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United States Government Accountability Office: 
GAO: 

Report to Congressional Addressees: 

January 2013: 

Financial Regulatory Reform: 

Regulators Have Faced Challenges Finalizing Key Reforms and 
Unaddressed Areas Pose Potential Risks: 

GAO-13-195: 

GAO Highlights: 

Highlights of GAO-13-195, a report to congressional addressees. 

Why GAO Did This Study: 

The 2007-2009 financial crisis resulted in unprecedented government 
actions to respond to the unfolding turmoil in the markets, including 
providing capital to many financial institutions and government 
conservatorship for others. Although many factors likely contributed 
to the crisis, gaps and weaknesses in the supervision and regulation 
of the U.S. financial system generally played an important role. In 
recognition of the need to improve the regulation of financial markets 
and institutions to minimize the potential for future crises, in 2009 
GAO designated reform of the U.S. financial regulatory system as one 
of the high-risk issues facing the federal government. In July 2010, 
the Dodd-Frank Act directed regulators to implement reforms across a 
range of areas. To assess these efforts, GAO examined the (1) overall 
status of U.S. financial regulatory reforms arising from the act, (2) 
challenges affecting the implementation of the act, and (3) areas that 
pose continued risk. 

GAO analyzed data from private and regulatory sources on the status of 
required rulemakings, synthesized GAO’s body of work on Dodd-Frank Act 
reforms, and interviewed financial regulators and industry and 
consumer groups on the status of and challenges to implementing 
reforms. 

What GAO Found: 

Implementation of financial regulatory reform is ongoing. Although 
regulators have made progress in implementing some key reforms 
required by the Dodd-Frank Wall Street Reform and Consumer Protection 
Act of 2010 (Dodd-Frank Act), others remain incomplete. Moreover, the 
effectiveness of some implemented reforms, as illustrated below, 
remains to be seen. 

* The Financial Stability Oversight Council (FSOC) was established to, 
among other things, identify systemic threats, and it has taken steps 
to carry out its responsibilities. However, GAO recently made a number 
of recommendations to enhance the accountability and transparency of 
FSOC’s decisions and activities and improve collaboration among its 
members. 

* Regulators have taken actions to implement some key reforms intended 
to reduce systemic risk. For example, FSOC developed-—and is currently 
implementing—-a process and criteria to determine whether certain 
nonbank financial institutions should be designated for supervision. 
But, to date, no such designations have been made. Although not 
directly required by the act, regulators have also proposed rules 
implementing international standards to enhance capital requirements 
for banks. These also are not yet final and their protections are 
proposed to phase in over the next 10 years. 

* Key aspects of new liquidation authorities and other reforms for 
resolving troubled financial firms have been implemented, with certain 
institutions having submitted required resolution plans—-“living wills”
-—that would guide their rapid and orderly resolution in a bankruptcy, 
if needed. However, market observers noted the effectiveness of these 
provisions would not be known until the first large failure. 

Overall, GAO identified 236 provisions of the act that require 
regulators to issue rulemakings across nine key areas. As of December 
2012, regulators had issued final rules for about 48 percent of these 
provisions; however, in some cases the dates by which affected 
entities had to comply with the rules had yet to be reached. Of the 
remaining provisions, regulators had proposed rules for about 29 
percent, and rulemakings had not occurred for about 23 percent.
A variety of challenges affected regulators’ progress in implementing 
the act’s reforms. Regulators noted that completing rules has taken 
time because of the number and complexity of the issues, and because 
many rules are interconnected. For example, to implement the act’s ban 
on proprietary trading-—trading activities conducted by financial 
institutions for their own accounts as opposed to those of their 
clients—-the regulators issued draft rules that contained over 750 
questions for the public’s input and spurred over 19,000 comment 
letters. Further, regulators said that implementing the act’s reforms 
requires a great deal of coordination at the domestic and 
international levels. Although regulators have established mechanisms 
to facilitate coordination and believe coordination efforts have 
improved the quality of the rulemakings, several regulators indicated 
that coordination increased the amount of time needed to finalize 
rulemakings. Finally, regulators noted that they have prioritized 
developing responsive, appropriate rules over meeting tight statutory 
deadlines. As a result, some important rules may take the longest to 
develop. 

