Skip to Main Content
Project on Government Oversight




Financial Reform, Part Two: Return of the Regulators

July 27, 2010 


President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law last week, bringing an end to months of intense congressional debate over the proper way to reform the regulatory system in the wake of the financial crisis. But the issue of financial reform is far from over.

As the president pointed out in his remarks at the bill’s signing, “for these new rules to be effective, regulators will have to be vigilant.” Shortly after the Dodd-Frank bill was passed, lobbyists and allies of the financial services industry had already started preparing for the next step: implementing the rules at the regulatory level.

Many commentators have written in the past few weeks about the tremendous burden now facing financial regulators. Zach Goldfarb at The Washington Post reported last week that the Securities and Exchange Commission (SEC) alone is now required to write 95 new regulations, 17 one-time studies, and five ongoing reports.

As the financial reform debate shifts to the regulatory arena, POGO wanted to highlight two recent papers that thoroughly illustrate the issues now facing financial regulators: 1) an analysis by Douglas Elliot at the Brookings Institution, and 2) a slide presentation prepared by Davis Polk & Wardwell LLP.

These documents make it clear that financial regulators and government watchdogs will still be conducting studies and rulemaking on some of the most critical issues that were left unresolved in the Dodd Frank bill. For example:

  • The new regulatory bodies that are to be created, such as the Consumer Financial Protection Bureau (CFPB) and Financial Stability Oversight Council (FSOC), will be established with only some broad guidelines and limitations; it will be up to the regulatory bodies themselves to establish their own rules, determine the way they will operate, and decide how they will exert their influence.


  • While Congress has mandated that standardized derivatives must be traded on exchanges and cleared through central clearing houses, and that over-the-counter (OTC) derivatives must have certain collateral and capital requirements, it has essentially left all the details up to the SEC and the Commodity Futures Trading Commission (CFTC), including determining what is “standard,” what the collateral and capital requirements should be, and how to keep clearinghouses from becoming “too big to fail.” Even a small change in these requirements could significantly undermine Congress’s attempts to make OTC derivatives trading more transparent and better regulated


  • It will be up to regulators to determine what exactly defines a “proprietary” activity in order to enforce the Volcker Rule stating that banks cannot engage in proprietary activities (engaging in trading with their own money). 


  • The regulators will have to determine when a bank has become “too big to fail” and decide what measures they will take to correct the problem.


  • While the original House bill contained a section (7103) that held brokers and dealers to the same standards of conduct as investment advisors, including a requirement that they provide advice that is in the customer’s best interest without regard to their own financial incentive, the final version of the bill dropped that provision in favor of a study (Sec. 913). 


  • The Government Accountability Office (GAO) and SEC will be required to examine whether it would be beneficial to have self-regulatory organizations overseeing private funds (Sec. 416) and investment advisers (Sec. 914).

    (As POGO asserted in a recent letter to Congress, financial self-regulatory bodies such as the Financial Industry Regulatory Authority (FINRA) cannot necessarily be trusted as independent watchdogs because they often have such close ties to the industry they are regulating. The studies required by the bill could result in the SEC delegating even more of its responsibility to these private self-regulators.)


  • In addition, there had been proposals (supported by POGO) requiring the newly created Consumer Financial Protection Bureau to issue regulations prohibiting or imposing conditions on mandatory arbitration agreements for consumer financial products, and requiring the SEC to create a Credit Rating Agency Board that would address the basic conflict of interest caused by “ratings shopping.” But the final bill requires further study of both issues before any new rules are put in place.

However, there are a number of studies in the bill that are likely to provide lawmakers and regulators with some very useful information. For instance, Sec. 964 requires the GAO to report to Congress every three years on the SEC’s oversight of national securities associations such as FINRA. The GAO will specifically be required to report on conflicts of interest, executive compensation, post-employment restrictions, and transparency, all of which POGO thinks are significant problems in the case of FINRA. In addition, provisions introduced by Senator Patrick Leahy (D-VT) will require various inspectors general to conduct much-needed studies of financial agency whistleblower programs, and of the potential impact that FOIA exemptions will have on incentivizing disclosures by whistleblowers and on public access to information.

But on many other issues, POGO is primarily concerned that Congress may be burdening regulators and watchdogs with unnecessary studies, rather than putting hard-and-fast rules in place. Many of these studies will provide another avenue for the financial services industry to exert its influence on the process, and in the meantime, the studies could impose a significant burden on regulators and watchdogs that are already short on funding, staff, and resources.

Finally, as the action moves to the regulatory arena, it’s imperative that regulators provide as much transparency as possible. Reports indicate that industry representatives have been gearing up to influence the rulemaking process through public comments, lobbying, and by offering lucrative jobs to regulatory employees who go through the revolving door. In addition, industry lobbyists are already holding private meetings with SEC officials, with many of the details left unknown to the public.

SEC Chair Mary Schapiro took an important step in the right direction today by announcing that the agency is seeking to “offer maximum opportunity for public comment” even before the official comment periods have begun. The agency is already accepting public comments on many of the issues that will soon be addressed in studies and rulemaking, and it will be posting these comments online. Schapiro also announced that her staff would try to meet with any interested party on the new regulations, and that the agency would put any private meeting agendas and written comments in the public record.

POGO would also encourage the SEC to publish its comment requests in the Federal Register, as it is planning to do for its study on establishing a fiduciary duty for investment advisers. It also urges the other financial regulatory agencies to follow the SEC’s lead in providing for greater transparency and public participation in their studies and rulemaking.

Stay tuned, as POGO will be submitting many of its own comments on the financial reform rules, and will be highlighting opportunities for members of the public to make their voices heard on these critical issues.

For further information, click here to read about some of the POGO's recommendations on transparency and accountability measures included in the Dodd Frank bill.

Founded in 1981, the Project On Government Oversight (POGO) is a nonpartisan independent watchdog that champions good government reforms. POGO's investigations into corruption, misconduct, and conflicts of interest achieve a more effective, accountable, open, and ethical federal government.

# # #