In Part One of this series we took an overview of the regulatory policy objectives of the G20 group of Finance Ministers and their aim to restore global growth, strengthen the international financial system and reform international financial institutions following the 2007/2009 banking crisis and subsequent recession.
The two largest international financial centres, the USA and Europe, have been at the forefront of compliance with the G20. This article considers the USA response to the G20 call to arms in regulating the financial markets.
The Dodd-Frank Act
The 2010 Dodd Frank Wall Street Reform and Consumer Protection Act (‘Dodd-Frank’) is a work in progress, coming into effect in stages that started with the Commodity Futures Trading Commission (‘CFTC’) rules in November 2012. Dodd Frank set up the Financial Stability Oversight Council (‘FSOC’) chaired by the Treasury and made up of members from the main regulatory authorities, including the Securities and Exchange Commission (‘SEC’) and the CFTC, and the insurance industry.
FSOC’s purpose is to identify future risks to the financial system by information sharing and coordination, commissioning reports from a new Office of Financial Research (‘OFR’), responding to future emergencies and promoting discipline by disseminating the message that there will be no future bail-outs.
In addition Dodd Frank created the Office of Credit Rating Agencies within the SEC. This addresses the failure of the rating agencies to evaluate accurately the structured finance instruments and securities that led to the financial collapse. Consequently conservative funds, such as pension funds, continued to invest in supposedly Triple A securities that were later revealed to be junk.