Although the act addressed a number of weaknesses of the regulatory 
system that were exposed by the recent financial crisis, some risks 
remain and others have emerged. In 2009, GAO established a framework 
for evaluating financial regulatory reform proposals; it outlines nine 
characteristics that should be reflected in any new regulatory system 
(see table). This framework provides a useful lens through which to 
consider how weaknesses were addressed through the act and where 
additional work remains. For example, the creation of the Consumer 
Financial Protection Bureau could help to ensure broader and more 
consistent oversight of firms and issues affecting consumers. 
Additionally, the creation of FSOC could help to provide a systemwide 
view and identify potential threats before they create a disruption. 
In contrast: 

* The efficiency of the regulatory system was not materially changed 
as a large, fragmented regulatory structure with numerous regulators 
remains. This requires regulators to coordinate actions and try to 
reconcile or balance differing approaches to ensure that regulated 
entities are subject to appropriate scrutiny. 

* GAO and others have raised concerns about the failed housing 
government-sponsored enterprises—Fannie Mae and Freddie Mac—that have 
operated under federal conservatorships since 2008, and as of December 
2012 have received $187 billion in federal assistance. Until their 
status is resolved, these entities continue to represent financial 
exposures for the federal government, a risk to taxpayers, and an 
impediment to the transition to a housing market that functions 
effectively without the current level of substantial federal support. 

* Although the act took steps to increase the regulatory system’s 
focus on systemic threats, regulators have expressed concerns that the 
current structure of money market mutual funds may represent an 
unresolved risk. These funds provide short-term funding to many 
financial institutions but lack capital buffers and other protections 
that could reduce the likelihood of destabilizing runs on their 
holdings. However, some have questioned the need for additional recent 
reforms affecting these funds. 

* Certain credit risk concentrations also pose potential systemic 
implications, such as the failure of one of the two institutions that 
provide credit to facilitate transactions in the tri-party repurchase 
(repo) market that provides short-term funding to many institutions. 
While these concentrations of credit risks create potential threats to 
stability, some observers caution that threats also can emerge from 
other sources, such as from risky products or large numbers of 
failures among smaller institutions. 

Although various proposals for action to address these risks have been 
put forward, definitive actions have yet to be taken to implement them. 

Table: GAO 2009 Framework for Evaluating Financial Regulatory Reforms: 

Characteristic: Clearly defined regulatory goals; 
Description: Goals should be clearly articulated and relevant. 

Characteristic: Appropriately comprehensive; 
Description: Financial regulations should cover all activities that 
pose risks or are otherwise important to meeting regulatory goals. 

Characteristic: Systemwide focus; 
Description: Mechanisms should be included for identifying, 
monitoring, and managing risks to the financial system regardless of 
the source of the risk. 

Characteristic: Flexible and adaptable; 
Description: A regulatory system that is flexible and forward looking 
allows regulators to readily adapt to market innovations and changes. 

Characteristic: Efficient and effective; 
Description: Effective and efficient oversight should be developed, 
including eliminating overlapping federal regulatory missions where 
appropriate, and minimizing regulatory burden without sacrificing 
effective oversight. 

Characteristic: Consistent consumer and investor protection; 
Description: Consumers and investors should receive consistent, useful 
information, as well as legal protections for similar financial 
products and services. 

Characteristic: Regulators provided with independence, prominence, 
authority, and accountability; 
Description: Regulators should have independence from inappropriate 
influence, as well as prominence and authority to carry out and 
enforce statutory missions, and be clearly accountable for meeting 
regulatory goals. 

Characteristic: Consistent financial oversight; 
Description: Similar institutions, products, risks, and services 
should be subject to consistent regulation, oversight, and 
transparency. 

Characteristic: Minimal taxpayer exposure; 
Description: A regulatory system should foster financial markets that 
are resilient enough to absorb failures and thereby limit the need for 
federal intervention and limit taxpayers’ exposure to financial risk. 

Source: GAO. 

