Introduction
Passed by the House of Representatives on June 30, 2010, Dodd-Frank Wall Street reform is a landmark legislative alteration to financial supervision. The bill was signed into law by President Barack Obama on the 21st of July, 2011 (Paletta 29). It is expected to address various system loopholes and weaknesses which contributed to the recent economic downturn in the U.S and the world at large. Its effect has only been compared to the changes made years back in 1930 after the great financial depression. Its impact is expected in financial institutions as well as other institutions involved in commercial activities. Although the regulations will affect financial institutions within the United States, its effect will be felt by many other financial institutions operating out of the United States but engaged in financial activities within the United States. Its full implementation will mark a remarkable shift in various financial activities in the United States including banking securities, compensation of executives, protection of consumers, as well as corporate governance structures. All these areas will either be directly or indirectly affected by the Acts general framework. While the heavy impact will be on big, complex financial entities, smaller corporations will also be subject to complex and expensive regulatory procedures. The Act is intended to effected in phases.
Implementation phases began with its enactment on June 30, 2010. Participants as well as regulators were and are still expected to continue to respond to the legislation after its enactment. Its enactment paved way for an intense duration of making rules expected to last for up to 18 months. Its implementation has seen market participants engage in critical decision making more so considering the prevailing uncertainties with regard to financial regulation (Carney 11). Various players have expressed concern that the regulation is complex and has a number of ambiguities, many of which will only be resolved upon adoption of the accompanying regulations. Even then, some stakeholders still emphasize the need for continuous consultations with the staff from the various agencies charged with financial issues review. The rule making agencies are expected to come up with rules which form the framework of the Acts implementation. However, the new legislation is premised on the structure of the preceding US financial framework and hence it is important that one understands the old regulation as a foundation to understanding the new regulations (Paletta and Lucchetti 17).
The implementation process of the new law is dynamic. Various market participants will be expected to alter their operations and behavior in response to the new laws implementation. In the words of Chairman Frank, several challenges are expected and likewise significant market opportunities. Players both locally and internationally will have to face the expected and the unexpected consequences of the Acts implementation (Carney 11)..
Historical background of the legislation
Upon signing by the president, the act became law on July 21, 2010. This marked formation is the final product of an initiative spearheaded mainly by democrats in the 111th United States Congress. Its initial proposition is traceable to Barney Frank in the house of representatives and Chris Dodd in the senate committee. It is from the two that the bill later came to borrow its name. The proposal to adapt the names of the two originated from the conference committee in order to appreciate their involvement. The late 2000’s economic recess facilitated the passing of the bill in a bid to create a swooping alteration in financial regulations across the United States. It reflects a significant change in regulatory structure of financial institutions in America and affects all federal regulatory agencies. Generally, the bill affects all financial service aspects across the industry (Morgenson 14).
Between 2007 and 2010, a financial crunch hit the globe mainly originating from the United States. In 2009, president Obama proposed an overhaul of the financial regulatory system in the United States (Obama 1). The scale of transformation was later to be the biggest since the great depression times. Upon the bills finalization, president Obama stated that up to 90% of proposals had been included in the bill (Morgenson 14). The bill was mainly aimed at promoting financial stability of the United States, through enhanced accountability and transparency within the nation’s financial system. Additionally, it aimed at protecting American tax payers from abuse by financial activities as well as other purposes including bringing to an end, bail outs (Cooper 14).
The Act alters the existing regulatory structures as a measure to streamline regulatory processes and enhancing the oversight role of various regulatory authorities. It focuses on establishing a rigorous standards evaluation and supervision mechanism to galvanize the economy as well as American consumers and businesses. Additionally, it aimed to bring to an end, cases of tax payer bailout of financial entities in addition to providing advanced warning systems on the country’s economic stability. Further the regulation targeted executive compensations and corporate governance in general, through creation of rules on the same (Anonymous 1). The legislation proposed rules which eliminated loopholes accused of causing the economic depression. The new or transformed agencies are charged with oversight role on various aspects of financial regulation. The agencies would be required to annually report to the congress on the current plans and elaborate future goals. Some of the institutions affected by these changes include; Federal Deposit Insurance Corporation abbreviated as FDIC, U.S. Securities and Exchange Commission abbreviated as SEC, and Securities Investor Protection Corporation abbreviated as SIPC as well as the , Federal Reserve (Grim 19).
Prior to passing of the bill, investment advisers were not obligated to register with the SEC if they had clients less that 15 during the preceding 12 months and did not present themselves to the public as financial advisers. The new regulations does away with this exemption and instead subjects all financial advisers, hedge funds as well as private equities to a mandatory registration and supervision procedures. Under the new regulation, various non-banking financial entities will be subject to Fed supervision in the same manner that banks are supervised.
