The Dodd-Frank Wall Street Reform Act
The Act Increases Compliance Rules for Practitioners and Consumers
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“the Dodd-Frank Act”) was signed into law by President Obama on July 21, 2010. In both shear size and complexity, the Act dwarves the Public Company Accounting Reform and Investor Protection Act of 2002, more commonly referred to as Sarbanes-Oxley. The Sarbanes-Oxley Act was passed into law at just over one hundred pages, with the complexities of the law still being sifted through, with the accounting industry still continuing to recognize new ramifications daily. In comparison, the Dodd-Frank Act was signed into law at approximately 2,300 pages, and requires at least 144 rules be drafted by various federal regulators over the next two years. A key concern is the expense that those in the financial sector, predominately banks and investment firms, will have to face. One fear is that the expense is going to make credit more expensive, perhaps even harder to get. Part of these increased compliance costs, no doubt, will go towards paying both attorneys and accountants fees.
The Dodd-Frank Act’s Effect upon Consumers
The Independent Bureau of Consumer Financial Protection within the Federal Reserve: One of the most discussed features of the Dodd-Frank Act is the creation of a new, independent watchdog, housed at the Federal Reserve. The independent Bureau of Consumer Financial Protection (“the Bureau”) has been given the authority to ensure that American consumers receive the clear, accurate information necessary to intelligently and responsibly shop for mortgages, credit cards, and other financial products. The Bureau will act to protect consumers from hidden fees, abusive terms favoring the lender, and deceptive lending practices. The Bureau will both consolidate and strengthen consumer protection responsibilities currently handled by various federal agencies, including, but not limited to: the Office of the Comptroller of the Currency; Office of Thrift Supervision; the Federal Deposit Insurance Corporation; the Federal Reserve; the Federal Trade Commission; and the Department of Housing and Urban Development.
The Bureau is to be headed and led by an independent director who must be appointed by the President of the United States and confirmed by the United States Senate. The Bureau will not be congressionally funded; rather, its annual operating budget will be paid directly by the Federal Reserve System. The Bureau is given authority to examine and enforce regulations for banks and credit unions with assets of over ten billion dollars; it will also regulate all mortgage-related businesses, payday lenders, student lenders, and any other non-bank financial companies that are large, for example debt collectors and consumer reporting agencies. In order to fulfill its mission, the Bureau has been given autonomy to write rules for consumer protections governing all financial institutions, both banks and non-banks, which offer consumers financial services or products.
In theory, the Bureau will be able to act faster to protect consumers from unsavory investment deals and schemes, as the American populous will no longer need an act of Congress to regulate a new, shady business or lending practice. To compliment this new ability to adapt to the ever-changing market place, the Bureau has created the Office of Financial Literacy, whose goal it is to educate consumers by increasing their awareness of what the law is, and potentially unsafe, unsavory, or fraudulent investment or lending opportunities.
Mortgage Reform: The Dodd-Frank Act requires lenders to ensure that borrowers are able to repay any loan that they are sold. It also prohibits unfair lending practices. The law makes illegal financial incentives for subprime loans; these incentives resulted in lenders pushing borrowers into more costly loans, resulting in the subprime mortgage crisis. Likewise, prepayment penalties are also prohibited.
New penalties for irresponsible lending ensure that lenders will no longer attempt to push borrowers into loans that they cannot afford. Failure to comply with these new standards will result in lenders and mortgage brokers being liable to consumers for three-years of interest payments, damages, and attorney fees. Also, lenders and mortgage brokers will no longer be able to foreclose on properties that are in foreclosure as a result of irresponsible lending.
Lenders and mortgage brokers must disclose the maximum amount consumers could pay on variable rate mortgages, and must also explain to borrowers that mortgage payments may vary based on interest rate changes. Finally, in terms of mortgage reform, the Dodd-Frank Act establishes the Office of Housing Counseling within the Department of Housing and Urban Development, with the mission to increase the availability of homeownership and rental housing counseling.
Stemming the Effects of the Mortgage Crisis: In addition to reforming mortgage lending practices, the new law has established ways to tackle the effects of the mortgage crisis. One billion dollars is to be provided to state and local governments to protect neighborhoods from some of the peripheral consequences of the mortgage crisis, namely preventing property values from declining further and combating increasing crime rates. The money is intended to be used to rehabilitate, redevelop, and reuse abandoned and foreclosed properties.
Another one billion dollars has been set aside to provide what is being referred to as “bridge loans” to qualified unemployed owners who have reasonable prospects of being reemployed in the near future. The bridge loans will help those qualified individuals and families to cover mortgage payments until they are again employed, at which time the loan must be repaid.
Finally, the Department of Housing and Urban Development has been authorized to administer a program for making grants to legal services and legal aid organizations throughout the country to aid low to moderate income families deal with legal issues arising from the mortgage and foreclosure crisis. These funds must be used to provide legal assistance related to home ownership preservation, home foreclosure prevention, and tenancy issues related to home foreclosure.
Investor Protections: Perhaps the most important change in the broker/client relationship is the SEC’s newly granted power to impose a fiduciary duty upon investment brokers. If imposed, the fiduciary duty would effect all investment brokers giving investment advice, and would require that any information given to the client be in the best interest of the client.
Whistle Blowers: The Dodd-Frank Act encourages whistle blowing. The act requires that the SEC establish a program for the purpose of encouraging people to report securities violations. As an incentive, whistle blowers may be entitled to up to thirty percent (30%) of funds recovered from the information provided.