[End of table] 

What GAO Recommends: 

GAO is not making any new recommendations in this report, but has 
previously made over 25 recommendations to the federal financial 
regulators related to Dodd-Frank reforms implementation. 

View [hyperlink, http://www.gao.gov/products/GAO-13-195]. For more 
information, contact A. Nicole Clowers at (202) 512-8678 or 
clowersa@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Regulators Have Made Progress in Implementing Dodd-Frank Act Reforms, 
but Many Efforts Are Ongoing: 

Regulators Have Faced Various Challenges Implementing Reforms: 

Various Areas Continue to Pose Risks, and Regulatory Actions to 
Mitigate These Risks Have Not Been Finalized or Implemented: 

Agency Comments and Our Evaluation: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Comments from the Securities and Exchange Commission: 

Appendix III: GAO Contact and Staff Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: Prudential Regulators and Their Basic Functions, 2012: 

Table 2: GAO's 2009 Framework for Evaluating Financial Regulatory 
Reform: 

Figure: 

Figure 1: Status of Regulators' Efforts to Implement Dodd-Frank 
Provisions, as of December 2012: 

Abbreviations: 

ABCP: asset-backed commercial paper: 

CFPB: Consumer Financial Protection Bureau: 

CFTC: Commodity Futures Trading Commission: 

Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection 
Act of 2010: 

FDIC: Federal Deposit Insurance Corporation: 

Federal Reserve: Board of Governors of the Federal Reserve System: 

FHA: Federal Housing Administration: 

FHFA: Federal Housing Finance Agency: 

FSB: Financial Stability Board: 

FSOC: Financial Stability Oversight Council: 

HUD: Department of Housing and Urban Development: 

LEI: legal entity identifier: 

MBS: mortgage-backed securities: 

MMFs: money market fund: 

OCC: Office of the Comptroller of the Currency: 

OFR: Office of Financial Research: 

OLA: Orderly Liquidation Authority: 

OTC: over-the-counter: 

SEC: Securities and Exchange Commission: 

SIFI: systemically important financial institution: 

SRO: self-regulatory organization: 

Treasury: Department of the Treasury: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

January 23, 2013: 

The Honorable Debbie Stabenow:
Chairwoman:
Committee on Agriculture, Nutrition and Forestry:
United States Senate: 

The Honorable Tim Johnson:
Chairman:
Committee on Banking, Housing, and Urban Affairs:
United States Senate: 

The 2007-2009 financial crisis threatened the stability of the U.S. 
financial system and the health of the U.S. economy. Many households 
suffered as a result of falling asset prices, tightening credit, and 
increasing unemployment. In response to the crisis, the federal 
government took unprecedented steps--providing hundreds of billions of 
dollars of capital and over a trillion dollars of emergency assistance 
to financial institutions--to stem the unraveling of the financial 
services sector and restore order to the credit markets. Although many 
factors likely contributed to the crisis and the relative role of 
these factors is subject to debate, gaps and weaknesses in the 
supervision and regulation of the U.S. financial system generally 
played an important role. In 2009, we designated reforming the 
financial regulatory system as a high-risk area and also identified 
characteristics that should be reflected in any new regulatory system. 
[Footnote 1] 

In 2010, Congress enacted the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Dodd-Frank Act), which includes numerous 
reforms to strengthen oversight of the financial services sector. 
[Footnote 2] Although the financial services industry, academics, and 
others generally have supported the Dodd-Frank Act's goal of enhancing 
the stability of the U.S. financial system, the act's implementation 
has not been free of controversy or debate. For example, no consensus 
exists on the extent to which the act will help to reduce the 
likelihood and severity of future financial crises. In addition, some 
market observers have raised concerns about the pace of reform, with 
some suggesting that reform is occurring too slowly and others arguing 
that it is moving too quickly. 

