Financial Reform Ethics: Dodd-Frank Wall Street Reform

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Passed by the Congress on June 30, 2010, Dodd-Frank Wall Street reform is a landmark legislative alteration to financial supervision which was signed into law by President Barack Obama on the 21st of July, 2010 (Paletta). It is expected to address various system loopholes and weaknesses which have contributed to the recent economic downturn in the USA and the world at large. Its effect has often been compared to the changes made years back in 1930, after the great financial depression. It is expected to impact financial institutions as well as other establishments involved in commercial activities (see fig. 1).

Although the regulations affect the financial institutions within the United States, their influence will be felt by many other financial entries operating outside the United States but engaged in financial activities within the country. Full implementation of the act will mark a remarkable shift in various financial activities in the United States, including banking and securities, compensation of executives, protection of consumers as well as corporate governance structures. All these areas will be affected either directly or indirectly by the general framework of the act. While big, complex financial entities are heavily impacted by the reforms, smaller corporations will also be subject to complicated and expensive regulatory procedures. The act is intended to be put into effect in several phases.

Implementation phase began with its enactment on June 30, 2010. Participants as well as regulators were and are still expected to continue responding to the legislation after its enactment. The enforcement of the act paved the way for long duration of policy making 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)

Various players have expressed concern that the reforms were complex and had a number of ambiguities, many of which would only be resolved upon the 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 the policies which are to form the framework of the act’s 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 regulations as a foundation to understanding the new ones (Paletta and Lucchetti).

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 implementation of the new law. During the realization process, several challenges are expected and, likewise, significant market opportunities. Players, both locally and internationally, will have to face the expected and unexpected consequences of the act’s implementation (Carney).

Historical background of the legislation

Upon signing by the President, the act became the law on July 21, 2010, being the final product of an initiative spearheaded mainly by the 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 these two politicians the bill later came to borrow its name. The proposal to use 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 the regulatory structure of financial institutions in the USA and affects all federal regulatory agencies. Generally, the bill impacts all financial service aspects across the industry (Morgenson).

Between 2007 and 2010, a financial crunch hit the globe, starting from the United States. In 2009, President Obama proposed an overhaul of the financial regulatory system in the USA (Obama). The scale of transformation became later the biggest since the great depression times. Upon the bill finalization, President Obama stated that up to 90% of proposals had been included in it (Morgenson). The bill was mainly aimed at enhancing the financial stability of the country through increased accountability of the US financial system and its improved transparency. Additionally, it aimed at protecting American tax payers from abuse by financial activities as well as other purposes, including bringing bailouts to an end (“Obama Signs Sweeping Financial Overhaul”).

The Act upgrades the current regulatory processes and enhances 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 the American consumers and businesses. Additionally, it aims at bringing the cases of tax payer’s bailout of financial entities to an end providing advanced warning systems on the country’s economic stability. Furthermore, the regulation targets at executive compensations and corporate governance in general, through creation of rules on the same (Cooper). The legislation proposes rules which eliminate the loopholes accused of causing the economic depression. The new or transformed agencies are charged with the oversight role on various aspects of financial regulation. The agencies will be required to report to the Congress on the current plans and elaborate on future goals annually. Some of the institutions affected by these changes include the Federal Deposit Insurance Corporation abbreviated as FDIC, the U.S. Securities and Exchange Commission abbreviated as SEC, and the Securities Investor Protection Corporation abbreviated as SIPC as well as the Federal Reserve (Grim).

Prior to passing the bill, investment advisers were not obligated to register with the SEC if they had less than 15 clients during the preceding 12 months and did not present themselves to the public as financial advisers. The new regulation does away with this remission and, instead, subjects all hedge funds, financial advisers, and 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 as banks.

All financial regulatory agencies are affected by the legislation enforcement. The Office of Thrift Supervision is eliminated while two other agencies are formed. They are the Financial Stability Oversight Council and the Office of Financial Research (Grim). Various additional consumer protection agencies are also provided for including the Bureau of Consumer Financial Protection. As one might put it, the act reflects a complete paradigm shift of the American financial landscape. However, for a smooth transition upon signing, only a few of its provisions become effective, while the others come into effect gradually, within the next 18 months, as regulatory agencies formulate rules that will foster implementation. It is only then that the full impact of its implementation will be felt.

Political effects of the legislation

The passing of the legislation was preceded by much partisan politics. Its signing saw a shift from the partisan debate on whether or not to pass the bill to policy making by regulatory agencies. There is a widespread expectation that the implementation of the act will face many challenges and may be headed for a slowdown as a result of the increased influence of the Republicans. The Republicans are likely to slow down the implementation process as witnessed by the recently debated budget where no money was set aside for the same (Appelbaum and Dennis). However, as the Republicans continue to direct their efforts towards fighting the implementation of the legislation, Wall Street and financial industry players have accepted its passage and are now focusing their efforts on lobbying the regulators charged with the formation of the required laws. As The Examiner’s senior political columnist T. Carney puts it, “This is one reason government growth is never reversed. Companies and lobbies sink costs into working on the regulatory process and complying with new rules — the last thing they want is for those rules to disappear”.

As law makers focus their attention on the law implementation, banks and financial institutions have already realized that the actual impact of the law will depend on policy making and are, therefore, directing plenty of resources into lobbying. It is believed that the million of dollars invested in lobbying is already paid off with financial institutions celebrating a victory in watering down the provisions meant to reduce risky trading.