All financial regulatory agencies are affected by the legislation’s coming into effect. The Office of Thrift Supervision is eliminated while two other agencies are formed. These are the Financial Stability Oversight Council and the Office of Financial Research (Grim 19). Various additional consumer protection agencies are also provided for, including Bureau of Consumer Financial Protection. As one would put it, it reflects a complete paradigm shift of the American financial landscape. However, for smooth transition, upon signing, only a few of its provisions became effective and the others would come gradually within the next 18 months as regulatory agencies formulate rules that would foster implementation. It is only then that the full impact of its implementation will be felt.
Political effects of the legislation
The passing of this legislation was preceded by much partisan politics. Its signing saw a shift from this partisan debate on whether or not to pass the bill to making of the rules by regulatory agencies. There is widespread expectation that implementation of the same will face many challenges ahead and could be headed for a slow down. This is as a result of the increased influence of the republicans as witnessed by the recent trends. The republicans are likely to slow down implementation process as was witnessed in the recently debated budget where no money was set aside for the same (Appelbaum and Brady 13). However, as republicans continue to direct their efforts towards fighting implementation of the legislation, Wall Street and financial industry layers have accepted its passage and are now focusing their efforts on lobbying the regulators charged with formation of the laws.
Various persons have cited that, as law makers focus attention on the laws implementation, banks and financial institutions have already realized that the actual impact of the law will depend on the rule making and as such are directing plenty of resources into lobbying. It is believed that the million of dollars invested in lobbying are already paying off with financial institutions recoding some victory in watering down the provisions meant to reduce risky trading.
According to a wall street journal, spending by banks on lobbying in the first quite of 2011 was quite higher compared to spending during the same period in 2010. This has been cited as a loophole upon which the regulations may end up yielding less than had been anticipated (Nasiripour and Ryan 8). The federal regulators have been provided with too much discretion of which political players as well as financial entities are banking on to soften the impact of the legislation on them. Banks and other financial entities have identified this discretion and hence loophole and using it through extensive meetings between them and the regulators. Financial services sector has however maintained its fight for continued control over derivatives reforms, consumer protection and fees charged for debit card usage, a role that is taken away from them by the new legislation.
Generally, the effect of politics on the process of implementation is bound to have some undesirable effects on the outcome of the final legal guidelines provide by regulatory authorities. The legislation’s adoption has seen banks, credit unions and other financial related entities put efforts at shaping the process of putting the act into place (Paletta and Lucchetti 12). Reports indicate that financial industry lobbyists are spending more than necessary time with regulators charged with the responsibility of writing rules for the laws implementation. Additionally, some are lobbying the congress to roll back some provisions for instance the limit on fess charged for debit cards. A lot of efforts and resources have been directed influencing the outcome of rules by regulating agencies as is witnessed by the recent trends in lobbying spending. The effects of the Act however go beyond mere political rhetoric and squabbles. It is expected to affect various areas within the financial sector.
In what passes of as political sabotage of the legislation’s implementation, , Senator Jon Tester, sponsored a legislation that delays implementation of the debit card fee rule by a period of two years (Paletta and Lucchetti 12). This amendment in essence puts to shelve the rules proposed by the federal reserve capping debit card charges at 12 cents per transaction, a move that banks has cited would enormously affects it revenue generation. Tester argued that there was need for more time to evaluate the legislation. Harry Reid is also in the process of attempting to secure adequate votes for other controversial amendments to the small business bill. These include the measure aimed at blocking regulation of greenhouse gases, and ethanol subsidies, as well as protection of Social Security. For instance, Bank of America Corporation has pointed out that capping move would deny it approximately $2.3 billion of revenues every year. The overall picture across the financial service industry is not different with the total annual loss approximated at $13 billion annually if the capping rule comes into effect.
Social and Ethical effects of the legislation on business
Ethical issues also arise from implementation of the legislation. Executives have often been subject to lots of criticism regarding payment and benefits entitlement. to curb the vice of executives accruing large amounts in form of benefit at the expense of stakeholders, the acts requires disclosure of all incentive based compensations arrangements that banks and other financial institutions engage in. additionally, the legislation prohibits any forms of incentive based compensations which according to laws to be defined by regulators encourage and promotes the risk of excessive compensation allocation and or, has ability to result into financial loss to the financial entity.
In fund advisers, advisors bid to protect consumers from activities unscrupulous activities by fund advisors, the legislation makes it mandatory for all financial advisors to not only register but also presents updated reports for the agency to assess the systematic risks presented by these advisers. If this proposal is adopted, there would be a substantial burden on advisers to report their activities. This proposal puts much emphasis on managing assets worth over $1 billion. Additionally, the consumers are to be protected from unethical practices through creation of a Uniform Fiduciary Standard for Broker-Dealers and Investment Advisers. This is expected to rein in on personalized advisers who banks on client ignorance inappropriately.
