Strategic Shortcomings of the Dodd-Frank Act

• Date: 01 December 2013
• Published date: 01 December 2013
• DOI: 10.1177/0003603X1305800405
• Author: Larissa Roxanna Smith,Víctor M. Muñiz-Fraticelli
• Subject Matter: Article

Strategic shortcomings

of the Dodd-Frank Act

BY LARISS A ROXANNA SM ITH*AND

VÍCTOR M. MUÑIZ-FRATICELLI**

Despite its broad ambitions, the Dodd-Frank Wall Street Reform and

Consumer Protection Act is a piecemeal attempt to realign conflicting

interests, rather than an effort to fundamentally address the systemic

design questions in the current financial system. Some of the central

difficulties involved in the legislation are the group-targeting method

of bringing only some business entities under federal regulation, the

inability of backward-looking legislation to respond to future market

innovations, and the weakness of fines as a deterrent mechanism for

actions that lead to future instability. A preferred alternative would

be a functional approach to financial regulation, which acknowledges

the role and limits of legislation and leaves discretion to both the

administrative bodies and the courts to identify specific abusive acts.

KEY WORDS:Dodd-Frank, financial, corporate, market, penalties, functional

I. INTRODUCTION

In the wake of the global financial crisis of 2008, the U.S. government

resolved to enact serious reforms so that the American people would

never again be subject to such financial vulnerability. The govern-

THE ANTITRUST BU L LE TI N :Vol. 58, No. 4/Win ter 2013 :617

* B.C.L./LL.B 2011, McGill University Faculty of Law.

** As sista nt P ro fe ss or, McGi ll U ni ve rs it y Facul ty o f La w an d

Department of Political Science.

AUTHORS’ NOTE:This article was written in August 2011.

© 2013by Federal Legal Publications, Inc.

ment’s broad bipartisan response is the Dodd-Frank Wall Street

Reform and Consumer Protection Act1(the Act). The legislation began

with proposals from the Obama administration for a “sweeping over-

haul of the financial regulatory system, a transformation on a scale

not seen since the reforms that followed the Great Depression.”2The

111th Congress passed the Act and President Obama signed it into

law on July 21, 2010. Despite the heavy regulation contained in the

Act, as with reforms of the past, the Act is a piecemeal attempt to

realign conflicting interests, rather than an effort to fundamentally

address the systemic design questions in the current financial system.

In this article, we look at a few of the Act’s key provisions and

evaluate their role in the larger landscape of the corporate reality. In

part II, we look at the overall strategy of the Act. Despite the fact that

the Act deals with a wide range of topics and actors—from banks and

credit rating agencies to insurance—there is an identifiable, target-ori-

ented strategy applied to all areas of the reform. The Act singles out

key actors, subjects them to standards and reporting requirements,

and further creates monitoring bodies in an attempt to catch future

financial instabilities before they reach the point of no return. In part

III, we examine some of the central difficulties involved in the strate-

gic approach used in this kind of forward-looking legislation. In par-

ticular, we critique the group-targeting method of bringing some, but

not others, under federal regulation, the inability of backward-look-

ing legislation to respond to future market innovations, and the

weakness of fines as a deterrent mechanism for actions that lead to

future instability. In the conclusion, we call for a principled approach

to financial regulation, which acknowledges the role and limits of leg-

islation, as the only means of redesigning a financial system to mini-

mize systemic risk.

618 :THE AN T IT RU S T BULLETIN:Vol. 58, No. 4/Winter 2013

1Dodd-Frank Wall Street Reform and Consumer ProtectionAct of 2010,

Pub. L. No. 111-203, 124 Stat.1376 (2010).

2Press Re lea se, T he Wh ite H ous e, Offic e of th e Pres s Sec ret ary,

Remarks by the President on 21st Century Financial Regulatory Reform (June

17, 2 00 9), a va il abl e at h ttp :/ /ww w.wh it ehous e. gov /t he_ pr ess _o ffi ce

/Remarks-of-the-President-on-Regulatory-Reform/.