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ESSENTIALSof the Dodd-Frank Act

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ESSENTIALS SERIESThe Essentials Series was created for busy business advisory and corporate professionals.

The books in this series were designed so that these busy professionals can quickly

acquire knowledge and skills in core business areas.

Each book provides need-to-have fundamentals for those professionals who

must:

� Get up to speed quickly, because they have been promoted to a new position or

have broadened their responsibility scope

� Manage a new functional area

� Brush up on new developments in their area of responsibility

� Add more value to their company or clients

Other books in this series include:

Essentials of Accounts Payable, Mary S. Schaeffer

Essentials of Balanced Scorecard, Mohan Nair

Essentials of Business Ethics, Denis Collins

Essentials of Business Process Outsourcing, Thomas N. Duening and Rick L. Click

Essentials of Capacity Management, Reginald Tomas Yu-Lee

Essentials of Cash Flow, H.A. Schaeffer, Jr.

Essentials of Corporate Fraud, Tracy L. Coenen

Essentials of Corporate Governance, Sanjay Anand

Essentials of Corporate Performance Measurement, George T. Friedlob, Lydia L.F.

Schleifer, and Franklin J. Plewa, Jr.

Essentials of Cost Management, Joe and Catherine Stenzel

Essentials of Credit, Collections, and Accounts Receivable, Mary S. Schaeffer

Essentials of CRM: A Guide to Customer Relationship Management, Bryan Bergeron

Essentials of Enterprise Compliance, Susan D. Conway and Mara E. Conway

Essentials of Financial Analysis, George T. Friedlob and Lydia L. F. Schleifer

Essentials of Financial Risk Management, Karen A. Horcher

Essentials of Foreign Exchange Trading, James Chen

Essentials of Licensing Intellectual Property, Paul J. Lerner and Alexander I. Poltorak

Essentials of Knowledge Management, Bryan Bergeron

Essentials of Managing Corporate Cash, Michele Allman-Ward and James Sagner

Essentials of Managing Treasury, Karen A. Horcher

Essentials of Patents, Andy Gibbs and Bob DeMatteis

Essentials of Payroll Management and Accounting, Steven M. Bragg

Essentials of Sarbanes-Oxley, Sanjay Anand

Essentials of Shared Services, Bryan Bergeron

Essentials of Supply Chain Management, Michael Hugos

Essentials of Trademarks and Unfair Competition, Dana Shilling

Essentials of XBRL, Bryan Bergeron

For more information on any of the above titles, please visit www.wiley.com.

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ESSENTIALSof the Dodd-Frank Act

Sanjay Anand

John Wiley & Sons, Inc.

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Copyright# 2011 by Sarbanes-Oxley Group. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted inany form or by any means, electronic, mechanical, photocopying, recording, scanning, orotherwise, except as permitted under Section 107 or 108 of the 1976 United StatesCopyright Act, without either the prior written permission of the Publisher, orauthorization through payment of the appropriate per-copy fee to the Copyright ClearanceCenter, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978)646-8600, or on the web at www.copyright.com. Requests to the Publisher for permissionshould be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 RiverStreet, Hoboken, NJ 07030, (201) 748-6011, f ax (201) 748-6008, or online at http://www.wiley.com/go/per missions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used theirbest efforts in preparing this book, they make no representations or warranties with respectto the accuracy or completeness of the contents of this book and specifically disclaim anyimplied warranties of merchantability or fitness for a particular purpose. No warranty maybe created or extended by sales representatives or written sales materials. The advice andstrategies contained herein may not be suitable for your situation. You should consult with aprofessional where appropriate. Neither the publisher nor author shall be liable for any lossof profit or any other commercial damages, including but not limited to special, incidental,consequential, or other damages.

For general information on our other products and services or for technical support, pleasecontact our Customer Care Department within the United States at (800) 762-2974,outside the United States at (317) 572-3993 or fax (317) 572-4002.