According to the Wall Street journal, spending on lobbying by banks in the first quarter of 2011 was quite higher compared to spending during the same period in 2010 (Nasiripour and Grim). It has been cited as a loophole upon which the regulations may have ended up yielding less than it had been anticipated (Nasiripour and Grim). The federal regulators have been provided with too much discretion 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 used it through extensive meetings between them and the regulators, which caused a loophole. Financial services sector has, however, kept fighting for continued control over derivatives reforms, consumer protection, and fees charged for debit card usage, a role that is to be 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 provided by regulatory authorities. The legislation adoption has seen banks, credit unions, and other finance related entities put efforts into shaping the process of implementing the act (Paletta and Lucchetti). Reports indicate that lobbyists of the financial industry are spending more than necessary time with regulators charged with the responsibility of writing rules for the law implementation. Additionally, some are lobbying the Congress to roll back several provisions, for instance, the limit on fees charged for debit cards. A lot of efforts and resources have been directed at influencing the outcome of rules by regulating agencies as 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 off as a political sabotage of the legislation’s implementation, Senator Jon Tester sponsored a legislation that delays the implementation of the debit card fee rule by a period of two years (Paletta and Lucchetti). This amendment, in essence, holds back the rules proposed by the Federal Reserve capping debit card charges at 12 cents per transaction. This move may enormously affect banks’ revenues. Tester argued that there was a need for more time to evaluate the legislation (Paletta and Lucchetti). 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 the regulation of greenhouse gases, ethanol subsidies, and 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 does not differ from 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 the implementation of the legislation. Executives have been often 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 act requires disclosure of all incentive based compensation arrangements in which banks and other financial institutions engage. Additionally, the legislation prohibits any forms of incentive based compensations which, according to the laws to be defined by regulators, encourage and promote the risk of excessive compensation allocation and/or can result in financial losses of a financial entity.

In Fund Advisers, advisors bid to protect consumers from unscrupulous activities whereas the legislation makes it mandatory for all financial advisors not only to register but also present the updated reports to the agency to assess the systematic risks. If the proposal is adopted, there will be a substantial burden on advisers to report their activities. This proposal puts much emphasis on managing assets worth over $1 billion. Additionally, 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 the personalized advisers who inappropriately bank on clients’ ignorance.

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 human resource. Based on the SEC proposed laws, all market participants are expected to present annual reports, which illustrate the annual meetings’ proceedings, and the materials of nominated candidates for executive positions because as long as the minimum of 35% of corporate 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 for the formation of an independent committee. Independence is defined based on the independence of the persons within the board with regard to possible benefits a person receives from the corporation or its subsidiaries. Any affiliations of the firm or its affiliates call into question individuals’ independence.

Hiring of compensation consultants requires that all other possible affiliations within the hiring firm are considered. The services offered by an advisory firm to a corporation are put into consideration in addition to any fees paid by an advisory firm; other factors include the measures adopted by an advisory firm to minimize the possibility of conflict of interest. Any possible businesses as well as personal relationships are also taken into account in addition to relation between an advising entity and a compensation committee. Possible holdings by the entity within the company are also considered.

Additionally, the National Security is compelled to ensure that the standards they adopt for listing motivate the financial institutions to establish expansive clawback policies. It requires that such a corporation reclaims any erroneously paid incentives from its executive within the preceding three years when a company has to prepare an accounting restatement because of non-compliance with financial regulations. In instances where directors and employees are allowed to engage in the purchase of financial instruments, a corporation must indicate the same in its reports, especially if such instruments are meant to hedge or offset equity securities market downfall.

The social impact of the legislation is further expected to be felt through the systematic evaluation of financial scenarios, which enables to raise the alarm early enough on possible financial risks. This function is assigned to the Financial Stability Oversight Council who is expected to research on 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. Moreover, the Council will identify all non-banking financial entities and bring them under the supervisions and power of the Federal Reserve. The Oversight Council has a mandate to come up with prudential standards for primary financial regulators and apply them to activities deemed as resulting in systematic risks. A vast majority of systemic risk provision requires implementation of which is left at the discretion of regulators. Either statutory standards are to be modified, or exemptions are to be issued, as deemed appropriate by the regulators.


In conclusion, it is important to mention that the financial crisis came at the time when banks had excessive amount of leverage and too many risks in terms of assets. Critics of the legislation argue that banks were, therefore, not the problem as well as that endeavors to regulate the banks were 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, similarly, a number of challenges are expected to couple its implementation. Its enforcement is bound to affect the financial business sector both politically, socially, and ethically, either negatively or positively.

Works Cited

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 Overhaul of Financial System.” New York Times. 2010. Web.

Grim, Ryan. “GOP Sen. Shelby: Reorganize The Fed.” Huffington Post. 2010. Web.

Littenberg, Michael. “A Dodd-Frank Cheat Sheet for New Directors.” NACD Directorship. 2011. Web.

Morgenson, Gretchen. “Strong Enough for Tough Stains?” New York Times. 2010. Web.

Nasiripour, Shahien, and Ryan Grim. “Dodd’s Banking Bill Takes the Fed Down a Notch or Two: Help Us Dig Through It.” Huffington Post. 2010. Web.

Obama, Barack. “Remarks by the President on 21st Century Financial Regulatory Reform.White House. 2010. Web.

“Obama Signs Sweeping Financial Overhaul, Pledges ‘No More’ Bailouts.” Fox News. 2010. Web.

Paletta, Damian. “It Has A Name: The Dodd/Frank Act.” Wall Street Journal. 2010. Web.

Paletta, Damian, and Aaron Lucchetti. “Law Remakes U.S. Financial Landscape.” Wall Street Journal. 2010. Web.

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