Rather than responding appropriately to the crisis, which would include developing a modern regulatory system with the flexibility to adapt to changes in the global financial system, we instead have been saddled with an increasingly prescriptive and inflexible regulatory environment that is characterized far more by more regulation than by smart regulation. --SEC Commissioner Daniel M. Gallagher
While the US economy still remains the most powerful economic engine globally, rather than making US financial markets stronger, could parts of comprehensive financial regulatory reform be making them weaker, or driving economic activity we once took for granted elsewhere? Important voices both in the the public and private sector have been raising the alarm about the potential that aspects of Dodd-Frank may be putting US financial health in peril rather than protecting it. SEC Commissioner Daniel M. Gallagher is one such voice. In a series of speeches before a variety of audiences, Commissioner Gallagher has questioned the effectiveness of Dodd-Frank in protecting us from another financial crisis, criticized the process by which Dodd-Frank was formulated, and worried openly about the quality and quantity of regulation required by the legislation.
In Gallagher's eyes, the Dodd-Frank Act was flawed from inception to implementation. He feels that Congress missed an important opportunity to regulate financial markets more effectively. Rather than waiting for "expert" agencies like the Fed, SEC, FDIC, and CFTC to report on what kinds of reforms would be needed, Congress allowed the urgent need for regulatory reform to be overwhelmed by a grab bag of disparate wish-list items, many of which had nothing to do with the financial crisis but were derived instead from long-held ambitions of policymakers, bureaucrats, and special interest groups. The resulting Dodd-Frank Act, according to Mr. Gallagher, is a ponderous and imprecise piece of legislation mandating vast numbers of burdensome new regulations that merely further the trend of federalizing corporate law.
Rather than responding appropriately to the crisis, which would include developing a modern regulatory system with the flexibility to adapt to changes in the global financial system, we instead have been saddled with an increasingly prescriptive and inflexible regulatory environment that is characterized far more by more regulation than by smart regulation.
Gallager sees the Dodd-Frank Act as an enormous missed opportunity. Rather that focusing on proactive regulatory reform, regulation that would foster - not hinder - competition, and ending too big to fail, the Act focuses on approximately 400 specific mandates to be implemented through agency rulemaking. Many of these Gallagher characterizes as "new, sometimes misplaced and usually onerous, requirements as 'feel good and cure all' responses to perceived problems that one would be hard pressed to disagree with." In Gallager's assessment, the Dodd-Frank mandates are more telling for what areas they missed.
What continues to amaze me about the Act is not only what it covers in its 2319 pages, but also the crucial regulatory issues it does not address. The juxtaposition of the two is jarring. The Act tasks the SEC with a mandate to create unprecedented new disclosure rules relating to conflict minerals from the Congo — but not to reform money market mutual funds, which, we were later told, are ticking time bombs of systemic risk. Dodd-Frank addresses extractive resource payments made by U.S. listed oil, gas and mining companies — but leaves the reform of Freddie Mac and Fannie Mae for another day. The Act fundamentally restructures the nation’s financial regulatory infrastructure by establishing the Financial Stability Oversight Council, not to mention the Consumer Financial Protection Bureau — but failed to eliminate the redundancy of having the SEC and the CFTC share jurisdiction over substantially similar and interrelated markets and products.
Another area of reform that troubles Mr. Gallager is the Volker Rule. In his assessment, the Volker Rule cure is worse than the disease. Rather than ending too big to fail, the Volker Rule actually enshrines the concept in law and regulation by creating a class of systematically important financial institutions that are forever considered "too big to fail."
The Act was intended to end “too big to fail,” but in reality it enshrined that concept by creating an entire system of special regulation for financial institutions that are “systemically important.” This system threatens to aggravate the problem by conferring a competitive advantage on these already “too big to fail” institutions.
Critics like Gallagher of the latest rounds of financial regulatory reform are not saying that reforms were not necessary. They do think, however, that remedies born out of crisis, though always well intentioned, are often rife with unintended consequences. Dodd-Frank is just such an instance in which zeal to act quickly has overridden prudence, and could do real damage to the nation's competitiveness and economic health in the long run.
The progeny of the most recent financial crisis is titled, in full, the “Dodd–Frank Wall Street Reform and Consumer Protection Act.” Reforming “Wall Street” and protecting investors and consumers is like standing up for baseball, mom, and apple pie – who can argue with those goals? Yet, if you objectively look at the impact of Dodd Frank and Sarbanes-Oxley, you may wonder whether the unintended consequences of the requirements they impose on market participants, including with respect to corporate governance, will outweigh the lasting benefits to investors and Main Street.