term wealth based on incredibly dangerous leveraged risk-taking, courting disaster that ultimately fell on America’s families, workers, taxpayers and communities.

First, the legal activities. The years before the crash saw a dramatic increase in irresponsible and unethical behavior by Wall Street. For example, Wall Street firms grew enormously in size while ramping up their leverage to dangerously high levels. They also originated or supplied the funding for others to originate as many subprime mortgages as they could, while their derivatives and structured products divisions simultaneously created an insatiable demand for those mortgages.

This was enabled by the massive bipartisan deregulation during the 1990s and 2000s. Following the crash of 1929, the U.S. passed laws and regulations to create layers of protection between Wall Street’s high-risk activities and Main Street’s homes, jobs and savings. Those reforms imposed the heaviest regulation on the financial sector in the history of the world. Wall Street and its allies claimed that those laws and regulations would be the end of capitalism, destroy the banking sector, prevent lending, kill economic growth and cause the loss of jobs across the country.

Yet, Wall Street’s hysterical claims of doom on Main Street if they were required to reduce their most dangerous, socially unproductive risk-taking all proved wrong. With the innumerable new laws and rules focusing finance on the real economy, America enjoyed an unprecedented booming economy in the following decades, which created the largest middle-class history, and even the financial industry thrived. That’s what prevented another catastrophic financial crash for more than 70 years.

Until deregulation. One of the more important laws passed after the great crash and whose repeal was a key factor leading to the 2008 crisis was the Glass-Steagall Act. It prohibited the same bank from engaging in both relatively low-risk traditional commercial banking (using FDIC-insured and Fed-backed deposits to make mortgage and business loans) and higher-risk trading, insurance and investment banking operations. Because Glass-Steagall required those activities to be conducted in entirely different financial firms, it prevented Wall Street’s highest-risk activities from endangering the bank that engaged in socially beneficial lending to the real economy. (It also prevented low-cost, sticky and federally insured deposits from funding and thereby unfairly and anti-competitively subsidizing the high-risk trading operations of the banks.)

Glass-Steagall was effectively repealed with the passage of the Gramm-Leach-Bliley Act in 1999, which unleashed an acquisition spree that supersized banks by allowing the combination of traditional bank lending with trading, securities and insurance activities. When the merger frenzy peaked, what had been almost 40 financial institutions resulted in just four sprawling financial conglomerates. Three of those spanned the globe with trillions of dollars in assets and derivatives, hundreds of thousands of employees, operating through thousands of subsidiaries in 50 or so countries.

The result was gigantic, sprawling, interconnected, global financial institutions that threatened the financial system and the entire economy if they ever failed. These so-called “collateral” consequences are what makes these giants “too big to fail” and, in violation of the most basic rules of capitalism, virtually guarantees they would be bailed out rather than failing in bankruptcy like every other firm in the U.S.

Two other deregulatory changes made these firms more fragile and unstable. First, the Commodity Futures Modernization Act was passed in 2000, which effectively prohibited the regulation of the swaps derivatives markets. As a result, legal hurdles to unbridled derivatives speculation that dated back decades allowed the derivatives markets to balloon to more than $700 trillion, only a small fraction of which was related to the real economy. Not only were these derivatives bets dangerous to the individual firms, but they acted as a conveyor belt distributing unseen risks throughout the global financial system (as proved by AIG, Lehman Brothers and so many others). That’s why Warren Buffett called them “weapons of mass financial destruction.”

Second, while the banks were supersizing themselves, combining lending and trading, and engaging in the highest-risk derivatives trading, they were also leveraging themselves to extremely dangerous levels with very short-term, often overnight, debt. This was accelerated in 2004 after the SEC dramatically loosened its regulations governing leverage ratios for Wall Street’s banks. As a result, the typical ratio for a big bank shot up to 33-to-1, leaving a razor-thin layer of capital between the bank and bankruptcy: a mere 3 percent decline in asset values would essentially wipe out the firm. This excessive short-term borrowing and extraordinarily high levels of leverage resulted in very fragile too-big-to-fail firms.