Wiley also publishes its books in a variety of electronic formats. Some content that appearsin print may not be available in electronic books. For more information about Wileyproducts, visit our web site at www.wiley.com.

Library of Congress Cataloging-in-Publication Data:

Anand, Sanjay, 1969- author.Essentials of the Dodd-Frank Act/Sanjay Anand.p. cm. — (Essentials Series)

Includes index.ISBN 978-0-470-95233-7 (pbk.): ISBN 978-1-118-02831-5 (ebk);ISBN 978-1-118-02832-2 (ebk); ISBN 978-1-118-02833-9 (ebk)1. United States. Dodd-Frank Wall Street Reform and Consumer Protection

Act. 2. Financial services industry—Law and legislation—United States. 3. Financialinstitutions—Law and legislation—United States. I. Title.KF969.58201A2 2011346.73 0082—dc22

2010047242

Printed in the United States of America.

10 9 8 7 6 5 4 3 2 1

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To my son

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Contents

Foreword xi

Preface xv

Acknowledgments xvii

1 Introduction to the Dodd-Frank Act 1

2 History and Background 6

Financial Instability 7

Scope 8

Architects of the Dodd-Frank Act 9

The Plan and Proposal 10

Timeline 11

Key Goals of the Act 12

Summary 13

Notes 14

3 Key Titles and Sections 15

Title I: Financial Stability 16

Title II: Orderly Liquidation Authority 26

Title III: Transfer of Powers to the Office of

Comptroller of the Currency, Corporation,

and Board of Governors 39

vii

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Title IV: Regulation of Advisers to

Hedge Fund and Others 45

Title V: Insurance 51

Title VI: Improvements to the Regulation of

Bank and Savings Association Holding

Companies and Depository Institutions 59

Title VII: Wall Street Transparency and

Accountability 63

Title VIII: Payment, Clearing, and Settlement

Supervision 67

Title IX: Investor Protections and Improvements

to the Regulation of Securities 68

Title X: Bureau of Consumer Financial Protection 71

Title XI: Federal Reserve System Provisions 74

Title XII: Improving Access to Mainstream

Financial Institutions 76

Title XIII: Pay It Back Act 77

Title XIV: Mortgage Reform and Anti-Predatory

Lending Act 78

Title XV: Miscellaneous Provisions 80

Title XVI: Section 1256 Contracts 81

Summary 81

4 Institutions Impacted 84

Foreign Banking Organizations 85

Derivatives 86

Insurance Companies 88

Consumers and Mortgage Banking 88

Broker-Dealers 89

Banks, Thrifts, and Bank Holding Companies 89

viii C o n t e n t s

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Summary 91

Notes 92

5 Dodd-Frank Act Rulemaking 93

SEC and Rulemaking 94

Corporate Governance 96

Investment Advisers 96

Securities Lending 97

Arbitration 97

Swaps 97

Credit Rating Agencies 97

Securitization 98

Other Legislation 98

Summary 103

6 Role of New and Existing Agencies 104

Financial Stability Oversight Council 106

Office of Financial Research 106

Bureau of Consumer Financial Protection 107

Bank Holding Companies 107

Nonbank Financial Companies 108

Depository Institutions 108

Office of Thrift Supervision 109

Federal Deposit Insurance Corporation 109

Office of Comptroller of the Currency 110

Orderly Liquidation Authority 110

Securities Investor Protection Corporation 111

Securities and Exchange Commission 111

Federal Reserve Board 112

Commodity Futures Trading Commission 112

Government Accountability Office 114

C o n t e n t s ix

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Summary 115

Notes 116

7 Global Impact and Implications 117

Banking Industry 118

Investment Industry 124

Summary 127

Note 127

8 Advice for Specific Professions 128

Executive Management 128

Municipal Securities Markets 132

Broker-Dealers 133

Investment Advisers 134

Insurers 136

Summary 137

Note 138

9 Relationship with SOX and the Basel Accords 139

The Dodd-Frank Act and SOX 139

The Dodd-Frank Act and the Basel Accords 142

Summary 143

Appendix A: Contents of the Dodd-Frank Act 145

Appendix B: Effective Dates and Deadlines 172

Glossary of Key Acronyms 175

About SOX Institute and the GRC Group 181

Index 183

x C o n t e n t s

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Foreword

Great business leaders share many common positive attributes, such

as intellectual curiosity and a propensity to act. In periods of

significant business transformation, consummate business leaders

step out even further to train and explain new business and regulatory

developments to the masses.

