Today, the Senate Banking, Housing and Urban Affairs Committee held a hearing entitled “Implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act,” to discuss the framework for adoption of regulations under the wide-ranging Dodd-Frank Act. Testifying before the Committee were:

  • Neal S. Wolin, Deputy Secretary, U.S. Department of the Treasury
  • Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve System
  • Sheila Bair, Chairman, Federal Deposit Insurance Corporation
  • Mary Schapiro, Chairman, U.S. Securities and Exchange Commission
  • Gary Gensler, Chairman, U.S. Commodity Futures Trading Commission
  • John Walsh, Acting Comptroller of the Currency, Office of the Comptroller of the Currency

The hearing began with widely differing views on the likely efficacy of Dodd-Frank in preventing future financial crises. Chairman Christopher J. Dodd (D-CT), one of the principal authors of Dodd-Frank, acknowledged that “the work is not done at all” but that the Act created a solid framework for new financial regulation, which he expected would be “very good, competent regulation.” Ranking Member Richard Shelby (R-AL) disagreed, saying that Congress “delegated [its] responsibilities to unelected bureaucrats” which “undermined [the Act’s] effectiveness.” He further stated that the Act provides “no specific guidance in any number of areas.”

Mr. Wolin began by describing the Act's implementation as a “complex undertaking.” He stated that Treasury has several guiding principles: first, to move as quickly and carefully as possible to implement the Act; second, to bring full transparency to the process; third, to streamline and simplify government regulation; fourth, to create a coordinated regulatory process; fifth, to build a level playing field; sixth, to protect freedom of innovation and seventh, to keep Congress fully informed.

Mr. Wolin first discussed the Financial Stability Oversight Council (FSOC) created by Dodd-Frank. He noted that prior to Dodd-Frank, no single regulator had responsibility for monitoring and addressing risks to financial stability, but Dodd-Frank “makes agencies collectively accountable” for the mission of financial stability. He noted at its first meeting tomorrow, he expected that the FSOC would seek public comment on recommendations on implementing statutory restrictions imposed by the Volcker Rule, as well as discussing draft bylaws and commenting on the “criteria to designate large interconnected nonbank financial companies.” Chairman Bernanke weighed in on the FSOC, noting that “it’s important that [it] be given overlapping responsibilities.” Chairman Bair echoed this sentiment, stating “if we all start writing each other’s rules, this Council will become an impediment and not a way to facilitate reform.”

Mr. Wolin also discussed the status of the Consumer Financial Protection Bureau (CFPB) and the recent appointment of Elizabeth Warren to serve as special advisor in connection with the creation of the CFPB. He stated that on July 21, 2011, or one year from enactment of Dodd-Frank, the CFPB will assume existing authorities of seven agencies, including the OCC, OTS, Federal Reserve, FDIC, HUD, FTC and NCUA. To that end, Treasury has already made plans for meeting Dodd-Frank’s deadlines. Under tense questioning from Sen. Bob Corker (R-TN), Mr. Wolin assured the Committee that Ms. Warren wouldn’t have the powers to write rules for the CFPB because she had not been confirmed by the Senate. “Treasury’s powers are quite limited there,” he said.

Chairman Bernanke gave an update on the Federal Reserve’s progress, noting that Dodd-Frank requires the Federal Reserve to complete more than 50 rulemakings and sets of formal guidelines. A transition team headed by Federal Reserve Governor Elizabeth Duke is working with Treasury in creating the CFPB. He also discussed efforts by the Federal Reserve to increase the transparency of its balance sheet and liquidity programs. Under Dodd-Frank, by December 1, 2010, the Federal Reserve is required to provide detailed information regarding individual transactions conducted across a range of credit and liquidity programs during the period from December 1, 2007 until July 20, 2010. On an ongoing basis, the Federal Reserve will also be providing updated information regarding its counterparties and transactions.

Chairman Bair noted the 44 rulemakings for which the FDIC was responsible. “Implementation will require extensive coordination among the regulatory agencies and will fundamentally change the way we regulate large complex financial institutions,” she noted. In her prepared testimony, Chairman Bair supported an increase in the FDIC’s minimum reserve ratio above the Dodd-Frank-mandated level of 1.35% of insured deposits. Previously the ratio had been 1.15%. Chairman Bair warned that even an increase would not ensure banks would not have high deposit insurance assessment ratios when they “are strained by a crisis and are least able to pay.”

