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Financial Regulatory Reform: The Dodd-Frank Wall Street Reform and Consumer Protection Act Authors: Brian M. Wong, Deborah A. Carrillo, Harpreet Bal
The Dodd-Frank Act will enact significant financial reform legislation that will have a major and lasting impact on the operations of banks, financial institutions and other financial services organizations doing business in the United States.
On July 15, 2010, the United States Senate approved the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank Act was approved by the United States House of Representatives on June 30, 2010 and is now expected to be signed into law by President Obama. The act will significantly reform the structure of federal financial regulation and enact new substantive requirements and regulations that will apply to a broad range of financial market participants, affecting every segment of the financial services industry. The Dodd-Frank Act strengthens oversight and regulation of banks and nonbank financial institutions, enhances regulation of over-the-counter derivatives and asset-backed securities, includes corporate governance and executive compensation reforms applicable to all public companies, creates new requirements for hedge fund and private equity fund advisers and establishes new rules for credit rating agencies. In this alert we highlight certain significant aspects of the Dodd-Frank Act. We are concurrently issuing alerts addressing in detail various provisions of this sweeping and comprehensive legislation.
Systemic Risk and Regulation
The Dodd-Frank Act creates a new framework intended to promote the financial stability of the United States financial services system. The act creates a new inter-agency regulatory authority, the Financial Stability Oversight Council, that is responsible for monitoring the activities of the financial system and recommending a framework for substantially increased regulation of financial companies and large bank holding companies.
The Financial Stability Oversight Council
The Financial Stability Oversight Council (FSOC) is charged with identifying and managing systemic risk in the financial system. The FSOC, chaired by the Secretary of the Treasury, will consist of ten voting members who are heads of federal financial regulatory agencies, and will also include five nonvoting members, who are heads of a new Office of Financial Research and a new Federal Insurance Office, and representatives of state insurance, banking and securities regulators.
The FSOC will have authority to designate a nonbank financial company (including a foreign company) as being subject to Federal Reserve supervision and regulation if it determines that material financial distress at the company, or the nature, scope, size, scale, concentration, interconnectedness or mix of its activities, could pose a threat to the financial stability of the United States. The FSOC’s authority to subject nonbank financial companies to regulation by the Federal Reserve is limited to nonbank financial companies that are “predominantly engaged in financial activities.” A company is considered “predominantly engaged in financial activities” if at least 85 percent of its consolidated annual gross revenues are derived from, or 85 percent of its consolidated assets are related to, activities that are financial in nature.
The FSOC will have the authority to recommend that the Federal Reserve implement stricter prudential standards and reporting and disclosure requirements for nonbank financial companies supervised by the Federal Reserve and “large interconnected bank holding companies” (those with total consolidated assets of $50 billion or more). These standards may be increased in stringency depending on a variety of factors, including the company’s size and total liabilities. The Dodd-Frank Act also authorizes the FSOC to make recommendations to the Federal Reserve on various other matters, including requiring such companies to submit resolution plans, mandating credit exposure reports, establishing concentration limits, and limiting short-term debt. The FSOC may also recommend that other federal financial regulatory agencies apply new or more stringent standards on financial activities.
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