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Deciphering key provisions of the Dodd-Frank financial reform act

Crowe Horwath examines how the law will affect the financial services industry

OAK BROOK, Ill. (Nov. 30, 2010) – As regulators begin the rule-making process for the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), it is estimated that the act mandates nearly 250 regulations and 70 studies. Crowe Horwath LLP, one of the largest public accounting and consulting firms in the U.S., examines some of the law’s major provisions and how they will likely affect financial institutions.

“The legislation is just the beginning of what is likely to be a long journey,” said Dennis Hild, an associate director of Financial Services Regulatory Affairs within Crowe’s Risk Consulting practice. “With the Republican party gaining control of the House of Representatives, which will bring a new leader of the House Financial Services Committee, we could see a delay in the issuance of a technical corrections bill for Dodd-Frank.”

He added that the GOP-controlled House might also look to incorporate legislative amendments to change the structure of the Bureau of Consumer Financial Protection, one of Dodd-Frank’s primary provisions. “As the House transitions from a Democratic to Republican majority, and the rule-making process gets underway, financial institutions should use this time to connect with regulators and legislators.”

 According to Hild, major provisions of the bill include:

  • Consumer protectionDodd-Frank creates the Bureau of Consumer Financial Protection. The autonomous bureau will have extensive authority to regulate consumer financial products and services, enforce compliance with federal consumer financial laws and ensure that markets for such products and services are “fair, transparent and competitive.”
  • Systemic risk oversightDodd-Frank also establishes the Financial Stability Oversight Council (FSOC) to focus on identifying and monitoring systemic risks posed by financial firms and by financial activities and practices. The act establishes a new regulatory and supervisory framework for large, interconnected banking organizations and certain nonbank financial companies. Additionally, to help identify emerging risks to financial stability, the FSOC can direct, and request data and analyses from, the newly created Office of Financial Research (OFR) housed within the Treasury.
  • Elimination of the Office of Thrift Supervision – The existing regulatory structure remains largely intact, with the exception of the elimination of the Office of Thrift Supervision (OTS). Its operations will be merged into other federal banking agencies. These changes are certain to have an impact on the safety and soundness examinations for banks currently regulated by the OTS as the primary regulatory authority of thrift-chartered banks gets transitioned to the Office of the Comptroller of the Currency (OCC) in July 2011. 
  • Executive compensationDodd-Frank places more emphasis on shareholder’s input on executive compensation and any “golden parachute” payments in connection with a change in control. In addition, the act specifies the requirements for clawback policies and additional disclosure of performance-based pay and internal equity ratios.  It also imposes new independence standards for compensation committees and their advisers. “Following the banking crisis, executive compensation was regulated in 2009 by the Troubled Asset Relief Program and the Security and Exchanges Commission. Dodd-Frank reinforces how important this issue is to regulators, so institutions should be examining their pay practices,” added Pat Cole, a senior manager in Crowe’s Audit and Financial Advisory practice, who specializes in human resources consulting for financial institutions.
  • Capital requirementsDodd-Frank restricts the ability of banks to apply trust-preferred securities (TPS) toward regulatory capital requirements. This provision, however, permits small-bank holding companies to continue to issue TPS and include them as Tier 1 capital. According to Hild, the requirement is less onerous than previous proposals because it grandfathers Tier 1 capital treatment for TPS issued before May 19, 2010, for bank holding companies with assets of less than $15 billion. On a related front, the Basel Committee on Banking Supervision reached agreement in September on new reforms that are likely to result in substantially increased bank regulatory capital requirements. The new Basel III framework, which was further endorsed by the G20 at its recent meeting, is scheduled to be implemented between January 2013 and January 2015.  U.S. regulators will have until Jan. 1, 2013, to issue Basel III implementing regulations and determine applicability for U.S. banks.


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