Dodd-Frank's legacy outlined

Author: Danielle Myles | Published: 8 Jan 2013
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Anna Pinedo

The US's biggest financial overhaul since the great depression represents a fundamental shift in regulatory philosophy, says Morrison & Foerster's Anna Pinedo. And its legacy will be felt far beyond the US

It has been two and a half years since the Dodd-Frank Act took effect, beginning the rewrite of rules touching every corner of the US financial system.

As DC's response to the US-instigated financial crisis, an exhaustive set of reforms seemed inevitable. But Dodd-Frank's numbers are staggering. The statute is 848 pages long, consists of 1,601 sections, and requires 398 rulemakings shared by seven regulators.

Even more telling, though, is the message underlying the reforms. "It represents a significant philosophical change in regulatory approach," says New York-based Morrison & Foerster partner Anna Pinedo.

Before the crisis, regulators' prioritised the safety and soundness of individual institutions, on an entity-by-entity basis. Dodd-Frank introduced an overarching focus on interconnectedness and the financial sector as a whole. Under it, the concept of systemic risk has come into its own.

The shift was so fundamental that even if the Republicans had been victorious in the 2012 presidential election, no one realistically thought the statute would be repealed, according to Pinedo. Similarly, a substantial scaling-back of the reforms when economic conditions improve is unlikely.

"I just don't see it happening, because it involved such a fundamental philosophical shift," Pinedo says. "It's possible, of course. But I suspect it would be limited to loosening around the edges."

The message is not just for those within the US. Dodd-Frank's extraterritorial reach is unprecedented, often placing heavy burdens on entities with only tenuous US-connections. EU authorities have warned their US counterparts that regulation is a two-way street, but so far only one European regulation covers trades in the US.

At a more practical level, Dodd-Frank has created a maze of interconnected, vague and delayed regulations. Asked whether the statute's number and breadth of the reforms made this inevitable, Pinedo says no.

"It's not been the case with other legislation that has resulted in significant changes, as legislators took their time formulating the statutes and there was additional opportunity for analysis and comment. But here, the process has been really broken," she says

Despite some rough drafting and lack of understanding about some key provisions, the bill was hurried through Congress to hasten the government's response to the crisis. It is a lesson in rushed-legislation. And the best example of the end-result is the Volcker rule.

The ban on banks' proprietary trading – one of the statute's most controversial sections – was an eleventh hour inclusion. Six months after the rule technically took effect, there is neither a final text nor any certainty around key definitions.

As matters of principle, Dodd-Frank's philosophical shift and extraterritorial reach have changed the course of financial regulation. But for lawyers doing their day-to-day jobs, the decoding of regulations could be the statute's lasting legacy.

For more of IFLR's 30th anniversary coverage see http://www.iflr.com/30th-anniversary

See also:

'Why Dodd-Frank extraterritoriality is fundamentally flawed' 

'Dodd-Frank's latest quandary' 

'Dodd-Frank: one year on'