Dodd-Frank provides for an orderly liquidation of “financial companies” whose failure would have “serious adverse effects on financial stability in the United States.” Following a theme she raised in a roundtable discussion regarding Dodd-Frank’s new resolution authority, she noted that thecourt-appointed examiner in the Lehman Brothers bankruptcy had found that “the lack of a disaster plan contributed to the chaos of its bankruptcy and the liquidation of its brokerage.” Dodd-Frank requires the FDIC and the Federal Reserve to jointly issue regulations within 18 months of enactment to implement new resolution planning and reporting requirements that apply to bank holding companies with more than $50 billion in assets.

Chairman Schapiro noted that the SEC is responsible for over 100 rulemakings, many of which require action within one year. She stated that the SEC is guided by new internal processes regarding public consultation for comment and increased transparency. She noted that the SEC would be working with the CFTC in writing rules to address capital, margin and mandatory clearing requirements, operation of swap execution facilities, business conduct standards for swap dealers, and public transparency for transactional information. She expected to begin issuing rule proposals relating to OTC derivatives in October.

By July 2011, all hedge fund advisers and private equity fund advisers will be required to register with the SEC. Chairman Shapiro noted that the SEC staff has been collecting the systemic risk information required and held both internal and external discussions, and was on track to propose rules between October and December 2010. She also noted the deadlines with respect to executive compensation under Dodd-Frank: rules related to Section 951 requiring shareholder say on pay votes will be issued in time for the 2011 proxy season; with respect to Section 957, rules prohibiting broker voting on all executive compensation matters had already been approved; the SEC anticipates proposing rules related to Section 952 for compensation committee independence in the near future; rules related to Sections 953, 953 and 955 will be proposed by July 2011; and, finally, the SEC is working with other federal regulators to implement Section 956 relating to incentive-based compensation disclosure requirement for covered financial entities.

Chairman Schapiro also provided an update on various studies required by Dodd-Frank. Section 913 of Dodd-Frank mandates a study of the effectiveness of existing legal or regulatory standards of care for broker-dealers and investment advisers, and requires a report in January 2011. Chairman Schapiro noted that the SEC is moving rapidly to meet that deadline. Along with FINRA, the SEC established a cross-divisional working group to implement the study, and is planning to meet with as many interested parties as possible. She noted that the SEC had already received more than 3,000 individualized letters in response to this study. She also noted Section 917’s requirement that the SEC conduct a broad study regarding the financial literacy of investors, focusing on the current level of financial literacy and how to increase the transparency of expenses and conflicts of interests for investment products. That study is slated to be completed within the next 18 months.

Mr. Gensler remarked on the cooperation the CFTC was seeking with senior European regulators on regulation of OTC swaps and derivatives marketplace. He predicted “strong and consistent regulation” of the American and European swaps market. He estimated that as many as 200 entities would register with the CFTC as swap dealers as a result of Dodd-Frank. His team was focused not only on defining “swap dealers” and “major swap participants” to determine not only what entities must register, but also what those registration obligations should entail. He speculated than the number of “major swap participants” would likely be “very small.” He also reassured the Committee, along with Chairman Schapiro, that the CFTC would not retroactively impose additional margin requirements against existing derivatives contracts. He also explained his team’s role in requiring standardized swaps to be traded on exchanges. He estimated that as many as 30 new entities would register a trading system or platform as an exchange or swap execution facility. Dodd-Frank also requires that standardized derivatives be cleared through central clearinghouses. He estimated that the number of registered derivatives clearing organizations would increase from around 14 to 20. The CFTC (in conjunction in certain respects with the SEC) is required to develop rules by July 21, 2011; however, Mr. Gensler warned that “certainly something will slip.”

Mr. Walsh reiterated a point made by other witnesses: that the key issue in implementing Dodd-Frank would be determining systemic risk and mapping that risk across the financial industry. “[Rulemaking] is a process that is sometimes tortuous, but it has worked before and it will work again,” he assured the Committee. Mr. Walsh discussed the recent initiatives of the Basel Committee on Banking Supervision (Basel Committee), which recommends prudential standards for large, internationally active banks, and the interplay with Dodd-Frank. Both the Basel Committee and Dodd-Frank “seek to establish conservative, stringent capital standards” for large financial institutions. He reviewed the similarities between the reforms recommended by the Basel Committee and those required by Dodd-Frank with respect to: macroprudential and systemic risk considerations, mitigating procyclical regulatory requirements, leverage ratio requirements, and liquidity requirements, noting that “while the key elements of the [Basel Committee] have been set forth, much work will be needed to implement these enhancements” and harmonize the interaction between the Basel Committee and Dodd-Frank.