Understanding the Dodd-Frank Act

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Financial reform

In July 2010, President Obama signed the Wall Street Reform and Consumer Protection Act, also known as the Dodd-Frank Act. The reforms resulting from the act will certainly have an impact on both financial services and nonfinancial services companies across the United States.1

Touted as a bill that will completely overhaul the financial regulatory system, the Dodd-Frank Act creates new regulators, regulates new markets, brings new firms into the regulatory arena, and provides new rule-making and enforcement powers for existing agencies. While comprehensive in its coverage, the act stipulates many specifics whose implementation has been left in the hands of both existing financial services industry regulators, such as the US Securities and Exchange Commission (SEC) and the Federal Reserve, and newly created ones, such as the Financial Stability Oversight Council and the Consumer Financial Protection Bureau. In fact, the new law mandates that 533 rules, 60 studies, and 93 reports be conducted over the next several years to further clarify the act’s requirements.

The new financial regulatory architecture

The new financial regulatory architecture

The Dodd-Frank Act will clearly have a significant impact on financial services firms, but it could also have an impact on nonfinancial services firms. The act imposes increased oversight of the over-the-counter derivatives business and will require that many over-the-counter derivative contracts be executed on centralized exchanges. Nonfinancial services firms that utilize over-the-counter derivatives to hedge specific risks of their businesses could be faced with increased costs due to the changes, or they could even find themselves subject to oversight by the SEC or the US Commodity Futures Trading Commission. The act could also affect the cost and availability of credit for firms because banks will be subject to certain increased capital and liquidity requirements. Finally, firms’ retail financing arms could find themselves subject to oversight by the new Consumer Financial Protection Bureau and that bureau’s requirements.

Some parts of the Dodd-Frank Act will go into effect this year, while others will go into effect over the next several years. The combination of the potentially widespread impact of the act coupled with the amount of uncertainty regarding its application makes it more important than ever for firms to stay on top of key developments regarding the act’s implementation. Companies are not waiting for the effective date to understand the potential impact of the act on their businesses. They are analyzing the act and monitoring developments at the regulatory agencies as mandated studies get completed and as proposed rules and regulations get drafted. Firms are also closely monitoring the political landscape, because the makeup of Congress can greatly affect the conduct and direction of oversight functions and the breadth of any technical corrections considered.

1 PwC, 10Minutes on US Financial Reform, July 2010.