On July 21st, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, a sweeping overhaul of Wall Street (the largest such overhaul since the Great Depression), aimed at preventing future economic collapses like the kind we have experienced in recent years. The Act will also look to add protections for consumers.
From President Obama: “Because of this law, the American people will never again be asked to foot the bill for Wall Street’s mistakes”
Here are the highlights of the Reform and Protection Act:
Swaps and Derivatives Regulation
The Securities and Exchange Commission and the Commodity Futures Trading Commission will have the authority to regulate derivatives and swaps. Many derivatives will be done through exchanges and clearing houses rather than face-toface to make derivatives trading more transparent.
Hedge Fund Regulation
Most hedge funds that have over $100 million in managed funds will have to register their funds with regulators. Like swaps and derivatives, this will make the hedge funds more transparent and help prevent fraud such as the Madoff Ponzi scheme. To further protect consumers, hedge funds will have to have their assets verified by independent public accountants.
Fiduciary Duty by Brokers
The S.E.C. will conduct a study to determine whether investment adviser fiduciary duties should be extended to brokers as well. Now, a broker is able to recommend securities to investors that are lucrative to the broker but not necessarily best for the investor. After the study the S.E.C. has the authority to adopt rules changing current practices.
Bureau Of Consumer Financial Protection
This new bureau, under the Federal Reserve Board, will act to regulate credit cards and mortgages in order to protect consumers. the bureau will act to “implement and, where applicable, enforce federal consumer financial law consistently for the purpose of ensuring that all consumers have access to markets for consumer financial products and services and that markets for consumer financial products and services are fair, transparent and competitive.”
Greater Bank Capital Requirements
Banks will be required to hold greater capital in reserve to cushion against bad economies and against risk. If a bank’s that assets are believed to pose a risk to the market they may be required to hold more capital.
Financial Stability Oversight Council
This council is charged with overseeing the entire financial system and has the power to collect information and recommend rules. They can also single out firms for more stringent policing when needed.
More Power and Money for the Securities and Exchange Commission (S.E.C.)
The S.E.C. will be able to hand it’s budget directly to Congress, untouched by the President. Their budget will also increase to $2.25 billion in 2015. They will also have more enforcement powers. The S.E.C. is also given the authority to end or restrict mandatory arbitration between financial institutions and consumers. In the past, arbitration was usually a mandatory requirement by financial institutions that prevented class-action suits by consumers. It was also believed that arbitrators favored financial institutions in cases.
“Orderly Liquidation” Process
A new process will be put in place that will allow authorities to take over and liquidate firms on the verge of collapse. This measure is to help prevent future bailouts and bankruptcies, the like of which contributed to our recent economic troubles. Costs will be covered by the sale of assets from the firms involved.
“There will be no more tax-funded bailouts…period” – President Obama
Debit Card Fees
Fees on debit card transactions will be reduced.
Volcker Rule
Banks will not be allowed proprietary trading for their own accounts when not related to customer accounts. The growth of the biggest banks will also be limited (reducing the “too big to fail” argument). Involvement with hedge funds and private equity will also be limited by big banks.
It’s not all set in stone yet
Though the law is considered a sweeping reform of Wall Street, many aspects of the law have not been specified as yet and the law will require studies and interpretation before it will be fully fleshed out and implemented.
These are some interesting changes and time will tell if they truly protect our economy from near-collapse or simply cause banks to figure out new ways to maximize their investments and risks. Still, some aspects do seem like they will help out consumers and reign in overly risky entanglement by big banks and investment firms.
What do you think of the Dodd-Frank Wall Street Reform and Consumer Protection Act?
Sources:
A New World Begins for Wall Street Oversight – DealBook Blog – NYTimes.com
Finding a Good Financial Bill in 2,300 Pages – DealBook Blog – NYTimes.com
Obama Signs Overhaul of Financial System – NYTimes.com
Obama signs sweeping Wall Street overhaul into law | Reuters
Factbox: Highlights of financial regulation reform bill | Reuters
Yeah these definitely all look like great reforms, but I think only another Wall Street crisis could tell whether or not they’ve made any difference. I wonder how stock brokers feel about these. Will new laws make more people want to invest because it seems safer, or will many confusing laws make less people want to try buying stocks?
I think right now a lot of people are gun shy about investing between what we hear on the news about the economy and things like Bernie Madoff. Perhaps these reforms will help with investor confidence but time might be all the market needs.
And yes, we won’t know what really works until things fail again. Still, I think we went a pretty long time between major market failings so hopefully that will be the case again.
Will be interesting to see how all this pans out and how much of this trickles down into noticeable affects and changes.
It will be, indeed.
“There will be no more tax-funded bailouts…period” – President Obama
I’d have a lot more faith in that statement if he hadn’t engineered the previous round of tax-funded bailouts, and defended his actions as vital to the economy.
Regardless of how badly such actions hamper the movement of assets to higher-valued uses, I honestly have no idea whether Obama thinks said actions are beneficial or not. I’m not sure he does either.
Time will tell how the reforms work out. Something needed to be done but we’ll see if it’s enough. I think it’s good that consumers get a little more protection (hopefully it doesn’t cost in other areas).
It’s a good start. Thank you for listing the basic elements of the changes for your readers. I will include it on http://americaforfairbanking.blogspot.com
Unfortunately the country is still reeling from the fallout of the recklessness by the financial and insurance institutions. As the dominos continue to fall there is still much false blame being passed around as people try to get their feet under them and lives back together. Another reason why the new laws are so important. The economic underpinnings were eroding at the foundational levels so it was difficult to know what the damage would be until it was almost too late. It’s bad now but would have been much worse had the administration not taken any action.
Hopefully we won’t have to go through this type of economic downturn again but the cynic in me tells me there will something down the line.
There is no way this Bill (or really ANY type of bill) will prevent free market natural cyclical movement. Maybe it will lessen the bursting of the next bubble, but this isn’t going to change 600 years of cyclical economic realities