This mindless deregulation was compounded by compensation schemes that incentivized the highest-risk short-term behavior imaginable from the executive suites to the streets. For example, because leverage boosted the firm’s return on equity (ROE) and executive compensation was based in significant part on ROE, leveraging a firm to near-fatal levels was incredibly lucrative for Wall Street’s financiers. Also, the no-risk “originate to distribute” fee-based business model fueled the crash with hundreds of billions of dollars in fraudulent subprime mortgages that were packaged into trillions of dollars of worthless derivatives like credit default swaps (CDS) and structured products like collateralized debt obligations (CDOs) by Wall Street’s biggest banks. From mortgage brokers to Wall Street CEOs, irresistible compensation schemes that rewarded short-term profits with big bonuses supersized the subprime bubble, showering unimaginable riches on a few thousand financiers at the expense of all Americans.

This reckless, irresponsible and unethical — albeit mostly legal — conduct due to deregulation, nonenforcement and upside-down incentives all contributed to causing the crash, but they are only part of the story. Massive illegal and, at times, criminal conduct also caused the crash.

Remember that trillions of dollars of securities and derivatives had to be written down in value, often to zero. This wasn’t a case of one or two or three mortgages or derivatives being overvalued by 10 percent or 20 percent. Entire categories had to be written off, often entirely. Just one example: When housing prices fell, one credit rating agency downgraded 83 percent of the $869 billion in mortgage securities it had rated AAA in just one year (2006). These across-the-board downgrades and the trillions of dollars in losses they reflected were not the result of an occasional or intermittent mistake or negligence. Instead, they reveal that the crash was the result of pervasive industrywide practices of fraudulently mispricing and misselling mortgages and the securities and derivatives based on them.

As one of the most insightful and prolific experts on Wall Street’s too-big-to-fail firms, George Washington University law professor Art Wilmarth observed, “You had systemic fraud at the origination stage, then you had systematic fraud at the securitization stage, then you had systemic fraud at the foreclosure stage. At what point do we consider these institutions to have become effectively criminal enterprises?” There is ample evidence of illegal if not criminal conduct, highlighted, for example, by PBS’s Frontline show “The Untouchables,” the 60 Minutes expose “Prosecuting Wall Street,” Bob Ivry’s book “The Seven Deadly Sins of Wall Street,” and Matt Tiabbi’s “The $9 Billion Witness.”

But that’s not all. Goldman Sachs’ infamous “Abacus” CDO that it constructed for John Paulson epitomized it’s illegal conduct Citigroup’s CDO mayhem machine cut out the middle men like Paulson and shorted its constructed CDOs itself, as blatantly illustrated in its 2013 settlement with the SEC the Lehman Brothers’ examiner’s bankruptcy report detailed widespread illegal conduct the Senate Permanent Subcommittee on Investigations' various reports on wrongdoing at every stage of the subprime bubble the Financial Crisis Inquiry Commission’s 550-page report on its investigation of the crash the 361-page decision by the federal judge in the Southern District of New York in the cases against Nomura Holdings and the Royal Bank of Scotland and the innumerable multibillion dollar settlements by virtually all the biggest banks for their role in inflating the fraudulent subprime bubble.

There can be no genuine doubt that pervasive fraud in the sale of residential mortgage-backed securities — and the related derivatives and structure products the biggest banks created, packaged and sold — were significant contributors in causing the crash.

There certainly are other fact-based contributors to the crash, like the role of the Fed and low interest rates, an ideology of “markets know best,” and the conversion of investment bank partnerships into public companies, among others. However, other claimed causes are baseless and rejected by almost everyone. For example, the worn-out and discredited idea that federal housing policy caused the crisis. This argument focuses primarily on the Community Reinvestment Act as the chief culprit, but that is contradicted by the facts. First, the CRA only applies to banks and the vast majority of subprime mortgages were not even issued by banks. Second, if the CRA had caused the crisis, a number of events should have transpired: home sales and prices in urban communities would have inflated the U.S. housing market CRA-mandated loans would have defaulted at rates higher than other mortgage loans foreclosures in these same communities would have outpaced rates in the suburbs and, the loan portfolios of banks in the Troubled Asset Relief Program should have been full of bad CRA loans. None of this happened because the CRA was not a contributor to the crash.

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, while imperfect like all laws, addressed what actually did cause the crash: unreasonable risk-taking, low capital and high leverage, short-term runnable debt, liquidity and interconnectedness, unregulated derivatives, the shadow banking system, resolution mechanisms, consumer protection, lending standards, compensation schemes, externalized costs and much more. As a result, the law and rules enacted to implement it not only addressed systemic risk and financial crashes, but also refocused and rebalanced finance away from socially unproductive trading and gambling to juice the bonus pool toward lending to the real economy to support jobs, communities and economic growth.

