Now that the Restoring American Financial Stability Act of 2010 (the Dodd-Frank legislation or “the Act”) is about to be enacted into law, the question is: what happens next? At a length of approximately 2,300 pages, one might assume the Act contains detailed rules on the reforms the U.S. Congress believes must be imposed on the financial services industry. That assumption is wrong. According to the law firm of Davis Polk & Wardwell LLP, a critical regulatory phase is about to commence[i]. In this phase, over the next six to eighteen months, at least ten regulatory agencies will undertake a minimum of 243 rule-makings and 67 studies[ii]. For example, Davis Polk estimates that the U.S. Securities and Exchange Commission will undertake 95 rule-makings and the U.S. Commodity Futures Trading Commission will undertake 61 rule-makings.  Over one-half of the anticipated rule-making therefore appears to hit the capital markets industry. Each new regulation likely will run into the hundreds of pages when reported in the Federal Register. Davis Polk’s flow chart outlining the timelines for agency rule-making and studies shows the regulatory phase continuing for the next 12 years.  To put all of this into perspective and reveal the immensity of the new reforms, the Sarbanes-Oxley Act required only 16 new regulations and 6 studies[iii].

 Certainly, the financial reform legislation may result in immediate business decisions being made by financial services firms. Thus, it has been reported that Goldman Sachs may divest itself of its bank holding company charter in order to avoid the impact of the provision in the act that prohibits a bank from owning more than a three percent (3%) stake in any private equity group or hedge fund[iv]. However, for most financial services firms, the next few years will be devoted to constantly monitoring the proposed rules that will issue from the various regulatory agencies.  Thus, it has been reported that J.P. Morgan Chase has over 100 teams already assigned to reviewing the legislation and future regulations in order to assess their impact on JPMC[v].  For example, under the “Swaps Pushout Rule” of the Act, a “major swap participant” will be denied certain types of “Federal assistance”[vi].  However, securities lawyers already have differing opinions as to how the SEC and CFTC will define who is a “major swap participant”[vii]. 

In addition, the Act and subsequent regulations may serve as a launching pad for future expansion of federal regulation into the financial services industry.  It has been conjectured, for example, that the creation by the Act of the Federal Insurance Office within the U. S. Department of the Treasury is just the first step towards the creation of an optional federal charter for insurance companies[viii].  The House Committee on Financial Services reportedly will debate the creation of an optional federal charter for insurance companies in 2011[ix]. 

Senator Dodd has frankly admitted, “No one will know until this is actually in place how it works.”[x] It could be added that the expansion of federal regulation into the financial services industry may not be over even with the passage of the Dodd-Frank legislation and the agencies’ issuance of related regulations. As Bette Davis famously said in the classic movie “All About Eve”: “Fasten your seat belts, it’s going to be a bumpy night!” Only, for the financial services industry, this “bumpy night” could last for years.  

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[i] See Davis Polk Summary of the Act at http://www.davispolk.com/files/Publication/7084f9fe-6580-413b-b870-b7c025ed2ecf/Presentation/PublicationAttachment/1d4495c7-0be0-4e9a-ba77-f786fb90464a/070910_Financial_Reform_Summary.pdf and Implementation Timeline Deck at http://www.davispolk.com/files/Publication/bc70cd4c-c6bd-472d-ad37-0a63481fe36a/Presentation/PublicationAttachment/6a2f81d8-d5c5-4d5d-9b97-fef48b6821e6/070910_Implementation_Slides.pdf.  The Davis Polk summary notes on page 3 (of 130 pages) that the estimated number of regulations is based on explicit references in the Act and is likely to be a “significant underestimate.”

[ii] See http://online.wsj.com/article/SB10001424052748704288204575363162664835780.html.

[iii] See http://www.chamberpost.com/2010/07/financial-regulatory-reform-uncertainty-grows.html.

[iv] See http://www.theatlantic.com/business/archive/2010/06/dodd-frank-bills-volcker-rule-a-win-for-big-banks/58747/.  See also, page 47 of 130 of the Davis Polk Summary of the Act. 

[v] See http://www.fow.com/Article/2632162/Dodd-Frank-is-herecertainty-is-years-away.html.

[vi] See page 51 of 130 of the Davis Polk Summary of the Act.

[vii] See, e.g., http://www.risk.net/risk-magazine/news/1722952/dodd-frank-passes-leaves-questions-unanswered and page 52 of 130 of the Davis Polk Summary of the Act.

[viii] See, e.g., http://www.financetech.com/feed/showArticle.jhtml?articleID=225900059&cid=RSSfeed_FTN_All.

[ix] See http://insurancenewsnet.com/article.aspx?id=205842.

[x] See http://www.washingtonpost.com/wp-dyn/content/article/2010/06/25/AR2010062500675_pf.html.