This week marks the five-year anniversary of the Dodd-Frank Act, a sweeping attempt to rewrite the rules on Wall Street in the wake of the worst financial crisis since the Great Depression.
Nobody wants a repeat of the 2008 crisis, which cost Americans as much as $20 trillion in lost economic output. But there is still widespread disagreement about what caused the last crisis, and what the government can do to avert the next one.
For critics on both sides of the aisle, Dodd-Frank’s five-year birthday was hardly a cause for celebration. Public Citizen highlighted the law’s “unfulfilled promises,” stating in a report that “Dodd-Frank is 5 years old and still not allowed outside the house.” Meanwhile, the American Enterprise Institute heralded Dodd-Frank’s “unhappy fifth birthday” with remarks by Representative Jeb Hensarling (R-TX), Chairman of the House Financial Services Committee, who said the law has left America “less stable, less prosperous, and less free.”
The Project On Government Oversight did not take a position on many of the policies that garnered the most attention in the Dodd-Frank Act, such as the creation of the Financial Stability Oversight Council. But on other issues, such as protecting whistleblowers and slowing the revolving door between Washington and Wall Street, the five-year anniversary is full of both promise and disappointment.
POGO took this opportunity to review the implementation of Dodd-Frank at the Securities and Exchange Commission (SEC), one of the agencies responsible for implementing the policies we supported. The SEC was tasked with writing 94 rules required by the Act. As of this month, it has finalized 60 of those rules (approximately 64 percent), while missing the deadline for 22 (approximately 23 percent), according to a report published by the law firm Davis Polk & Wardwell. (The deadline has not yet passed for the other 12 rules.) In addition, the SEC has received more than 600,000 comment letters on its proposed Dodd-Frank rules, and held nearly 1,500 meetings with outside groups.
The SEC’s policies have yielded mixed results. POGO supported a Dodd-Frank provision that gave the SEC more tools to reward individuals who blow the whistle on corporate and Wall Street fraud, and to protect those whistleblowers from retaliation. Whistleblowers at firms such as Countrywide Financial, Citigroup, and JPMorgan sounded the alarm about the reckless activities that fueled the 2008 financial crisis, and POGO has urged the government to work hand-in-hand with tipsters who can provide an early warning of future crises. In the two decades preceding the enactment of Dodd-Frank, the SEC paid less than $160,000 in whistleblower rewards to only five individuals. With its new Dodd-Frank authority—under which the agency can provide larger tips and whistleblowers can file claims if they experience retaliation—the SEC’s whistleblower office has provided 17 rewards totaling more than $50 million. Earlier this year, the SEC filed a groundbreaking enforcement action against KBR for the company’s use of confidentiality agreements that could stifle whistleblower complaints, and charged Paradigm Capital Management with retaliating against a whistleblower who provided a tip to the agency.
At the same time, some whistleblowers have raised concerns about a lack of transparency in the SEC’s program, and expressed their frustration at how long it can take the SEC to recover funds from fraudsters and process the rewards, according to reports by The Wall Street Journal. In addition, POGO and its allies have urged the SEC to issue additional rules and guidance to ensure that industry employees are fully protected from retaliation, in light of widespread retaliatory tactics and court rulings that have narrowed the scope of the existing anti-retaliation rules.
Another Dodd-Frank provision required the SEC to mandate greater transparency in the oil, gas, and mining industries, an issue that is near and dear to POGO. The SEC adopted a strong measure several years ago, but a district court ordered the agency to rewrite the rule following a challenge by the American Petroleum Institute. POGO and its allies have urged the SEC to finish the job by completing its rulemaking, which has now been delayed for a full five years.
In these and other areas, the SEC’s work is complicated by the revolving door between the agency and the world it regulates. During the Dodd-Frank debate, POGO supported a bipartisan Senate measure that would’ve extended the cooling-off periods for employees who circulate between Washington and Wall Street, and required the SEC and other agencies to post revolving door records online, but the measure was not adopted. Last week, House and Senate Democrats introduced a new bill to slow the revolving door and prohibit companies from giving special rewards to executives who join the government. In the meantime, POGO has called on President Obama to replace SEC Chair Mary Jo White, whose tenure at the agency has been compromised by her past work on behalf of powerhouse Wall Street firms such as JPMorgan and UBS. POGO and others have also raised concerns about a potential SEC commissioner who has represented the American Petroleum Institute in meetings with the agency.
The fate of the Dodd-Frank Act and any future efforts to tighten the rules for Wall Street will ultimately depend on the independence of the regulators who write and enforce the rules. The revolving door threatens the independence of the SEC and agencies throughout the financial regulatory system. As long as the revolving door continues to spin, any celebration of the Dodd-Frank Act may be premature.