The evidence is overwhelming that financial reform is working, that finance is more stable, that the risk of a crash or economic catastrophe in the U.S. is greatly reduced, that banks are highly profitable and significantly increasing their lending, and that the economy is steadily growing. Yet, the Trump administration and Republicans in Congress have nonetheless wholeheartedly embraced Wall Street’s agenda and the siren songs of deregulation and unenforcement of the law. So far, their deregulation has focused particularly on shadow banking, consumer protection and derivatives rules, but they are really just beginning. It’s as if they want to return to regulatory system of 2005, pretending that the 2008 crash never happened.

It’s as if someone suggested that the U.S. should take down half or more of the protections put up around New Orleans after Hurricane Katrina in 2005 because 10 years have passed and there hasn’t been another disastrous hurricane. No responsible person would even suggest that. Yet, the equivalent of that in financial reform regarding the Dodd-Frank law and rules is the prevailing ideology in the Trump White House, the administration more broadly, and too much of Washington.

These are stunning acts of willful blindness that are sowing the seeds of the next crash. With our fiscal, monetary, social and political capacities to respond to another crash exhausted, the next crash will almost certainly be much worse than the last one. That this is happening when financial institutions are consistently reporting increasing — if not historically high — revenue, profits, lending and bonuses makes the coming tragedy all the more indefensible.

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Generals are often accused of "fighting the last war," in that they set their strategies going forward based on their most recent combat experience. This can be a mistake, of course, because times change. Strategies evolve. Adversaries adjust. Weapons systems advance.The same can be said of the intent behind the Dodd-Frank Act, which was conceived with the best of intentions.

Fissures in global financial markets were first exposed in August 2007 when a leading bank in Europe, France&aposs BNP Paribas, stopped allowing investors to withdraw capital from two funds that held mortgage-backed securities.The situation escalated seven months later when Bear Stearns experienced a liquidity crisis. The investment bank&aposs institutional clients stopped providing the funds the bank needed to stay afloat. Things got so dire that the federal government offered JPMorgan Chase(NYSE: JPM) a $30 billion loan to facilitate its acquisition and thus rescue.

But it wasn&apost until September 2008 that the crisis climaxed with the failure of Lehman Brothers, the nation&aposs fourth biggest investment bank at the time. The stock market plummeted. Credit markets froze. And countless companies, both within the financial sector and outside of it, found themselves on the brink of failure. The fear pulsing through the credit markets was particularly alarming because it made it impossible for even the most creditworthy of companies such as General Electric to access the funds needed to cover its payroll and other ordinary operating costs.

The government&aposs initial response was swift. It arranged Bank of America&aposs (NYSE: BAC) purchase of Merrill Lynch. It nationalized all but a small sliver of American International Group, the massive insurance company that had insured vast swaths of investment securities backed by subprime mortgages. And it injected tens of billions of dollars&apos worth of capital into the nation&aposs leading banks, including JPMorgan Chase, Bank of America, Citigroup(NYSE: C), and Wells Fargo (NYSE: WFC).

These were stopgap measures, however, more akin to CPR than to a long-term solution to cardiac problems. The latter came in the form of the Dodd-Frank Act, which was passed two years later in a heavily partisan vote spearheaded by Democrats and opposed by Republicans. "The White House will call this a victory," said then-Senate Minority Leader Mitch McConnell (R-KY). "But as credit tightens, regulations multiply, and job creation slows even further as a result of this bill, they&aposll have a hard time convincing the American people that this is a victory for them."


Subtitle A – Financial Stability Oversight Committee

Subtitle A of Title I establishes a new regulatory body, the Financial Stability Oversight Council (FSOC), which will be funded out of the Office of Financial Research in the U.S. Treasury. See12 U.S.C. § 5321 (Dodd-Frank Act §§111, 118). The FSOC has the authority to collect information from various federal regulation agencies, monitor the financial market, and analyze this information to identify gaps in regulation and make recommendations on heightened standards for risk-management. See12 U.S.C. § 5322 (Dodd-Frank Act § 112).

