Dodd-Frank | Financial Services Regulation

Regulating the US financial markets

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) was introduced in 2010 to prevent another financial crash like the one in 2008 and to promote the financial stability of the United States.

Considered the most wide-ranging piece of financial regulation in the US since the Great Depression, Dodd-Frank introduced many new regulatory requirements for financial firms. By doing so, it sought to improve accountability and transparency, end the too big to fail mentality, protect the American taxpayer by ending bailouts, and safeguard consumers from abusive financial services practices, amongst other things.

To achieve this, the Act established new government agencies to oversee parts of the US financial system, including the Financial Stability Oversight Council, Consumer Financial Protection Bureau and SEC Office of Credit Ratings.

Impact

The size and scope of the regulatory requirements under the Dodd-Frank Act presented banks with a significant challenge, not only from a business strategy perspective but also an operational data governance viewpoint. The new regulations around banks’ investments and proprietary trading (notably the Volcker rule), the enhanced transparency rules for OTC derivatives, and the heightened accountability significantly increased the complexity and cost of financial compliance.

Changes to Dodd-Frank

Amid pushback on the regulatory burden presented to small financial firms, sections of the Dodd-Frank Act were repealed in 2018. This means some smaller banks and other financial firms were exempt from the toughest regulations (stronger capital and liquidity rules, enhanced risk management standards, living wills, etc.). The current US regime is expected to slowly rollback these repeals, with the level of scrutiny and enforcement from the CFPB have increased in 2021.

Regardless of size or political climate, firms are by no means exempt from all of the Dodd-Frank Act, and are required to continuously monitor and demonstrate compliance. The larger Systemically Important Financial Institutions (SIFIs – those deemed ‘too big to fail’) remain subject to the entirety of the Dodd-Frank Act.

Impact of Dodd-Frank on the buy-side

The Dodd-Frank Act eliminated the SEC registration exemption of private advisors which was included in the Investment Advisors Act of 1940.

Many Private Equity Funds and Hedge Funds became classified as "Investment Advisors", had to register with the SEC or their state (by 2012), and became subject to SEC's record keeping and monitoring of electronic communications.

Under Dodd-Frank, Investment Advisors must register with either with their state or the SEC:

Who needs to register with their state?

Advisors with $25m - $100m AUM

Who needs to register with SEC?

Advisors with $100m + AUM, unless tjhey only advise private funds. In this case, registration needs to happen at $150m AUM.

Note that the rules vary for non-US advisors who may have certain exemptions from registering with the SEC.

Ensuring compliance with Dodd-Frank continues to be a pressing issue for many firms

SteelEye reduces the complexity and cost of financial compliance and provides a range of regulatory tools that assist firms in complying with record keeping and oversight obligations. Book a demo to learn more about how SteelEye can help you Comply Smarter.