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The Dodd-Frank Act

The Unfinished Business of Regulating Clearinghouses

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The Dodd-Frank Act recently celebrated its 10th anniversary, with commentators, policymakers, and scholars joining the celebration by discussing the achievements of the sweeping post-crisis financial reform. Yet Dodd-Frank left critical unfinished business that, if not addressed, could erode the structural foundations of the post-crisis markets: the regulation of clearinghouses.

In a new article, I identify the flaws in the the current regulatory framework for clearinghouses. These flaws polarize rather than align the incentives of clearinghouses’ major stakeholders: the owners – companies such as the Chicago Mercantile Exchange Group, Intercontinental Exchange, and the London Stock Exchange Group – and the … Read more

SEC Chair Speaks on Resource Extraction Disclosure Rules

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Today [December 16], we take another step in a winding, resource-consuming, decade-long journey to implement Section 1504 of the Dodd-Frank Act.  In 2010, Section 1504 added Section 13(q) to the Securities Exchange Act of 1934, which directed the Commission to issue rules, commonly known as the “resource extraction rules,” requiring resource extraction issuers – in essence, certain companies publicly traded on U.S. exchanges – to disclose information about payments made to a foreign government or the Federal government for the purpose of the commercial development of oil, natural gas, or minerals.

The Commission has finalized these rules twice already.  Yes,

… Read more

A Tale of Two Enforcement Venues: Why the SEC’s Choice of Where to File Cases Matters

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The Dodd-Frank Act of 2010 allows the Securities and Exchange Commission (SEC) to bring enforcement actions and impose civil penalties in administrative proceedings as alternatives to federal district courts. Some argue that this gives the SEC a “home-court” advantage. For example, the SEC serves as both prosecutor and, through the administrative judges it appoints, adjudicator in an administrative proceeding, and no jury trials are allowed.[1] The SEC argues, though, that administrative proceedings can process cases more efficiently than federal courts.[2] Yet the opacity of administrative proceedings and the SEC’s discretion over the choice of venue have prompted criticism and challenges … Read more

Resurrecting the Office of Financial Research

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The Office of Financial Research (“OFR”) was created by the Dodd-Frank Act to help address the gaps in data availability and analysis that had hampered governmental authorities in their response to the financial crisis of 2008.  It was hoped that the OFR would serve as an “early warning system” that would detect emerging systemic risks through data collection and analysis, but the OFR never really had the opportunity to live up to its promise.  During the Obama administration, it suffered from an unsupportive Treasury Department and pushback from other federal financial regulatory agencies; under the Trump administration, the staff and … Read more

Enforcement Against the Biggest Banks

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My article, Enforcement Against the Biggest Banks, takes a census of the hundreds of enforcement actions by American regulators against the world’s largest banks between the passage of Dodd-Frank in July 2010 and December 31, 2016, near the end of the Obama administration.  The effort allows us to characterize the nature of contemporary American bank enforcement.

Enforcement against big banks can be “cumulative” – increasingly, multiple agencies penalize banks for the same misconduct. One regulator might view the misconduct as, say, a violation of public disclosure duties, but another regulator might see it as a problem with the safety … Read more

Presidential Pendulums in Finance

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While much attention has been paid to President Trump’s deregulatory efforts and intentions, presidential involvement in the work of the administrative agencies is not new.  Past presidents including Ronald Reagan, Bill Clinton, and Barack Obama have acted up to – and at – the limits of presidential power in efforts to ratchet-up, or ratchet-down, regulation.[1]

My recently published article, Presidential Pendulums in Finance, examines the past decade of presidential involvement in financial regulation in particular.  As the paper explains, presidential involvement in financial regulation over the past 10 years stands to quicken the rate at which regulatory cycles … Read more

The Deterrent Effect of Whistleblowing on Insider Trading

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One of the many significant reforms enacted in The Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 was the creation of a whistleblower bounty program within the SEC. The program increased monetary rewards for whistleblowing and provided protections from retaliation with the goal of encouraging more whistleblowers to report their information to the SEC. While there is a growing literature investigating the effects of many facets of Dodd-Frank, an unanswered question is whether the whistleblower program affected illegal insider trading – an activity that is traditionally hard for the SEC to detect and prosecute. In my recent paper, … Read more