Evaluation of Nonbank Financial Companies

The FSOC has the authority to evaluate and identify nonbank financial companies that will be under heightened supervision by the FSOC and the Board of Governors of the Federal Reserve System (Board of Governors). See12 U.S.C. § 5323(Dodd-Frank Act § 113). In determining what regulatory agencies will supervise companies, the FSOC may resolve disputes between two member agencies that claim supervisory jurisdiction of a particular company or institution. See12 U.S.C. § 5329 (Dodd-Frank Act § 119). Banks that were in financial distress and received financial assistance through the Troubled Asset Relief Program (TARP) are automatically under this heightened scrutiny. See12 U.S.C. § 5327 (Dodd-Frank Act § 117).

In evaluating a nonbank financial company, the FSOC will consider various factors that might contribute to the company’s risk of impacting financial stability, including leverage, off-balance-sheet expenses, transactions and relationships with other financial companies, the impact of the company as a creditor of households and other companies, assets and liabilities, current regulation and supervision, and the company’s financial activities. SeeDodd-Frank Act§ 117. Any companies that the FSOC chooses to supervise must register with the Board of Governors and comply with more stringent supervision and regulatory standards. See12 U.S.C. § 5325 (Dodd-Frank Act §§ 114, 115).

Enforcement of Risk Mitigating Standards

The regulatory standards recommended by the FSOC to the Board of Governors are designed to target company operations that create systemic risk in the financial system. For example, the FSOC can recommend standards to limit contingent capital, credit exposure, and a company’s short-term debt, which are all potential sources of risk for a company’s financial stability. See12 U.S.C. § 5325 (Dodd-Frank Act § 115). The FSOC can also set broader public disclosure requirements so that investors and customers are fully informed of the risks they bear when dealing with that financial company. Seeid. Finally, the FSOC can require a company to develop a resolution plan that explains how a company would conduct a rapid and orderly resolution in case of financial distress or failure. Seeid.

The FSOC can also actively intervene in company operations to mitigate risks to financial stability. If a large bank holding company appears to pose a grave threat to financial stability, the FSOC has the authority to limit the bank’s products, operations, and affiliations with other companies, and can even require that the bank terminate certain activities, or transfer or sell its assets. See12 U.S.C. § 5363 (Dodd-Frank Act § 121).

Subtitle B – Office of Financial Research

Title I establishes a new office within the Department of the Treasury, the Office of Financial Research (OFR). See12 U.S.C. § 5342 (Dodd-Frank Act § 152). The OFR collects and standardizes data, conducts applied and long-term research, and develops new tools to measure and monitor risk. See12 U.S.C. § 5343 (Dodd-Frank Act § 153). This information is then shared with FSOC, member agencies, the Bureau of Economic Analysis, and other financial regulatory bodies. Seeid. Because the OFR is an entirely new office, Title I provides that it will receive funding from a specially created fund in the Treasury called the Financial Research Fund. See12 U.S.C. § 5345 (Dodd-Frank Act § 155). Additionally, there will be a period and process of orderly transition in order to begin operations in the OFR. See12 U.S.C. § 5346 (Dodd-Frank Act § 156).

The OFR is divided into the Data Center, which is responsible for data collection and the Research and Analysis Center, which focuses on developing computing and analyzing resources for monitoring, researching, and evaluating risk and financial conditions. See12 U.S.C. § 5344 (Dodd-Frank Act § 154).

Subtitle C – Additional Board of Governors Authority for Certain Nonbank Financial Companies and Bank Holding Companies

Supervisory and Enforcement Authority

Subtitle C of Title I expands the authority of the Board of Governors of the Federal Reserve System (Board of Governors) over nonbank financial companies and large bank holding companies that FSOC has determined to be under heightened supervision. See12 U.S.C. § 5361 (Dodd-Frank Act § 161). Under these new supervisory powers, supervised financial companies must report certain information to the Board of Governors, including any large acquisitions of other financial companies. Seeid. (Dodd-Frank Act § 163). The Board of Governors is also responsible for establishing tests to determine whether to automatically exempt certain types of foreign or domestic nonbank financial companies from supervision. See12 U.S.C. § 5370 (Dodd-Frank Act § 170).

