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Sunday, August 8, 2010

The Dodd-Frank Wall Street Reform and Consumer Protection Act: Issues and Summary

Baird Webel, Coordinator
Specialist in Financial Economics

Beginning in 2007, U.S. financial conditions deteriorated, leading to the near collapse of the U.S. financial system in September 2008. Major banks, insurers, government-sponsored enterprises, and investment banks either failed or required hundreds of billions in federal support to continue functioning. Households were hit hard by drops in the prices of real estate and financial assets, and by a sharp rise in unemployment. Congress responded to the crisis by enacting the most comprehensive financial reform legislation since the 1930s.

Treasury Secretary Timothy Geithner issued a reform plan in the summer of 2009, which served as a template for legislation in both the House and Senate. House committees reported a number of bills on an issue-by-issue basis, which were then consolidated into a comprehensive bill, the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173). H.R. 4173, as passed by the House on December 11, 2009, contained elements of H.R. 1728, H.R. 2571, H.R. 2609, H.R. 3126, H.R. 3269, H.R. 3817, H.R. 3818, H.R. 3890, and H.R. 3996. On May 20, 2010, the Senate passed H.R. 4173, after substituting the text of Senator Christopher Dodd's bill, the Restoring American Financial Stability Act of 2010 (S. 3217), as amended. Following a conference committee, the House accepted changes to H.R. 4173, now titled the Dodd-Frank Wall Street Reform and Consumer Protection Act, on June 30, 2010, and the Senate followed suit on July 15, 2010. President Obama signed the bill, now P.L. 111-203, on July 21, 2010.

Perhaps the major issue in financial reform has been how to address the systemic fragility that was revealed by the crisis. The Dodd-Frank Act creates a new regulatory umbrella group chaired by the Treasury Secretary—the Financial Stability Oversight Council—with authority to designate certain financial firms as "systemically significant" and subjecting them to increased prudential regulation, including limits on leverage, heightened capital standards, and restrictions on certain forms of risky trading. These firms will also be subject to a special resolution process similar to that used in the past to address failing depository institutions.

Other aspects of financial reform address particular sectors of the financial system or selected classes of market participants. The Dodd-Frank Act consolidates consumer protection responsibilities in a new Bureau of Consumer Financial Protection within the Federal Reserve. The act consolidates bank regulation by merging the Office of Thrift Supervision (OTS) into the Office of the Comptroller of the Currency (OCC). It requires more derivatives to be cleared and traded through regulated exchanges, and it mandates reporting for derivatives that remain in the over-the-counter market. Hedge funds have new reporting and registration requirements. Credit rating agencies are subject to greater disclosure and legal liability provisions, and references to credit ratings will be removed from statute and regulation. A federal office is created to collect insurance information. Executive compensation and securitization reforms attempt to reduce incentives to take excessive risks. Intermediaries who provide investment advice to retail investors and municipalities may be subject to a fiduciary duty. The Federal Reserve's emergency authority is amended and its activities are subject to greater public disclosure and oversight by the Government Accountability Office (GAO).

This report reviews issues related to financial regulation and provides brief descriptions of major provisions of the Dodd-Frank Act.

Date of Report: July 29, 2010
Number of Pages: 26
Order Number: R41350
Price: $29.95

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