Banking Bailout Law

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Bank bailouts during periodic financial crises aim to stop financial panic and restore the stability of the financial system. Even if they are undesirable, future bank bailouts are unavoidable due to political and political economy reasons, whether or not they are regulated or economically efficient. In a new book, I build on existing literature to examine the different bank bailout and resolution techniques and tools through carefully selected case studies from the U.S., the E.U., the U.K., Spain, and Hungary. The pros and cons of the different legal and regulatory options are identified in order to reconstruct a regulatory framework … Read more

Kohn, Kohn & Colapinto Discusses Changes to SEC Whistleblower Rules

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On September 23, 2020, the U.S. Securities and Exchange Commission approved changes to its highly successful Dodd-Frank Act whistleblower program in a 3-2 vote [1]. The program has resulted in over $2.5 billion in penalties against public companies, $750 million returned to investors, and $500 million paid in rewards.  Paying corporate whistleblowers mandatory monetary rewards of between 10-30 percent of all penalties obtained from commission enforcement proceedings triggered by their allegations has been a highly controversial law from the start.  These controversies all played out during the commission’s prolonged whistleblower rulemaking proceeding.

The whistleblower advocacy community strongly opposed the major … Read more

Public Disclosure and Consumer Financial Protection

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The 2008 financial crisis triggered a surge of interest in regulating consumer financial markets. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 created the Consumer Financial Protection Bureau (CFPB) to safeguard consumer interests. Since 2011, the CFPB has accepted complaints about the financial products and services provided by the depository institutions under its jurisdiction. Since 2013, the CFPB has released a complaint database to the public. The data include individual complaints, their submission dates, complainants’ 5-digit ZIP Codes, types of products and issues (without narratives), and the names and responses of the banks involved.

The purpose of … Read more

Why Financial Regulation Keeps Falling Short

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Modern finance is fast moving, extremely complex, and contributes to pervasive unknowns. Yet the processes governing how finance is regulated are typically slow, highly deliberative, and often reflect deeply ingrained and incredibly optimistic assumptions about our ability to understand the financial system and the potential impact of regulatory intervention. In our new paper, “Why Financial Regulation Keeps Falling Short,” we identify the key drivers of this fundamental mismatch between finance and financial regulation, demonstrate how this mismatch contributes to undesirable policy outcomes, and lay the conceptual foundations for understanding how the processes governing the creation of financial regulations … Read more

SEC Chair Clayton on Proposed Amendments to Volcker Rule and Disclosure Items

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Volcker Rule

Today, the Commission joined the Federal Reserve, OCC, FDIC and CFTC in proposing additional amendments to the implementing regulations under section 13 of the Bank Holding Company Act, commonly known as the “Volcker Rule.”[1]  The proposed amendments, which principally relate to the “covered funds” provisions of the Volcker Rule, represent the next step in the Agencies’ efforts to better tailor and clarify the implementing regulations while furthering the Volcker Rule’s important statutory objectives.[2]

Joint Agency Rulemaking and the Commission’s Three Part Mission

The Commission’s three part mission is to protect investors, maintain fair, orderly, and efficient

… Read more

Davis Polk Discusses FSOC’s Shift to an Activities-Based Approach

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The Financial Stability Oversight Council’s (FSOC) recently revised guidelines (the 2019 Guidelines)[1] on how it will identify and address financial stability risks are a major shift from the guidelines it issued in the immediate aftermath of the Financial Crisis (the 2012 Guidelines).  The 2019 Guidelines draw upon lessons learned from FSOC’s ultimately fruitless attempts to designate nonbank financial companies as systematically important.  Instead, building on one of the original purposes of the Dodd-Frank Act,[2] which was then emphasized in one of the Treasury Reports, the 2019 Guidelines focus on identifying and regulating systemically important … Read more

Sullivan & Cromwell Discusses FSOC Changes to Nonbank SIFI-Designation Guidance

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On December 4, 2019, the Financial Stability Oversight Council (the “Council”) voted unanimously to finalize amendments to its interpretive guidance (the “Final Guidance”) on designating nonbank financial companies as “systemically important financial institutions” (“SIFIs”).[1] The Final Guidance, which will replace the Council’s interpretive guidance on SIFI designations issued in April 2012 (the “Prior Guidance”),[2] implements an “activities-based” approach to identifying and addressing potential risks to financial stability, and is intended to enhance the “analytical rigor and transparency” of the Council’s process for designating SIFIs.

