Frank Dodd Act Op & Tech Implications Tracker

The regulations, the regulators and the regulated

The US financial services sector regulatory scene has been very confusing, to say the least, for the past two decades. On one hand, there was over-regulation with too many regulators and big gaps in regulation on the other. On top of all that already exists, we have the Frank-Dodd Act taking shape and it is reasonable to say that both the regulators and the regulated are struggling to deal with it.

Fundamentally, any compliance effort has two elements:

1.       “In-principle” compliance strategies & decisions – an organization may decide to become a holding company or get out of credit card business or terminate or initiate new associations and partnerships to position themselves in a certain manner vis-à-vis the regulation(s). These are highly organization-specific decisions and are not the focus on this blog series.

2.       “In-practice” compliance strategies, decisions and implementation – once you decide you have to comply with a regulation, you have to start taking steps that will enable you to comply. This includes understanding the Act, individual rules, their applicability to your circumstance, your current situation and the compliance gaps, remediation steps needed, prioritization of remediation actions, desired state & roadmap of compliance and having achieved compliance, how do you stay there? I call this “GET COMPLIANT, STAY COMPLIANT” process that has a definite beginning and a definite non-end but if done properly, can save you a lot of heartburn, effort, reputational and business risks and of course, a ton of money. People call me naïve (among other things) but at the time of this writing, I still believe good regulatory compliance can be a very significant competitive advantage.

The US financial services industry has had the SEC, the OCC, the FDIC, the OTS, the NCUA and the Fed as the major regulators. Creation of FFIEC as the central examination standards setter has served both the regulators and the regulated well. It is somewhat fashionable to talk of the FFIEC and the NIST as ‘behind-the-curve’ that is, in my opinion, unfair and more importantly, rather immature. Just because FFIEC does not have an examination for Cloud Computing does not mean it is behind the curve. Experienced auditors and examiners know the principles and can easily apply them to emerging technologies. This is not to say FFIEC or NIST should not accelerate but it does not make them any less useful or relevant. No regulatory or standards-setting body can keep up with thousands of innovators and entrepreneurs pushing the boundaries of technology every day that any RE is free to implement. Leave aside the bureaucracy and so forth, these bodies have done tremendous work to create a common intellectual property and as Frank-Dodd and other regulations mature, I hope they leverage these two assets intelligently. While NIST is charged with laying down the information security standards for the federal government, are information security requirements for a bank or a private sector organization any different? I will come back to these themes later. 

Today we start with a primer on the Frank-Dodd Act or the Wall Street Reform and Consumer Protection Act (P.L. 111-203). Clearly the most ambitious piece of legislation in recent memory, it aims to regulate a very wide (if not the whole of it) swath of US financial markets. This legislation, named after the two senators who drove it with a strong zeal, was signed into a law in June, 2010.

Some data points to gauge the size and the scope of the law:

1.       16 Titles with each title to evolve into a major, complex law to cover different aspects of banking, financial services and insurance industry in the United States

2.       Creates three new entities – the Financial Stability Oversight Council, Bureau of Consumer Financial Protection and the Federal Insurance Office

3.       More than 25 major studies (I mean major) will need to be conducted to scope, understand, define and get the government’s arms around the foundational issues

4.       More than 250 rules will need to be drafted over next 18 months with permissible time extensions where needed

5.       Will try to streamline the federal and state regulatory infrastructure  onto a more cohesive and unified platform to ensure full coverage while avoiding duplication, dilution and regulatory arbitrage enjoyed by some REs presently

6.       Thousands of market terms will now need a precise definition if they are used in a law. E.g. what is a ‘family office’ or ‘accredited investor’ or ‘off-balance-sheet-item’. This work is crucial as any open items here will simply open up new regulatory arbitrage (regarb) opportunities.

Enough for now and we will keep coming back to it. As rules are formulated and issued (by different agencies), it can significantly impact how American financial services industry works, complies, competes and succeeds in the highly integrated global marketplace of the future. Equally important, if not more, is how the regulators maintain their perspective, write the rules, create enforcement capabilities and do not end up stifling the industry’s ability to innovate and compete in the integrated global markets of tomorrow, especially as rival markets and currencies emerge in different parts of the world.

I intend to write regularly on the operational and technology aspects of compliance from March 1, 2011 to about end of 2012 on the very complex but compelling US Financial Services Regulation scene as some old dominos fall, some new ones enter our lexicons with the potential to change the US financial services industry in ways unimaginable at present. Despite all the politics, posturing, rhetoric and ‘while-we-are-at-it, let-us-fix-that-too’ approach and of course the possibility that it may be repealed, I feel Frank-Dodd Act has the potential to do more good than harm and possibly make American financial services industry more competitive in the years to come. I look forward to your comments and experiences as all of us work our way through this challenging