Presidents George W. Bush and Barack Obama signed into law several major legislative responses to the financial crisis of 2008. The most influential and controversial of these was the Dodd-Frank Wall Street Reform and Consumer Protection Act, which introduced a raft of measures designed to regulate the activities of the financial sector and protect consumers. Another notable law was also the Emergency Economic Stabilization Act, which created the Troubled Asset Relief Program (TARP). Moreover, the Federal Reserve took up many new and additional measures of its own.

Key Takeaways

  • Dodd-Frank, the Emergency Economic Stabilization Act, and steps taken by the Federal Reserve were key components in responding to the 2008 financial crisis.
  • Dodd-Frank amended many existing legislations and created many new standalone provisions.
  • The Emergency Economic Stabilization Act provided $700 billion in bailout relief.
  • Post-Dodd-Frank, many new committees and the Federal Reserve were tasked with the responsibilities of greater financial market oversight.

Dodd-Frank 

Dodd-Frank was signed into law in July 2010 and brought sweeping reforms to the U.S. financial sector. It branched out into many of the governing regulations already in place for setting standards in the securities and financial trading markets. It also built several new types of protections, namely the Consumer Financial Protection Bureau (CFPB), which has become an important agency in helping monitor and protect the financial interests of American consumers.

Financial Securities, Exchange, and Reporting

In the U.S. there are several key Acts that form the framework for regulations across securities, reporting, and trading. Some of the biggest changes effected from the passing of the Dodd-Frank Act were passed through to these legislations as follows:

  •  Securities Act of 1933: Dodd-Frank amended Regulation D to exempt some securities from registration. These exemptions were heavily tied to special securities issuance for accredited investors. Dodd-Frank also adjusted the definition of an accredited investor, mainly removing the inclusion of a primary residence as part of an investor’s net worth.
  • Securities Exchange Act of 1934: Title IX of Dodd-Frank includes provisions that require many amendments to the Securities Act of 1934. Title IX requires the creation of an Investor Advisory Committee (IAC), an Office of the Investor Advocate (OIA), and an ombudsman appointed by the OIA. It requires new studies to be conducted regularly on conflicts of interest within investment firms and on mutual fund advertisements, mainly by the newly formed oversight groups. Title IX amends the 1934 Act for issues pertaining to accountability, executive compensation, and corporate governance. Title IX, Sections 932, 935, and 939 of the Dodd-Frank Act amend the 1934 Act for improvements to the regulation of credit rating agencies, including the establishment of the Securities Exchange Commission (SEC) Office of Credit Ratings for oversight. Title IX, Section 941 adds major improvements to the 1934 Act pertaining to the asset-backed securitization process, which is heavily focused on mortgage-backed securitization.
  • Investment Company Act of 1940: The Dodd-Frank Act had little direct effect on investment companies and the Investment Company Act of 1940. However, the creation of new oversight committees and the increased power given to existing ones, primarily the SEC, leaves a great deal of opportunities for tighter restrictions on things like consumer protections and disclosure policies.
  • Investment Advisers Act of 1940: The Advisers Act of 1940 saw changes to the registration requirements for investment advisors, affecting both independent investment advisors and hedge funds. Amended regulations change the registration requirement to $100 million in assets under management with a $150 million private fund advisor exemption for advisors with assets from only private investors.
  • Sarbanes-Oxley Act of 2002: For Sarbanes-Oxley, Dodd-Frank added new protections for whistleblowers. The new provisions make providing information as a whistleblower more appealing and also more financially rewarding.

Other Dodd-Frank Enactments

Beyond amending existing laws, Dodd-Frank also had many standalone provisions.

Financial Stability Oversight Council

The Financial Stability Oversight Council (FSOC) is addressed in Title I of Dodd-Frank. The establishment of the FSOC was focused on improving systemic risks. The FSOC’s primary purpose is to monitor designated Systemically Important Financial Institutions (SIFIs) deemed “too big to fail." The FSOC’s voting members include the heads of the: Department of the Treasury, the Federal Reserve Board, the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau, the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission, the Federal Housing Finance Agency, the National Credit Union Administration, and an insurance expert appointed by the president. The FSOC has authority to require testing and documentation of the business operations of SIFIs. It can also decide to take action for dividing or reorganizing these institutions in such a way that reduces the overall risk to the economy.

Volcker Rule

One of Dodd-Frank’s provisions, the Volcker Rule, was designed to limit speculative investments. The Volcker Rule, for example, has acted as a de facto ban on proprietary trading by depository institutions, also decreasing the trading rights of proprietary traders at other large financial institutions.

Consumer Financial Protection Bureau

The CFPB was created from Dodd-Frank. Its purpose is to oversee all financial products, services, and market regimes that are available to U.S. consumers. Within its authority it provides a variety of educational materials. It can also bring to light unfair practices through judicial recognition in the U.S. court system.

Emergency Economic Stabilization Act

In October 2008, a divided Congress passed the Emergency Economic Stabilization Act, which provided the Treasury with approximately $700 billion to purchase "troubled assets," mostly bank shares and mortgage-backed securities. The Troubled Asset Relief Program, as the program was known, ultimately spent $426.4 billion bailing out institutions, including American International Group Inc. (AIG), Bank of America (BAC), Citigroup (C), JPMorgan (JPM), and General Motors (GM). The Treasury recovered $441.7 billion from TARP recipients.

$441.7 billion

The Treasury recovered $441.7 billion from the $426.4 billion in TARP funds it invested.

Federal Reserve

The Federal Reserve took extraneous steps to support the economy and the financial markets during and after the 2008 financial crisis. In addition to its authority to designate monetary policy, primarily the federal funds rate, the Fed also setup many special purpose vehicles for lending to various sectors of the market. These special purpose facilities have become somewhat of a new standard for the Fed in regular and emergency lending activities.

In addition to its own actions, the Federal Reserve was also directed by Dodd-Frank to carry out regular stress testing on banks in the banking sector. Provisions in the Dodd-Frank Act pertaining to Federal Reserve stress testing are primarily found in Title XI. Post-Dodd-Frank, the Federal Reserve conducts two types of stress testing annually: Comprehensive Capital Analysis and Review (CCAR) and Dodd–Frank Act supervisory stress testing (DFAST).

The Bottom Line

Dodd-Frank focus areas were broken down into the following sections:

  • Systemic Risk (Titles I and VIII)
  • Federal Reserve (Title XI)
  • Resolution Regime for Failing Firms (Title II)
  • Securitization (Title IX)
  • Bank Regulation (Title I, III, VI, and X)
  • Consumer Financial Protection (Title X)
  • Mortgage Standards (Title XIV)
  • Derivatives (Titles VII and XVI)
  • Credit Rating Agencies (Title IX)
  • Investor Protection (Title IX)
  • Hedge Funds (Title IV)
  • Executive Compensation and Corporate Governance (Title IX)
  • Insurance (Title V)
  • Miscellaneous Provisions

Dodd-Frank made many significant changes to the legal and regulatory framework for securities offerings, investment management, and corporate governance. It also sought to increase protections for consumers. Beyond that, a substantial portion of Dodd-Frank was created for the banking sector, including oversight for systemically important institutions, regulations for all bank holding companies, and the regulations for lending-particularly mortgage lending.

In 2018, President Donald Trump passed the Economic Growth, Regulatory Relief, and Consumer Protection Act. This Act eased a great deal of the regulatory burdens created for banks through Dodd-Frank, primarily by increasing the threshold at which banks are subject to greater regulatory documentation obligations. The threshold was increased from $50 million to $250 million.