Human capital is important in any business. However, this resource is susceptible to mismanagement and improper usage across various industries. The act emphasizes the need for transparency and accountability in management of this resource. Based on SEC’s proposed laws, all market participants are expected to present annual reports which illustrate the annual meetings proceedings, and materials of nominated candidates for executive positions for as long as the minimum of 35% of a corporations voting rights are held by a shareholder group. The authority of such a shareholding position must not be used to seek control over the entities operation. According to the regulation, shareholders are only allowed to nominate a maximum of 25% of the board’s composition.
Further independence is guaranteed through formation of various committees which facilitate implementation. National Security Exchange is placed under an obligation to deny listing to those companies which fail to comply with the requirement fro independent committee’s formation. Independence is defined based on the independence of the persons within the board with regard to possible benefits the person receives from the corporation or its subsidiaries. Any affiliation s to the firm or its affiliate’s puts to question individuals independence.
Hiring of compensation consultants require that that any other possible affiliations within the hiring firm are considered. The services offered by the advisory firm to the corporation are put into consideration in addition to any fees paid by the advisory firm., others factors considered include the measures adopted by the advisory firm to minimize possibility for conflict of interest. any possible businesses as well as personal relationships are also taken into consideration in addition to relation between the advising entity and the compensation committee. Possible holdings by the entity within the company are also considered.
Additionally the , the National Security is compelled to ensure that the standards they adopt for listing motivate the financial institutions to adopt expansive clawback policies. It requires that when a company has to prepare an accounting restatement due to non-compliance with financial regulations, then such a corporation is compelled to reclaim any erroneously paid incentives from its executive within the preceding three year duration. In instances where directors and employees are allowed to engage in purchase of financial instruments, the corporation must indicate such in its reports especially if such instruments are meant to hedge or offset equity securities market downfall.
The legislations social impact is further expected to be felt through its systematic evaluation of financial scenarios and hence raise alarms early enough on possible financial risks. This function is assigned to Financial Stability Oversight Council, which is expected to research and identify possible risks faced by firms as well as financial undertakings. Additionally, the newly established office of Financial Research will gather information on behalf of the council for purposes of trend analysis. Additionally, the council will identify all non-banking financial entities and bring them under the supervisions and mandate of the federal reserve. The oversight council has a mandate to come up with prudential standards to primary financial regulators and apply to such activities deemed as resulting into systematic risks. A vast majority of systemic risk provision require implementation of which is left at the discretion of regulators. Either statutory standards are to be modified, or exemptions issued as deemed appropriate by the regulators.
Conclusion
In conclusion, it is important to mention that the financial crisis came at a time when banks had excessive amount of leverage and way too many risks in terms of assets. Critics to the legislation argue that banks were therefore not the problem and that attempts to regulate the banks are not the solution. Instead they emphasize that attempts should be made to help banks strengthen their balance sheets and hence absorb potential losses and hold fewer risky assets. Generally, though the legislation is expected to come with lots of benefits to various stakeholders though similarly a number of challenges are expected to couple its implementation. Its implementations are bound to affect the financial business sector both politically, socially and ethically either to the negative tor to the positive.
References
Anonymous. Obama Signs Sweeping Financial Overhaul, Pledges ‘No More’ Bailouts”. FOX News. 2010.
Appelbaum, Binyamin and Brady Dennis. “Legislation by Senator Dodd would overhaul banking regulators”. Washington Post, 2009. Web.
Carney, Timothy. Wall Street lobbyists to GOP: Hands off Dodd-Frank, Washington Examiner, 2011. Web.
Cooper, Helene. “Obama Signs Legislation Overhauling Financial Rules”, 2010. New York Times.
Dodd-Frank Act (Pub.L. 111-203, H.R. 4173)
Grim, Ryan. “GOP Sen. Shelby: Reorganize The Fed”. Huffington Post, 2009.
Morgenson, Gretchen “Strong Enough for Tough Stains?”, New York times, 2010.
Nasiripour, Shahien and Ryan Grim. “Dodd’s Banking Bill Takes The Fed Down A Notch Or Two: HELP US DIG THROUGH IT”. Huffington Post, 2009.
Obama, Barack. Remarks by the President on Wall Street Reform. White House, 2010.
Paletta, Damian “It Has A Name: The Dodd/Frank Act”. The Wall Street Journal. 2010. Web.
Paletta, Damian and Lucchetti, Aaron. “Senate Passes Sweeping Finance Overhaul”. Wall Street Journal, 2010. Web.