The Final Guidance, which adopts the … Read more

Too Many to Fail: Against Community Bank Deregulation

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If there was one thing most people could agree on after the 2008 financial crisis, it was that “too-big-to-fail” banks were to blame for the market crash. This shared understanding was accompanied by a corollary: Small banks were not the problem. These so-called community banks were perceived to be innocent bystanders, overrun by market turmoil caused by much larger financial institutions.

Community banks have long been sympathetic figures in financial regulatory circles. Generally speaking, the term refers to banks with less than $10 billion in assets that focus on traditional financial products. Reasoning that such firms pose little risk, policymakers … Read more

The Effects of Mandatory Disclosure Rules on Hedge Fund Governance

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In a new paper, I add to the debate over hedge fund regulation by introducing empirical evidence that hedge fund registration requirements reduce misreporting. Using three alternating changes in hedge fund regulation, my study finds consistent evidence that registration reduces hedge funds’ misreporting — and provides evidence on why this regulatory regime is effective. In particular, my analysis suggests that the disclosure requirements led funds to make changes in their internal governance, such as hiring or switching the fund’s auditor, and that these changes induced funds to report their financial performance more accurately.

It was initially unclear whether regulation would … Read more

Spinning the CEO Pay Ratio Disclosure

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The growing compensation gap between CEOs and rank-and-file employees has generated considerable debate about potential adverse consequences at both the firm and societal levels. Despite interest in the topic, assessing vertical pay disparity has been difficult due to the lack of public disclosure about employee compensation.

While companies have long reported top-executive pay, transparency on employee compensation was recently enhanced when the SEC adopted the CEO Pay Ratio Rule requiring most reporting companies to provide new disclosures of the median employee’s pay and a ratio comparing the CEO’s compensation with this value.[1] For example, if the CEO and median … Read more

Calculating SEC Whistleblower Awards: A Theoretical Approach

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On October 23, the Securities and Exchange Commission is scheduled to vote on whether to adopt proposed amendments to the rules governing its whistleblower bounty program.  The most controversial proposed amendments are to Rule 21F-6, which governs the way the SEC calculates the amount of an award. In a recent paper, available here, I analyze the wisdom of the proposed amendments to Rule 21F-6.  My take: They are wise, but incomplete.

Under the Dodd-Frank Act, SEC whistleblowers are entitled to between 10 and 30 percent of the money collected by the SEC in an enforcement action that the whistleblower’s … Read more

Gibson Dunn Discusses Volcker Rule Revisions

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Since it was enacted in July 2010, the Dodd-Frank Act’s Volcker Rule has challenged banks and their regulators alike.  This is particularly the case with respect to its restrictions on proprietary trading.  It has been one thing for former Federal Reserve Chairman Volcker to state that “you know it when you see it,” quite another to formulate a regulation that accurately defines proprietary trading and implements a broad statutory directive across complex business operations.

On August 20, 2019, the Office of the Comptroller of the Currency and the Board of Directors of the Federal Deposit Insurance Corporation, Director Gruenberg dissenting, … Read more

Sullivan & Cromwell Discusses Amendments to Volcker Rule Regulations

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On July 9, 2019, the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Office of the Comptroller of the Currency (the “OCC”), the Federal Deposit Insurance Corporation (the “FDIC”), the Securities and Exchange Commission (the “SEC”) and the Commodity Futures Trading Commission (the “CFTC” and collectively, the “Agencies”) released final rules adopting their previously proposed amendments to the regulations implementing Section 13 of the Bank Holding Company Act of 1956 (the “BHC Act”),[1] known as the “Volcker Rule.”

The amendments modify the implementing regulations in a manner consistent with Sections 203 and 204 of the … Read more