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Dodd-Frank creates a new landscape: the most comprehensive changes to financial regulation in the United States since the great depression were signed into law in July. What's next, and just what does this massive piece of regulation mean for business?

Dwarfing the size and scope of most other major financial reform and consumer protection efforts, the Dodd-Frank Wall Street Reform and Consumer Protection Act will affect a multitude of industries around the nation. These effects will be felt well beyond the financial services industry, making changes to the way all companies work with credit rating agencies, banks, insurance providers and hedge funds and their regulators.


Though President Barack Obama signed the law in July, it is yet unclear whether all of the bill's ambitious goals will be met. The next eight to 10 months will be telling, as high-level federal agencies, such as the U.S. Securities and Exchange Commission, the Federal Reserve and the Commodities Futures Trading Commission (CFTC), complete the arduous task of implementing the new law through the drafting and adoption of literally hundreds of rules and regulations. (See sidebar "Size and Scope," on the next page.)

The public has been invited to rigorously comment on this process in hopes of minimizing unintended consequences in the markets. This is wise, considering the rules will carry nearly as much regulatory weight as the law itself.

During his bill-signing speech, President Obama also carefully left the door open to possible legislative changes, saying: "We may need to make adjustments along the way as our financial system adapts to these new changes and changes around the globe." This hint echoes rumblings from Capitol Hill that there may be a follow-up piece of legislation in the near future.


So what do the reforms in this massive piece of legislation mean for business?

Banking Fees May Increase, Products May Change

Many banks have already begun announcing fee increases and changes in services and more announcements are expected. This is due to a number of increased Federal Deposit Insurance Corporation (FDIC) assessments that are required as a result of permanently increasing the FDIC maximum coverage amount, as well as a specific requirement to increase the FDIC reserve ratio as a way to help pay for the bill's $26.9 billion price tag.

Banks will no longer be prohibited from offering interest on corporate checking accounts, but it's unclear how much banking fee arrangements will change as a result. The Volcker rule will clearly provide more reasons for banks to alter their product offerings and fee structures.

Named for former Federal Reserve Chairman Paul Volcker, it limits the amount of investing banks can do with their own money, as well as new capital ratio requirements put out by the Fed.

New Rules for Derivatives, Pensions and Hedging

Many companies may find that hedging business risks such as interest rates, commodities and foreign exchange using customized derivatives could change with the new law. First, companies will need to register and become familiar with CFTC, which will regulate most of the over-the-counter derivatives markets.

Nonfinancial companies that are hedging or mitigating commercial risk will enjoy a "corporate end-user" exemption from the broader central clearing requirements in the bill. But companies must first get approval from the appropriate committee on their corporate board, then must notify CFTC of their ability to meet their financial obligations before the exemption will be allowed.

All pension plans and employee benefit plans are considered financial entities under the bill, and thus will not be exempted from the requirement to centrally clear derivatives transactions, increasing the cost for pensions to hedge items such as interest rate risk.

There is also some uncertainty in the law regarding the ability of regulators to impose margin directly (or indirectly) on corporate end-users. It is certain that the Fed will mandate higher capital requirements and margin requirements for bank swap dealers' derivatives transactions as a result of this legislation.

If not exempted, these costs could be passed along to corporate end-users.

However, the bill mandates capital and margin requirements for non-cleared trades be tied to actual risk of loss and ensure "safety and soundness" of the counterparties involved. Regulators are also required to permit the use of noncash collateral.

Aside from the questions on margin, the bill does bring significant transparency to the over-the-counter markets by requiring swap dealers to report all transactions to a central data repository.

Banks are also required to spin off their commodity, agriculture and energy swaps business into a separately capitalized affiliate. Uncleared credit default swaps must be traded in the affiliate entity as well. Companies entering into these types of contracts may see changes in the number and names of the bank counterparties available.

Changing Relationships with Credit Rating Agencies

The new regulations on rating agencies will be interesting to follow. There seems to be a disconnect between a desire to reduce public reliance on ratings on the one hand, while on the other, recognizing their importance through additional regulations, six required studies and reporting requirements through a newly created office at the SEC.

The legal liabilities introduced in the bill mean that rating firms have been skittish to put their name on anything risky, which has already made headlines in the asset-backed security bond markets.

The bill also introduces some potential problems for companies. The law requires rating agencies to comply with Regulation Fair Disclosure and disclose any material, nonpublic information received from issuers during the ratings process. When it comes to companies sharing information, this provision could affect the quality of information rating agencies would be able to gather though through the ratings evaluation process without first entering into a separate confidentiality agreement.

A new lottery system for assigning agencies to issuers could be implemented within two years if the SEC feels there is no better way to increase competition and reduce conflicts of interest in the issuer-pay model. If that system is implemented, it is unclear whether smaller rating agencies would have the opportunity to be a part of the lottery system along with the major rating firms such as Moody's or Fitch.

A New Team at the SEC

SEC Chairwoman Mary Schapiro says she expects to hire up to 800 additional employees to help implement the new law. The SEC is also required to hire an external firm to conduct a study on internal operations, structure, funding and the need for organizational reforms.

Before that study is completed, the bill allows the SEC to adjust its own funding levels (with congressional approval) by increasing or decreasing the fees it charges issuers. Though not expected to greatly affect companies, it will allow the SEC to cover needs that arise between budget cycles and ramp up enforcement when needed.

