Racing to cement a Wall Street legacy

Racing to cement a Wall Street legacy
© Greg Nash

The Obama administration has yet to complete roughly a third of the regulations required under landmark legislation meant to rein in Wall Street, potentially exposing a pillar of the president’s legacy to attacks from the financial sector.

Of 390 rulemaking mandates contained in the sweeping Dodd-Frank financial reform law enacted more than five years ago, about 70 percent — 267 rules — have been finalized, according to figures kept by the New York-headquartered law firm Davis Polk & Wardwell LLP.

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President Obama, who has championed the law as necessary to stave off a repeat of the economic crisis of the late 2000s, has just one year left to either cement the unfinished pieces of Dodd-Frank or risk seeing those regulations die on the vine in a possible Republican administration.

In that scenario, industry opponents would almost certainly mount an aggressive campaign to beat back many of the pending rules.

“Dodd-Frank was approved by the legislature during a period of crisis,” said Rich Foster, senior vice president and senior counsel for regulatory and legal affairs at the Financial Services Roundtable. “There was a lot shoehorned into this statute, and now we’ve had some time to see how it’s working. It’s time to consider recalibrating.”

To date, banking regulators have finalized 93 of their 132 rulemaking requirements, the Securities and Exchange Commission (SEC) has finalized 63 of its 94 requirements, the Commodity Futures Trading Commission (CFTC) has met 51 of its 59 requirements, and 60 of the other 105 requirements are complete, according to a Davis Polk’s quarterly report.

Experts say most of the law’s most crucial pieces have already taken effect.

“Seventy percent in five and a half years doesn’t sound like much, but almost all the rulemakings Dodd-Frank wanted to put in place have been put in place,” said Gabriel Rosenberg, an associate at Davis Polk.

Proponents are quick to list the law’s accomplishments so far, including the so-called Volcker Rule, which requires big banks to sell-off financial investments known as collateralized loan obligations, the creation of the Consumer Financial Protection Bureau (CFPB), capital requirements for the largest financial institutions and new rules for mortgage loans.

In a statement to The Hill, a representative for the Treasury Department said Dodd-Frank has made the industry safer for consumers by “curbing excessive risk-taking, closing regulatory gaps and putting in place the strongest consumer financial protections in history.”

“Nearly all of the major rules under Dodd-Frank have been written, and we are focused on building on the progress we’ve already made and seeing implementation through,” the representative said.

But plenty of rules remain in the pipeline. Among them are rules for payday lenders from the CFPB, new rules for derivatives from the SEC, a joint rule from financial regulators on incentive-based compensation and a final rule from the CFTC to cap the amount any trader can hold in the market are topping the president’s list of priorities as he works to finish what he started when he signed Dodd-Frank into law in 2010.

“While the regulators have made tremendous progress in implementing most of the key rules required by Dodd-Frank, more work remains to be done,” said Rep. Carolyn Maloney (D-N.Y.), a member of the House Financial Services Committee.

“It is imperative that the regulators be given the resources they need to finish the job.”

But as Obama’s days dwindle, the threat of attack increases for rules that have yet to be proposed or finalized.

Susan Dudley, a former administrator at the White House Office of Information and Regulatory Affairs during the George W. Bush administration who now serves as the director of the Regulatory Studies Center at George Washington University, said agencies are still generally required by the federal statute to follow through with their rulemaking requirements, even under a new administration.

A new administration, however, would have the authority to reshape rules, even those that have already gone out for public comment, with new information that could lead to a vastly different outcome.

The rarely used Congressional Review Act (CRA), Dudley said, gives the GOP-controlled Congress a tool to roll back final rules, especially if a Republican wins the White House.

Under the CRA, Congress has 60 days after a major rule is finalized to issue a resolution of disapproval. Republicans have held numerous CRA votes in the past year, but the efforts were seen as largely symbolic, since Obama has the authority to block them with a veto. But the congressional disapproval of any significant rules issued in the waning days of the Obama administration could be upheld by a Republican successor.

Even so, it would be virtually impossible to gut Dodd-Frank at this point, said Bart Chilton, a former commissioner at the Commodity Futures Trading Commission who now serves as a senior policy advisor at DLA Piper LLP.

“If the Senate stays in Republican hands and there’s a Republican president, it’s possible that some of the Dodd-Frank rules could be rolled back,” he said, “but I’m convinced that Democrats and Republicans alike want the basic protections included in Dodd-Frank, like capital requirements and provisions to ensure we don’t have another big bank bailout.”

The issue over Dodd-Frank, Chilton reasoned, is over how much transparency, reporting and record keeping should be required.

“Whether it went too far, that’s in the eye of the beholder,” he said. “There’s certainly more transparency in the market. The very types of products that got us into trouble, primarily swaps which were unregulated, are now regulated, and they’re less likely to have the calamitous impact on the economy they had in 2008.”

Industry groups, however, hope a new administration will take a fresh look at the law.  

The Credit Union National Association (CUNA), for instance, contends many of the new rules, while issued with good intentions, have created new burdens that are taking their toll on the industry — particularly those rules promulgated by the CFPB.

“If the goal was to lead to a gradual reduction of credit unions in the country as a result of an overwhelming regulatory burden in response to the a crisis credit unions didn’t contribute to, then the law was a success,” said Ryan Donovan, CUNA’s chief advocacy officer. “Credit Unions, however, would view the law as a failure.”