I met Sanjay Anand at the beginning of last decade’s massive regula-

tory overhaul, triggered by the passage of the Sarbanes-Oxley Act of

2002 (SOX). This swift legislative reaction to major corporate and

accounting scandals, at Enron and other companies, caused those at

publicly held companies to scramble in an attempt to grasp the compli-

ance requirements for their organizations. Sanjay stepped up with his

book, Essentials of Sarbanes-Oxley (John Wiley & Sons, 2007), which

provided actionable information for those responsible for implementing

SOX. I reviewed and commented on his book, and witnessed his com-

mitment to professional development with his subsequent books and the

many courses sponsored by his SOX Institute.

In the aftermath of the 2008 credit crisis and related economic

downturn, once again Sanjay Anand has stepped forward to lead and

explain the Dodd-Frank Wall Street Reform and Consumer Protection

Act of 2010 (Dodd-Frank Act) in this book.

It is crucial that everyone in business and proportionally every ‘‘con-

sumer’’ understand this new and far-reaching law of the land. The Act is

extensive, but even more significant are the expected regulations that

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will follow. Unlike earthquakes, where aftershocks diminish as time

passes, the flow of regulations from the Dodd-Frank Act is anticipated

to be considerable and ever expanding.

Dodd-Frank addresses too-big-to-fail bailouts and includes recom-

mendations for risk committees at certain financial institutions. It gives

the Federal Deposit Insurance Corporation (FDIC) powers to ‘‘disaffirm

or repudiate any contract or lease to which the covered financial institu-

tion is a party’’ and recover or clawback compensation in certain

circumstances. The Act expands bounties for whistleblowers and gives

shareholders some ‘‘say on pay.’’ These are revolutionary changes of epic

proportions!

For the consumer, the Dodd-Frank Act establishes a new indepen-

dent watchdog agency within the Federal Reserve to make sure con-

sumers receive clear and accurate information regarding financial

products’ terms and costs. It creates a consumer hotline, a new office of

financial literacy, and generally expands accountability for consumer

protection.

As a business executive and board member whose business founda-

tion is as a CPA, I clearly see how important it is to update laws in order

to meet modern-day business conditions and velocities. It is incumbent

on all business owners and managers, and indeed all consumers, to

understand the Dodd-Frank Act. More important, as a business manager

and director, I call on readers to get involved in helping to shape the

regulations that are certain to follow from this new law. Too much

regulation—or the wrong kind of regulation—can be a drag on

businesses and the economy.

Dodd-Frank is also significant in that it implements the first amend-

ments to SOX. Who better to provide insights on Dodd-Frank than

Sanjay Anand, who was among the first responders of consummate busi-

ness leaders to explain SOX? You have chosen wisely, and I know you

will greatly benefit from reading this book.

Michael P. Cangemi, CPA

xii F o r e w o r d

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Michael P. Cangemi, CPA, an author and business advisor, is the former

president, chief executive officer, and director of Etienne Aigner Group, Inc.,

a leading designer of women’s accessories (1991–2004), and president, chief

executive officer, and director of Financial Executives International, the profes-

sional association for senior-level corporate financial executives (2007–8). He

currently serves as president of Cangemi Company LLC. Mr. Cangemi recently

completed a two-year term on the International Accounting Standards Board

Standards Advisory Council and a year as the FEI representative on the board of

COSO. For more information see www.canco.us.

F o r e w o r d xiii