The Dodd-Frank Act, Part of Our Financial Regulation Series

The Dodd-Frank Wall Street Reform and Consumer Protection Act is a major piece of financial legislation. Congress passed it in 2010 in the wake of the 2008 financial crisis. More commonly, people refer to this statute as simply the Dodd-Frank Act. Earlier, the perception was that big banks were “too big to fail.” The federal government would just step in to bail them out in a crisis. But then, big institutions such as Lehman Brothers collapsed. In reaction to the economic havoc the 2008 finaicial crisis caused, the Act implemented a number of reforms to the financial system.

Dodd-Frank Obama
President Obama signs Dodd-Frank Act

Congress named Dodd-Frank after the two sponsors of the bill—Senator Christopher Dodd of Connecticut and Senator Barney Frank of Massachusetts, both Democrats. President Barack Obama signed it into law on July 21, 2010. The goal of the Act was, and is, to increase the protection of consumers and taxpayers from the risky actions of banks.

The Dodd-Frank Act is quite comprehensive, spanning 848 pages. An overview of the key elements follows. Some of the major changes implemented include corporate governance and executive compensation reforms, heightened whistleblower protections, increased examination of credit rating agency practices, new registration requirements for hedge funds and private equity fund advisers, and stricter provisions regulating derivatives.

Financial Stability Oversight Council (FSOC)

The Dodd-Frank Act established the 10-voting member Financial Stability Oversight Council (FSOC). The FSOC’s mission is to enhance monitoring of the financial stability of major financial firms. The failure of these “too big to fail” financial institutions could have a severe negative impact on the economy, as illustrated by the collapse of Lehman Brothers in 2008. The FSOC is chaired by the Secretary of the Treasury and also includes the following members:

  • Board of Governors of the Federal Reserve System Chair
  • Comptroller of the Currency
  • Director of the Consumer Financial Protection Bureau (CFPB)
  • Securities and Exchange Commission (SEC) Chair
  • Federal Deposit Insurance Corporation (FDIC) Chai
  • Commodities Futures Trading Commission (CFTC) Chair
  • Director of the Federal Housing Finance Agency
  • National Credit Union Administration Board Chair
  • An independent member appointed by the President for a six-year term

Dodd-Frank Created the Orderly Liquidation Authority (OLA)

Title II of the Dodd-Frank Act creates the Orderly Liquidation Authority (OLA). The OLA enables the government to take control of, break-up, and wind down a failing financial company under certain conditions. The government can also deploy funds to provide emergency financial assistance to the failing company. If triggered, orderly liquidation could serve as an alternative to bankruptcy for so-called systematically important financial institutions. To date, OLA has never been invoked as an emergency tool.

Consumer Financial Protection Bureau (CFPB)

Dodd-Frank created the Consumer Financial Protection Bureau (CFPB) to prevent predatory mortgage lending. The CFPB addressed the subprime mortgage crisis that played a key role in causing the 2008 financial crisis. It more broadly puts in place rules that regulate banks, mortgage lenders, credit-card providers, and student loan companies. The CFPB has authority to enforce regulations over banks and credit unions with assets of over $10 billion.

Volcker Rule

One central aim of the Volcker Rule is to discourage banks from making certain types of speculative investments. It adds protocols to separate investment banking from commercial banking. The rule is named after former Federal Reserve Chairman Paul Volcker. It seeks to reimplement some of the protections that were offered by the Glass-Steagall Act of 1933 before Congress repealed it in 1999. Congress repealed the Glass Steagall Act along with the Gramm-Leach-Bliley Act in 1999 to make U.S. banks more internationally competitive.

The Volcker Rule seeks to eliminate proprietary trading by banks. Proprietary transactions involve the trading of securities, derivatives, commodities futures, and options by banks in their own accounts. The Volcker Rule also prohibits banks from sponsoring or investing in hedge funds or private equity funds. There are certain exemptions.

Dodd-Frank Stress Tests

A hallmark of the Dodd-Frank Act are the stress tests it imposes on banks holding $50 billion or more in assets. These banks must perform self-assessments on a semi-annual basis to determine whether they have the capital, on a total consolidated basis, to survive an economic crisis. Banks holding more than $10 billion, but less than $50 billion, must self-administer annual stress tests.

Credit Rating Agency Regulation

The Dodd-Frank Act creates the SEC Office of Credit Ratings. The office is tasked with ensuring greater reliability in the credit ratings provided by businesses, municipalities, and other entities. They establish rules for internal controls, transparency, and penalties. The agency is required to conduct annual examinations of nationally recognized credit rating agencies and publicly publish its findings.

The Dodd-Frank Whistleblower Program

The Dodd-Frank Act contains anti-retaliation protections for whistleblowers to safeguard individuals who report allegations of misconduct. Dodd-Frank further strengthens the whistleblower program originally put in place by the Sarbanes-Oxley Act of 2002. Congress passed Sarbanes-Oxley in response to a number of high-profile accounting fraud scandals. Dodd-Frank establishes monetary awards for whistleblowers that report misconduct that results in SEC or CFTC enforcement judgments exceeding $1 million.

In a 2018 case called Digital Realty Trust Inc. v. Somers, the Supreme Court narrowed the scope of the Dodd-Frank whistleblower protections. The Court noted that the anti-retaliatory provisions do not cover individuals who report allegations of misconduct internally without also reporting them to the SEC or CFTC. The Supreme Court’s decision to require immediate reporting to the SEC could have significant implications on the willingness of employees to report their concerns.