The Board of Governors has the authority to impose more stringent supervisory standards on those covered financial companies. See12 U.S.C. § 5365 (Dodd-Frank Act § 165). These regulations are tied to the same risk factors considered by the Federal Stability Oversight Council (FSOC), including liquidity requirements, risk management processes, resolution plan reports, credit exposure reports, and limits on risk concentration. Seeid. The Board of Governors can also impose new requirements for a company’s leverage and risk-based capital investments ratios to control potential risks in the company’s financial structure. See12 U.S.C. § 5371 (Dodd-Frank Act § 171). In general, these standards should be developed with the goal of addressing the risks that certain activities or operations pose to the institution, as well as public and private stakeholders, in the event of disruption or failure of the institution. Seeid.

The Board of Governors may also establish procedures that will minimize risk or impact if a bank becomes insolvent. For a supervised company that might have a major impact on the financial system if it were to fail, the Board of Governors may dictate early remediation actions that can help prevent or lessen those impacts. See12 U.S.C. § 5366 (Dodd-Frank Act § 166). Additionally, the Board of Governors can closely scrutinize and monitor the financial activities of a supervised company by requiring the company to house its financial operations in a newly created intermediate holding company. See12 U.S.C. § 5367 (Dodd-Frank Act § 167). This allows the Board of Governors to supervise the financial operations together, and to exercise enforcement powers over the holding company without having to enforce financial regulations over the entirety of the parent company. Seeid.

Limits on Newly Expanded Authority

The examination and enforcement duties of the Board of Governors are limited by a few provisions. First, the Title emphasizes the need to avoid duplicative regulation and information collection, seeking to ensure that the Board of Governors operates efficiently and does not impose unnecessary compliance costs on the companies. See12 U.S.C. § 5369, 12 U.S.C. § 1820(Dodd-Frank Act §§ 169, 172). Additionally, Title I provides for the Board of Governors and the FSOC to conduct a number of studies to better inform regulations in the future in order to keep regulations efficient and effective. SeeDodd-Frank Act§ 174. Finally, as a general rule of construction, Title I preserves the regulatory power of other regulatory agencies by stating that no regulation shall be construed as to lessen the stringency of other regulations, or to undermine or eliminate the authority of a regulatory agency under any other law. See12 U.S.C. § 5374 (Dodd-Frank Act § 176).

Foreign Financial Companies

Title I has a number of provisions that address foreign nonbank financial companies that operate in the U.S. The same evaluation process applies to foreign nonbank financial companies when the Board of Governors and the FSOC determine whether to hold those foreign companies to heightened supervision. See12 U.S.C. § 5323 (Dodd-Frank Act §113). Subtitle C gives the Board of Governors the power to restrict foreign financial companies from access to the U.S. if the foreign company cannot demonstrate that its country is making progress toward adopting a satisfactory system of financial risk mitigation and regulation. See12 U.S.C. § 1305 (Dodd-Frank Act § 173). To help further this enforcement, the President, FSOC, Board of Governor, and Secretary of the Treasury are responsible for coordination with foreign countries about international policy on financial regulation. See12 U.S.C. § 5373 (Dodd-Frank Act § 175).

The Dodd-Frank Act

Among the most important whistleblower laws is the Dodd-Frank Act, passed in 2010 following the financial crisis of 2008-09. The Act is a major Wall Street reform law covering commodities and securities actions worldwide that aims to promote financial stability by improving accountability and transparency. It created two whistleblower programs in the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), as well as enhanced whistleblower provisions under the Foreign Corrupt Practices Act.

Securities, commodities, and foreign bribery whistleblowers are now covered under enhanced provisions aimed at protecting their confidentiality and permitted to anonymously file reward complains. Whistleblowers outside of the United States are also now entitled to a financial reward.

Since this law was enacted, the SEC and CFTC have awarded hundreds of millions (US$) to whistleblowers who exposed fraud in securities and commodities trading and helped produced monetary sanctions in the hundreds of millions (US$) for the benefit of shareholders and economic fairness.

Dodd-Frank built upon the 2002 Sarbanes-Oxley Act (SOX), a piece of corporate reform legislation passed following major scandals like Enron & WorldCom. SOX intended to protect investors from corporate accounting fraud by strengthening the accuracy and reliability of financial disclosures. However, SOX’s whistleblower provisions were weaker than other successful laws.

