The Dodd-Frank Act was presented to the nation two years ago as the prescription to avoid a repeat of the financial crisis of 2007-2008. As my co-authors and I discuss in an upcoming book, Dodd-Frank: What It Does and Why It’s Flawed, due out later this month, the prescription wasn’t well-suited to the problems that gave rise to the crisis. Dodd-Frank doesn’t take away the taxpayer safety net and force the market to sink or swim without government guarantees. It doesn’t address the dangerous dependence on taxpayer guarantees in housing finance that was central to the crisis. Dodd-Frank deepens the government’s entanglement with the biggest financial institutions and threatens to shrink the ranks of smaller institutions through regulatory inundation.
Even as questions accumulate about the efficacy of Dodd-Frank’s solutions, regulators are busy implementing these statutory mandates. With the finalization of many Dodd-Frank rules set for 2013, it seems like a good time to think about what regulators have in store for us. Investors, consumers, and companies on Wall Street and on Main Street all have reason to be on edge heading into the New Year. Here are 10 key Dodd-Frank regulatory actions to watch in 2013:
1. Systemically Important Designations – The Financial Stability Oversight Council will identify certain nonbank financial companies as systemically important and in need of the Fed’s oversight. These are the new crop of too-big-to-fail firms.
2. Qualified Residential Mortgage/Qualified Mortgage Rules – Rules for Qualified Mortgages (by the Consumer Financial Protection Bureau) and Qualified Residential Mortgages (by various regulators) will be finalized. Depending on the form they take, these rules could undermine prudent underwriting, diminish options for consumers, and solidify the hold that Fannie Mae and Freddie Mac have on the housing finance market.
3. The CFPB’s Coming into Its Own – The CFPB (Consumer Financial Protection Bureau) will soon release a number of important rules governing activities such as mortgages, lending standards, and foreign money transfers. Its actions to date suggest that we can expect burdensome rules and aggressive enforcement efforts. The net result for consumers may be fewer products and services at higher prices.
4. The Implementation of a New Regulatory Structure for Over-the-Counter Derivatives – Dodd-Frank’s regulatory overhaul of the over-the-counter derivatives market—a market for financial instruments used to hedge risk—consists of a series of rules governing clearing, trading, reporting, business conduct, and capital and margin. Although the implementation of some of these rules has already begun, 2013 will be a critical year for the finalization and implementation of rules. The new regulations will make it difficult for companies, farmers, public utilities, and others to protect themselves from a wide array of business risks.
5. The Volcker Rule – The Volcker Rule, to date, has been stalled as regulators grapple with its complexities. As more banks adjust their activities to conform to the Rule, buyers and sellers of certain financial products may find it more difficult to find a trading counterparty.
6. The CFTC’s Position Limits Rule Challenge – The CFTC (Commodity Futures Trading Commission) is appealing the overturning of its position limits rule. As former commissioner Michael Dunn warned at the rule’s adoption, “position limits may actually lead to higher prices for the commodities we consume on a daily basis.”
7. The OFR’s Coming into Its Own – The director of the OFR (Office of Financial Research) is likely to be confirmed during 2013. Dodd-Frank gives him broad authority and a large budget, so the OFR likely will expand its information-gathering and dissemination activities.
8. Issuance of Report on Insurance Regulation Modernization – This report, which was due in January 2012, is likely to be issued soon by the Federal Insurance Office. If its recommendations are implemented, they could have a far-reaching effect on the way insurance is regulated in the US.
9. Fiduciary Duty Rulemaking by the SEC – The SEC (Securities and Exchange Commission) could move forward with a rulemaking to impose a uniform code of conduct on investment advisers and broker-dealers to govern their relationships with retail customers. Doing so could restrict investors’ access to financial-services professionals, diminish the types of services they can obtain, and increase the fees they pay.
10. Finalization of Municipal Advisors Regime – The SEC will finalize rules for municipal advisors. The SEC has interpreted the term “municipal advisor” so broadly that a whole range of people, from low-level bank employees to nonprofit board members, could find themselves subject to a strict new regulatory regime.