A:

The Sarbanes-Oxley Act (SOX) was enacted to protect investors from potential fraudulent accounting by companies, whereas the Dodd-Frank Act was passed to enact significant financial reform to reduce risk in certain areas of the economy. SOX was passed by Congress in response to large corporate accounting scandals at Enron, Tyco International and WorldCom that were uncovered in the early 2000s. Dodd-Frank was enacted in response to the 2008 financial crisis.

The Sarbanes-Oxley Act

SOX mandated a number of reforms relating to increasing corporate responsibility, more transparent financial disclosures, and to protect investors against corporate and accounting fraud. Section 302 of SOX requires that management certify the information contained in financial disclosures. Section 404 requires corporate management and their auditors to maintain internal controls with appropriate reporting methods.

Fraudulent accounting scandals caused large and complex bankruptcies for Enron and Tyco. These scandals put thousands of people out of jobs and cost stockholders billions in share value.

The Dodd-Frank Act

Dodd-Frank required significant reform in areas of regulatory regimes, swaps trading, derivatives valuation and corporate performance pay. Many believe the financial crisis was caused in part by issues with swaps trading in credit default swaps and mortgage-backed securities (MBS). These exotic financial derivatives were traded over the counter, as opposed to on centralized exchanges as stocks and commodities are. Many were unaware of the size of the market for these derivatives and the risk they posed to the greater economy.

Dodd-Frank set up centralized exchanges for swaps trading to reduce the possibility of counterparty default and also required greater disclosure of swaps trading information to the public to increase transparency in those markets.

RELATED FAQS
  1. What is the difference between derivatives and options?

    A derivative is a financial contract that gets its value from an underlying asset. Options offer one type of common derivative. Read Answer >>
  2. What is the Federal Reserve Board's market risk capital rule?

    Learn about the market risk capital rule enacted by the Federal Reserve, and understand how this it reflects Basel III international ... Read Answer >>
  3. How do companies benefit from interest rate and currency swaps?

    Interest rate and currency swaps help companies manage exposure to rate fluctuations and acquire a lower rate than they would ... Read Answer >>
  4. How do currency swaps work?

    Learn how a currency swap works, including who uses these transactions, and the mechanics and purpose of the different cash ... Read Answer >>
Related Articles
  1. Small Business

    Sarbanes-Oxley Act Of 2002 – SOX

    The Sarbanes-Oxley Act of 2002 is a legislative response to a number of corporate scandals that sent shockwaves through the world financial markets.
  2. Investing

    CFTC Probes Banks' Use of Interest Rate Swaps

    U.S. regulators are probing banks' trading and clearing of interest rate swaps, which played a central role in the 2008 financial crisis
  3. Managing Wealth

    An In-Depth Look at the Swap Market

    The swap market plays an important role in the global financial marketplace; find out what you need to know about it.
  4. Investing

    Dodd-Frank Creates a Liquidity Crunch for Bonds

    While each individual institution is undoubtedly safer due to capital constraints imposed by Dodd-Frank, this makes for a more illiquid market overall. The lack of liquidity will be especially ...
  5. Insights

    War Over "Too Big to Fail" Continues (RIF, CIT)

    Under new legislation, banks will no longer be designated as "too big to fail" just because they control assets of $50 billion or more.
  6. Trading

    An Introduction To Swaps

    Learn how these derivatives work and how companies can benefit from them.
  7. Tech

    An Inside Look At Internal Auditors

    Find out why these number crunchers are part of every chief officer's dream team.
  8. Trading

    Currency Swap Basics

    Find out what makes currency swaps unique and slightly more complicated than other types of swaps.
  9. Trading

    Introduction To Counterparty Risk

    Unlike a funded loan, the exposure from a credit derivative is complicated. Find out everything you need to know about counterparty risk.
  10. Insights

    Bank Stocks: The Attack on Dodd-Frank

    Bank stocks were given an initial boost after the House passed the new bill to repeal Dodd-Frank.
RELATED TERMS
  1. Sarbanes-Oxley Act Of 2002 - SOX

    The U.S. Congress passed the Sarbanes-Oxley Act of 2002 to protect ...
  2. Dodd-Frank Wall Street Reform and Consumer Protection Act

    The Dodd-Frank Wall Street Reform and Consumer Protection Act ...
  3. Asset Swap

    An asset swap is a derivative contract through which fixed and ...
  4. Price Swap Derivative

    Under a price swap derivative, one entity delivers stock, or ...
  5. Replacement Swap

    A replacement swap is a substitute for an existing swap arrangement ...
  6. Foreign Currency Swap

    A foreign currency swap is an agreement to exchange currency ...
Trading Center