Dodd-Frank amended SOX to increase the complaint filing period with the Department of Labor (DOL), to clarify the right to a jury trial, to bar the use of arbitration agreements, and to expand remedies for violations of whistleblower protections. Dodd-Frank also expanded SOX to cover more employees, including those of “nationally recognized statistical rating organization[s].”

If you need help or want to contact an attorney, please fill out a confidential intake form. To learn more about how NWC assists whistleblowers, please visit our Find an Attorney page .

What are the whistleblower offices created by Dodd-Frank?

When it was passed in 2010, the Dodd-Frank Act created whistleblower offices at the Securities and Exchange Commission and Commodities Futures Trading Commission. The current director of the SEC office is Jane Norberg, and the current director of the CFTC office is Christopher Ehrman.

To visit the website of the SEC Whistleblower Office, go here. To visit the website of the CFTC Whistleblower Office, go here.

Understanding the Dodd-Frank Act Whistleblower Provisions

Similar to other whistleblower rewards laws, Dodd-Frank emphasizes “original information.” In other words, a whistleblower complaint must contain information that is “derived from the independent knowledge or analysis of a whistleblower”, is not known to the SEC, and is not “exclusively derived from an allegation made in a judicial or administrative hearing, in a governmental report, hearing, audit, or investigation, or from the news media, unless the whistleblower is a source of the information.”

Under the Act, once a complaint is filed with the agency, it is up to the SEC or CFTC to investigate the allegations. If the SEC or CFTC confirm the validity of the whistleblower’s complaint and sanction the wrongdoer for $1 million or more, the whistleblower is entitled to a monetary reward. That reward is between 10-30% of any recovery made by the SEC or CFTC. If the SEC or CFTC does not investigate the wrongdoer and/or issue a sanction of $1 million or more, the whistleblower is not entitled to any award.

The Act also includes key whistleblower protections. Whistleblowers are allowed to file anonymously with the SEC and CFTC through counsel. Retaliation by employers against employees for whistleblower is also prohibited. Whistleblowers who are fired or otherwise punished by employers have a private cause of action, meaning they can bring a suit to enforce the statute.

However, unlike the False Claims Act, in which a whistleblower can initiate a lawsuit against the wrongdoer if the United States fails to investigate or sanction the wrongdoer, the Dodd-Frank Act does not provide for a private right of action. In other words, the whistleblower cannot file his or her own lawsuit against the company, but rather must rely on the SEC or CFTC to investigate.

To learn more about the Dodd-Frank Act’s whistleblower provisions, read The New Whistleblower’s Handbook , the first-ever guide to whistleblowing, by the nation’s leading whistleblower attorney. The Handbook is a step-by-step guide to the essential tools for successfully blowing the whistle, qualifying for financial rewards, and protecting yourself.

The Dodd-Frank Act is Extremely Successful

The data continues to prove the efficacy of the SEC and CFTC whistleblower programs, particularly the SEC program. Since the Dodd-Frank Act was passed in 2010, the SEC and CFTC have recovered over $3.7 billion, while more than $840 million has been awarded to whistleblowers.

In FY 2020 alone, the SEC received a record-breaking 6,900 whistleblower tips. The tips came from all 50 states as well as 78 countries outside of the United States.

The SEC’s Office of the Whistleblower’s 2017 annual report confirmed that “whistleblowers have provided tremendous value to its enforcement efforts and significantly helped investors.” It also confirmed that SEC whistleblower disclosures have “directly” contributed to “hundreds of millions of dollars returned to investors.” For example, that year alone the SEC paid $50 million in whistleblower rewards to 12 individuals.

Leadership of the SEC agree that whistleblower information is crucial for the success and ability of the SEC enforcement capacities. Time and time again, the SEC has made it clear: whistleblowers should not hesitate to come forward with information that they believe may lead the SEC to discover and prosecute criminals who aim to evade and undermine U.S. laws.

Former SEC Chairman Mary Jo White commented in 2013, “The whistleblower program . . . has rapidly become a tremendously effective force-multiplier, generating high quality tips, and in some cases virtual blueprints laying out an entire enterprise, directing us to the heart of the alleged fraud.”

Not only are such corporate whistleblower programs force multipliers, but they also enjoy broad public support. A Whistleblower News Network poll released in October 2020 shows that the American public considers corporate fraud a national priority and wants to help whistleblowers who expose it.