The legislative colossus that is the Dodd-Frank Regulatory Reform Bill was promulgated with the intent of cleaning up the consequences of the past decade's financial sector decline. The Act runs approximately 2,300 pages, addressing a broad range of issues concerning financial institution reform within its 16 titles including systemic risk, disposition of insolvent financial institutions, insurance industry monitoring, proprietary trading in banks, derivatives (swaps in particular), investor and consumer protections. But what is the true fallout? Aren't the people charged with the clean up the very ones who presided over the debacle in the first place? The enormity of items to implement and the timeline over which to do so means that only history can judge whether the bill's intentions will be carried out. One thing is certain though: the road to reformation will be challenging.

TUTORIAL: Credit Crisis

What the legislation will accomplish is impossible to know with complete certainly. The complex mess that played out was years in the making – so will it be years in the fixing.
Deregulation, the advent and proliferation of derivatives, a powerful financial services lobby, what is now seen as the misjudgment of well-paced government functionaries and policy experts, and the elixir of credit at a price all played a role. What will be some of the potentially adverse consequences of attempting to stitch things up?

Regulatory Cost
Financial institution compliance with the bill's numerous provisions will cost both time and money. A recent Economist piece cites the example of the Durbin Amendment's requirement of a drop in debit card fees which has cost banks $7 billion.

Opportunity Cost
Institutions may either pare back or delay certain lucrative lines of business pending greater legal certainty.

Talent Exodus
The provision of the Volcker Rule (Title VI of the Act) limiting a bank's proprietary trading activities and separating traditional banking from other financial services could set off a flight of talent to the shadow banking sector, which is less within Dodd-Frank's remit.

Regulatory Arbitrage
Bank accountability and oversight, supervision and liquidation are given robust treatment; the regulation of the shadow banking system, where the conduct of bank-like activities goes on without similar rules, however, is not given the same treatment. An example is the sale and repurchase agreement, which is a systemically important parallel bank funding tool that is not given adequate regulatory treatment. Dealing with potential redemption risk of money market funds along the lines of what happened pursuant to the default of Lehman Brothers' commercial paper has yet to be addressed.

Possible Contagion
As the bill's resolution authority prohibits bail-outs of failed financial institutions, other options exist, such as liquidation, receivership, a division of the institution into a good and bad bank, with the former to be run by the Federal Deposit Insurance Corporation (FDIC), selling the good bank to another bank or recapitalization. Fears of counterparty risk and former bondholders carrying equity of questionable value could engender a sale of its and its competitors' shares.

The Act affords protection against retaliation and a bounty of up to 30% of an award that resulted from a tip. Until now, the risks of whistleblowing were seen as too great. For many, they probably will still be. While a potential benefit of the act, this activity could equally give rise to frivolous lawsuits.

Plus Ça Change
The legislation would appear to have achieved minimal regulatory consolidation. Indeed, it requires over 225 new rules across 11 federal agencies, giving the very regulators who seem to have fallen down during the crisis even greater authority. At the very least, this leads to uncertainty for the financial sector until the regulatory agencies address how this new gaggle of rules is to be implemented.

The Family Office Rule
The act repeals the private advisor exemption of the 1940 Investment Advisers Act, under which advisors with fewer than 15 clients who did not hold themselves out to the public as investment advisors would not come under the Act's requirements. To avoid the burdensome compliance requirements, family offices may give securities advice only to family clients; the family office must be owned and controlled only by family members or entities and the office may not hold itself out to the public as an investment adviser. Advisors with multiple family offices could be affected. In 2011, George Soros converted his Quantum hedge fund into a single family office, returning cash to his few remaining outside clients to avoid SEC registration and disclosure.

The Bottom Line
The foregoing list of potential and actual behavioral changes in response to Dodd-Frank is a sampling only. A thorough treatment of all of its provisions and their implications is beyond the scope of this article. Only time and experience will determine how well the various features of the Act will function when put to the test.

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