Credit Rating Agencies: The Dodd-Frank Act further regulates Nationally Recognized Statistical Rating Organizations (Credit Rating Agencies). Credit rating agencies issue credit ratings that the SEC allows other financial firms to use for certain regulatory purposes. The law calls for the establishment of the new Office of Credit Ratings within the SEC, and has provided it with its own authority to fine credit rating agencies. Going forward, all credit rating agencies must be examined at least once annually, with any pertinent findings being made public. Credit rating agencies must disclose to the SEC their methodologies, their use of third parties for information, and their ratings track record. Any credit rating agency found to consistently provide poor, inaccurate ratings may be deregistered by the SEC, with such deregistration essentially acting as the death knell of the agency. Investors can bring private causes of action against rating agencies for knowing or reckless failure to conduct a reasonable investigation of the facts, or to obtain analysis from an independent source. Credit rating agencies will now be subject to expert liability.
The Dodd-Frank Act’s Effect upon Accountants/CPAs
Office of Minority and Women Inclusion: While the Dodd-Frank Act has many effects upon CPAs and their practice, a smaller, less well publicized part of the act that may be of particular interest to the members of the American Society of Women Accountants is the newly formed Offices of Minority and Women Inclusion. The primary purpose of this office is to address employment and contracting diversity matters. The Office will also provide technical assistance to minority-owned and women-owned businesses.
Increased Threshold for SEC Registration: One of the most important changes for CPA financial advisers under the Dodd-Frank Act is the increased threshold amount for registering with the SEC as an investment adviser under the Investment Advisers Act of 1940. Prior to the Dodd-Frank Act, an investment adviser was eligible to register with the SEC if they had more than twenty-five million dollars of assets under their management; if the adviser managed thirty million dollars or more of assets the adviser was required to register with the SEC. Under the Dodd-Frank Act, the states are given greater responsibility for monitoring smaller advisers. Unless an adviser has at least one hundred million dollars of assets under their management, they are prohibited from registering with the SEC. Those advisers having less than one hundred million dollars of assets under their management must register with the state, or states, in which they do business unless one of two exceptions is met. First, if an adviser has between twenty-five and one hundred million dollars of assets under their management but is not required to register with their home state the adviser is required to register with the SEC. Second, an adviser having between twenty-five and one hundred million dollars of assets under their management who is required to register in fifteen states or more may, at their discretion, register with the SEC instead. Registration must be completed by July 21, 2011 – less than six months from now!
As registration and regulatory requirements may vary from state to state, those advisers who are required to register in multiple states, but do not meet the fifteen state minimum exception, may find the new registration requirements burdensome and expensive. It is highly recommended that CPAs affected by this regulatory change begin reviewing their state or states registration requirements and, if necessary, seek legal counsel to best understand their options. The North American Securities Administrators Association, a voluntary association of state securities regulators, has provided valuable information, including answers to frequently asked questions and contacts to all state contacts.
For purposes of the new law, investment adviser is defined broadly and includes any person who, for compensation, is engaged in the business of providing advice to others or issuing reports or analyses regarding securities. However, any lawyer, accountant, engineer, or teacher whose performance of investment advising services are rendered solely incidental to the practice of their profession are excluded from the definition of an investment adviser. Any CPA or CPA firm that holds itself out as providing financial planning services, as being a financial planner or a financial adviser, cannot use the solely incidental exception. Thus, all CPAs should review the scope of the services they render and ensure that any investment advice given is done solely incidental to their rendering of accounting services, and not as an alternative service available to clients.
Public Company Accounting Oversight Board Authority Over Auditors of Broker-Dealers: While Sarbanes-Oxley required that auditors of nonpublic broker dealers registered with the SEC to also register with the Public Company Accounting Oversight Board (PCAOB), Sarbanes-Oxley did not subject the auditors of nonpublic broker dealers to PCAOB oversight; that has changed. Under the Dodd-Frank Act the PCAOB now has supervisory powers over auditors of nonpublic broker dealers. This means that auditors are subject to the PCAOB’s rulemaking power, may be required to partake in a PCAOB inspection program, and may have to follow PCAOB auditing standards.
Affect upon Foreign Accounting Firms and Those US Firms utilizing Foreign Accounting Firm Services: The SEC and PCAOB have been given the authority to request any and all audit work papers from any foreign accounting firm performing material services upon which domestic, PCAOB-registered accounting firms and practices rely in the conduct of an audit. Upon a request for production by either the SEC or PCAOB, any domestic accounting firm relying upon work from foreign accounting firms must produce the audit work papers of the foreign accounting firm, as well as any and all other documents related to the work conducted by the foreign firm. This will require that prior to engaging in business with a foreign accounting firm, domestic accounting firms must enter into agreements with foreign firms stating that the foreign firm will turn over any and all documents related to the work conducted on an audit when requested by the domestic accounting firm.
The complexity of the Dodd-Frank legislation will create numerous opportunities for CPAs to create business, as they become essential in helping clients and employers to understand and comply with all of the new regulations required under the act. For example, consumers may call upon a CPA for advice regarding the new consumer protection initiatives, on new mortgage regulations, or on new credit regulations. Likewise, opportunity exists to aid corporate clients with interpretation of new regulations, and how the new regulations affect their business financially.
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