On accounting and reporting issues, the new Financial Services Oversight Council (FSOC), made up of many different existing agencies, will be charged with reviewing and submitting to the SEC and any other standard-setting body comments with respect to existing or proposed accounting principles, standards or procedures.

Additionally, the bill formally exempts all public companies with less than $75 million market capitalization from the Sarbanes-Oxley Section 404(b) requirement to conduct an external audit of internal controls.

Furthermore, the law requires the SEC to conduct a study over the next nine months to determine whether the burden of 404(b) compliance for companies with market capitalization between $75 million and $250 million could be reduced and whether a 404(b) exemption could encourage companies to go public and increase the number of U.S. initial public offerings.

Many of the new offices created within the law will fall under SEC oversight, which explains the bulk of the planned hiring at the commission. Due to the increased regulatory powers provided to both the Public Company Accounting Oversight Board and CFTC, it is likely that they too will be hiring many new employees as part of the implementation.

(See sidebar above, "New Federal Agencies and Offices Created in the Bill") for a list of the new entities being created from the legislation.)

Will it Stick or Be Amended?

Often, when Congress passes legislation as formidable as this, changes are made in subsequent years to correct or redirect the scope of the new regulations. The Securities Act of 1933, for instance, was followed directly by an equally important piece of legislation, the Securities Exchange Act of 1934. Several subsequent changes were also made to the Sarbanes Oxley Act after it was originally passed in 2002.

In that same vein, there could be additional changes to this legislation, as alluded to by President Obama. Furthermore, numerous studies and reports, as well as the required review of the legislation for specific impacts on small businesses, could be catalysts for clarifications in the law.

The uncertainty that businesses have regarding this legislation will begin to fade as the full details of the reform law are understood during the rulemaking process. If desired, financial executives have open invitations from all the regulatory bodies to submit comment letters regarding the proposed rules and regulations. This process helps agencies understand potential unintended consequences and consider improvements.

RELATED ARTICLE: Size and Scope of the Dodd-Frank Act is Unprecedented

* 2 years in the making.

* 29 new federal agencies or offices created.

* 55 reports and studies equired.

* 128 congressional hearings on regulatory reform held over two years.

* 2,319 pages of law.

* $26.9 billion cost to the federal government in the first 10 years.

RELATED ARTICLE: FEI's Committee on Corporate Treasury (CCT) Involvement in the Legislative Process

July 17, 2009: CCT meets with the U.S. Treasury on proposals for financial regulation including a discussion on over-the-counter derivatives.

July 2010: FEI becomes a founding member of the Coalition for Derivatives End-Users, a broad group of business associations with a common interest in protecting corporations' ability to hedge legitimate business risks through foreign exchange, interest rate, commodity and equity derivatives.

Aug. 11, 2009: CCT provides results of a survey to U.S. Treasury, which provdes insight into how FEI member companies use derivatives to manage daily business risks, not speculate for profit.

Aug. 24, 2009: Coalition hosts a "Derivatives 101" briefing on Capitol Hill, which was well attended by congressional staff.

Sept. 28, 2009; Oct. 6-7, 2009; and April 21, 2010: CCT members visit with congressional members and regulators in Washington, D.C., to provide "real-life" examples of how they use derivatives.

Oct. 2, 2009 and Feb. 3, 2010: FEI joins more than 170 other organizations in writing letters to Congress supporting broad reforms to the OTC market while minimizing unintended consequences of requiring margin and collateral posting on all customized trades.

Oct. 29, 2009: Coalition responds to request from Senators regarding practical solutions for regulating the OTC markets.

Nov. 2009; July 2010: Coalition members and FEI staff participate in meetings with hundreds of congressional members and their staffs related to financial regulation reform.

March 2010-July 2010: Coalition has a series of meetings with the Commodities Futures Trading Commission.

June 17, 2010: Coalition writes a letter to Congress as it begins the conference committee process, urging action on a new regulatory framework for derivatives, but cautions that a clear exemption for end-users is essential.

July 21, 2010: President Barack Obama signs the Dodd-Frank Wall Street Reform and Consumer Protection Act into law.

RELATED ARTICLE: New Federal Agencies And Offices Created In the Bill

(the umbrella agency is in parenthesis)

1. Bureau of Consumer Financial Protection (the Federal Reserve)

2. Financial Stability Oversight Council (made up of various regulators)

3. Investor Advisory Committee (U.S. Securities and Exchange Commission)

4. Office of Credit Rating Agencies (SEC)

5. Office of Financial Research (U.S. Treasury)

6. Office of Housing Counseling (Housing and Urban Development)

7. Offices of Minority and Women Inclusion (set up in 20 regulatory agencies, including all Federal Reserve Banks)

8. Office of Municipal Securities (SEC)

9. Office of National Insurance (U.S. Treasury)

10. Office of the Investor Advocate (SEC)

CADY NORTH ( is manager of Government Affairs for Financial Executives International in the Washington, D.C., office. She also manages FEI's Committee on Corporate Treasury and has been working for more than a year with FEI members to help educate members of Congress and their staffs on the potential impacts of financial regulatory reform legislation.
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Author:North, Cady
Publication:Financial Executive
Geographic Code:1USA
Date:Sep 1, 2010
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