Dodd-Frank Act: FAQs

1. What is the Dodd-Frank Act?

The Dodd-Frank Act, also known as the Wall Street Reform and Consumer Protection Act, was signed into law on July 21, 2010 by President Obama. The Act is composed of 16 Titles, including Acts separately known as: the Financial Stability Act of 2010,¹ the Enhancing Financial Institution Safety and Soundness Act of 2010,²  the Private Fund Investment Advisers Registration Act of 2010,³ the Federal Insurance Office Act of 2010,⁴ the Nonadmitted and Reinsurance Reform Act of 2010, ⁵ the Bank and Savings Association Holding Company and Depository Institution Regulatory Improvements Act of 2010,⁶ the Wall Street Transparency and Accountability Act of 2010,⁷ the Payment, Clearing, and Settlement Supervision Act of 2010,⁸ the Investor Protection and Securities Reform Act of 2010,⁹ the Consumer Financial Protection Act of 2010,¹⁰ the Improving Access to Mainstream Financial Institutions Act of 2010,¹¹ the Pay It Back Act,¹² the Mortgage Reform and Anti-Predatory Lending Act,¹³ and the Expand and Preserve Home Ownership Through Counseling Act.¹⁴

Collectively, the Dodd-Frank Act aims to promote the country’s financial stability “by improving accountability and transparency in the financial system, to end ‘too big to fail’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.”¹⁵

2. Who is subject to the Dodd-Frank Act?

The Act primarily affects financial institutions (that operate both domestically and many that operate outside of the U.S.) and commercial financial companies.

3. When does the Act go into effect?

The provisions of the Act do not have a uniform implementation date. Some provisions are already in effect,¹⁶ and some will be implemented at later dates set forth in the Act,¹⁷ but many of the Act’s provisions will only apply after federal agencies complete reports, plans, studies, and rules prescribed by the Act.¹⁸ Some final rules have already been published,¹⁹ but for many others, the process may last up to 18 months.²⁰

4. How does the Act change the regulatory agencies system?

The Act affects most of the regulatory agencies currently involved in monitoring the financial system (FDIC, SEC, Comptroller, Federal Reserve, the Securities Investor Protection Corporation, etc.) because they have new powers and responsibilities for overseeing financial companies, markets, and transactions to prevent threats to the country’s financial stability.

The Act also created new regulatory bodies called the Financial Stability Oversight Council,²¹ the Office of Financial Research,²² and the Bureau of Consumer Financial Protection.²³ The Financial Stability Oversight Council’s duties include examining financial services markets, collecting information, and monitoring regulatory developments.²⁴ The Office of Financial Research performs research, budget analysis, and other support services for the Financial Stability Oversight Council and its member agencies.²⁵ The Bureau of Consumer Financial Protection will be an independent entity in the Federal Reserve, which is charged with regulating “the offering and provision of consumer financial products or services under the Federal consumer financial laws.”²⁶

In addition, the Act changed the makeup of the regulatory system by eliminating the Office of Thrift Supervision, and transferring its powers to the Board of Governors of the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency.²⁷

5. What information may the government require companies to submit to federal agencies under the Act?

To implement the Act’s purposes, the federal agencies associated with regulating financial markets are charged with supervising large companies and collecting information so that they may assess any threats that they may pose to the country’s financial stability.

For example, if a nonbank financial company could pose a threat to the country’s financial stability, it may be supervised by the Board of Governors of the Federal Reserve.²⁸ Accordingly, the Financial Stability Oversight Council and the Federal Reserve may require such a company to submit reports and plans for its shutdown in the event it goes under,²⁹ to enhance its public disclosures,³⁰ or to detail its overall financial condition, monitoring systems, etc.³¹ In addition, the Director of the Office of Financial Research has broad informational authority, as it is empowered to issue subpoenas to any financial company, seeking any data needed to carry out the Office’s functions.³²

The Act also increases registration and reporting requirements of investment advisors to hedge funds, with certain exemptions for venture capital fund advisors, advisors with managed assets under $150 million, and family offices.³³ Private funds must now maintain records that will be subject to the Securities and Exchange Commission’s (SEC’s) periodic and special inspection, including descriptions of assets, leverage, counterparty credit risk exposure, and trading practices, among others.³⁴ In addition, the Act also charges the SEC and Commodity Futures Trading Commission with establishing rules that will govern reports that hedge funds will be required to file, containing information aimed at protecting investors or for the assessment of systemic risk.³⁵

6. What are some of the measures that the government may now take to influence companies’ operations?

As discussed above, nonbank financial companies may be regulated by the Federal Reserve if there could be negative effects on the financial system if the company failed or its activities would pose a risk to the financial stability of the US.³⁶

Moreover, when an insurance company, non-bank financial company, and other financial institutions is failing, the FDIC or SPIC now has authority under the Act to liquidate such companies, which previously were not subject to governmental liquidation.³⁷

Additionally, the Act aims to prevent companies from becoming “too big to fail” by imposing strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity, with significant requirements on companies that pose risks to the financial system.³⁸

The Dodd-Frank Act also imposes regulations on FDIC emergency loans and government bailouts for financial companies.³⁹

7. Are financial transactions subject to new rules?

Many transactions are subject to new rules. The Act aimed to close loopholes for certain industries that had previously been unregulated, including over-the-counter derivatives,⁴⁰ asset-backed securities,⁴¹ hedge funds,⁴² and payday lenders.⁴³ For instance, the Act provides for new regulation of over-the-counter swaps markets, including credit default swaps and credit derivatives, encouraging them to instead be traded through exchanges or clearinghouses.⁴⁴ It also repeals security-based swap’s former exemption from regulation under the Gramm-Leach-Bliley Act.⁴⁵  In addition, the provisions known as the “Volcker Rule” restrict the ability of United States banks (or institutions that own a bank) to engage in proprietary trading and invest in hedge funds and private equity funds.⁴⁶

8. How does the Act impact financial services consumers?

The Bureau of Consumer Financial Protection created by the Act is responsible for ensuring that consumers receive clear, accurate information regarding their mortgages, education loans, and other financial products, and are protected from abusive terms, discrimination, and deceptive practices.⁴⁷
Another important provision to consumers is known as the “Durbin Amendment” is aimed at debit card interchange fees and increasing competition in payment processing. It applies to card issuers with over $10 billion in assets, which now have to charge debit card swipe fees that are "reasonable and proportional to the actual cost" of processing the transaction.⁴⁸

Bank and credit union customers are also affected by the Act’s permanent increase in the amount of deposits insured by the FDIC and the NCUSIF to $250,000 from $100,000.⁴⁹