Next Tuesday will mark the 5-year anniversary of the Dodd-Frank Act. Whether Dodd-Frank has done its job to prevent a recurrence of events that led to the last financial crisis depends on who you ask, and responses are as much divided along political lines as they are among capital market participants.
Dodd-Frank created a number of new oversight agencies to monitor the performance of financial institutions that are considered systemically important to our financial system (the so-called “SIFIs”), and no one can dispute that the financial crisis warranted some response—to reassure investors, if nothing else. Where advocates and critics disagree is on the type of reform and oversight ultimately proposed, even though Dodd-Frank’s complicated landscape of rules and exemptions have still not been fully implemented. (Just 60% of law’s mandated provisions have been finalized.)
One of those provisions—the much-discussed Volcker Rule—was intended to limit risk to federally-insured banking institutions by prohibiting them from engaging in proprietary trading and limiting ownership in certain types of covered funds (i.e., hedge funds, private equity funds, and venture capital investments). Yet critics argue that the “too big to fail” institutions have actually become larger.
Moreover, it would be difficult to argue that regulatory oversight is the panacea for all financial system risks. Two of the largest market manipulation headlines in the years following Dodd-Frank’s enactment – LIBOR and Foreign Exchange—occurred within regulated banks (including some based in the U.S.).
Even if the Act isn’t perfect, however, institutional investors have generally praised Dodd-Frank provisions that offer the promise of better corporate governance and best practices. In their view, the pay-for-performance provision, which would align executive pay with company performance, along with compensation claw backs from executives in situations involving a company’s material financial restatement, are at least steps in the right direction.
S.P. Slaughter
Folow me on Twitter: @SP_Slaughter
Dodd-Frank created a number of new oversight agencies to monitor the performance of financial institutions that are considered systemically important to our financial system (the so-called “SIFIs”), and no one can dispute that the financial crisis warranted some response—to reassure investors, if nothing else. Where advocates and critics disagree is on the type of reform and oversight ultimately proposed, even though Dodd-Frank’s complicated landscape of rules and exemptions have still not been fully implemented. (Just 60% of law’s mandated provisions have been finalized.)
One of those provisions—the much-discussed Volcker Rule—was intended to limit risk to federally-insured banking institutions by prohibiting them from engaging in proprietary trading and limiting ownership in certain types of covered funds (i.e., hedge funds, private equity funds, and venture capital investments). Yet critics argue that the “too big to fail” institutions have actually become larger.
Moreover, it would be difficult to argue that regulatory oversight is the panacea for all financial system risks. Two of the largest market manipulation headlines in the years following Dodd-Frank’s enactment – LIBOR and Foreign Exchange—occurred within regulated banks (including some based in the U.S.).
Even if the Act isn’t perfect, however, institutional investors have generally praised Dodd-Frank provisions that offer the promise of better corporate governance and best practices. In their view, the pay-for-performance provision, which would align executive pay with company performance, along with compensation claw backs from executives in situations involving a company’s material financial restatement, are at least steps in the right direction.
S.P. Slaughter
Folow me on Twitter: @SP_Slaughter
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