We prepared this report under the authority of the Comptroller General 
to conduct work on GAO's initiative to assist Congress with its 
oversight responsibilities. Specifically, this report examines the (1) 
overall status of U.S. financial regulatory reforms arising from the 
act, (2) challenges affecting the implementation of these reforms, and 
(3) areas that pose continued risk. To address our objectives, we 
synthesized GAO's body of work on Dodd-Frank Act reforms and other 
financial regulatory reform efforts and challenges.[Footnote 3] We 
also reviewed and analyzed government, academic, and other studies on 
Dodd-Frank Act reforms and implementation. To examine regulators' 
efforts to implement the provisions of the Dodd-Frank Act, we focused 
on eight major reform areas: capital requirements; resolution of 
financial institutions; proprietary trading; derivatives; consumer 
protection; mortgage reforms; expanded regulation of institutions and 
products; and investor protection. We also obtained and analyzed 
information from a database maintained by the law firm Davis Polk and 
Wardwell that identified provisions of the Dodd Frank Act that require 
and authorize regulators to take actions, and tracks the status of 
regulators' efforts to implement these provisions. We then used 
various sources and assumptions to compile a list of provisions 
requiring actions by regulators, including discussing provisions with 
agency officials who are responsible for implementation of the 
majority of these efforts. We focused our analysis on provisions that 
required rulemakings and other key actions, but excluded other 
requirements, such as those to publish studies. In addition, we used 
our professional judgment to categorize the information from the law 
firm and financial regulators. Using different sources, assumptions, 
and judgments in compiling the list of provisions requiring 
rulemakings and other key actions could result in different totals, 
and therefore the information we provide should not be taken as a 
definitive count of all actions required by the act. 

We also interviewed officials from seven federal financial regulators--
Board of Governors of the Federal Reserve System (Federal Reserve), 
Bureau of Consumer Financial Protection--also known as the Consumer 
Financial Protection Bureau (CFPB), Commodity Futures Trading 
Commission (CFTC), Federal Deposit Insurance Corporation (FDIC), 
Federal Housing Finance Agency (FHFA), Office of the Comptroller of 
the Currency (OCC), and Securities and Exchange Commission (SEC), as 
well as staff from the Financial Stability Oversight Council (FSOC) 
about their implementation of various Dodd-Frank reforms, challenges 
they are facing, and areas that continue to pose risk.[Footnote 4] In 
addition, we interviewed industry and consumer groups about these 
issues and obtained the views of market observers and experts who have 
written about various Dodd-Frank Act reforms. Appendix I contains 
additional information on our scope and methodology. 

We conducted this performance audit from June 2012 to January 2013 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

Background: 

The financial regulatory framework in the United States was built over 
the last 150 years, largely in response to crises and significant 
market developments. As a result, the regulatory system is complex and 
fragmented. For some time, we have reported that the U.S. financial 
regulatory system has not kept pace with major developments in 
financial markets and products in recent decades.[Footnote 5] Although 
the Dodd-Frank Act has brought additional changes, the U.S. financial 
regulatory structure largely remains the same. 

The U.S. financial regulatory structure is a complex system of 
multiple federal and state regulators as well as self-regulatory 
organizations (SRO). In the banking industry, the specific regulatory 
configuration depends on the type of charter the depository 
institution chooses. Charter types for depository institutions include 
commercial banks, savings associations, and credit unions. These 
charters may be obtained at the state or federal level. The prudential 
regulators--all of which generally may issue regulations and take 
enforcement actions against industry participants within their 
jurisdiction--are identified in table 1. 

Table 1: Prudential Regulators and Their Basic Functions, 2012: 

Agency: Office of the Comptroller of the Currency; 
Basic function: Charters and supervises national banks and federal 
savings associations. 

Agency: Board of Governors of the Federal Reserve System; 
Basic function: Supervises state-chartered banks that opt to be 
members of the Federal Reserve System, bank holding companies, thrift 
holding companies and the nondepository institution subsidiaries of 
those institutions, and nonbank financial companies designated for 
enhanced supervision by the Financial Stability Oversight Council. 

Agency: Federal Deposit Insurance Corporation; 
Basic function: Supervises FDIC-insured state-chartered banks that are 
not members of the Federal Reserve System, as well as federally 
insured state savings associations; insures the deposits of all banks 
and thrifts that are approved for federal deposit insurance; and 
resolves all failed insured banks and thrifts and has been given the 
authority to resolve large bank holding companies and certain nonbank 
financial companies that are subject to supervision by the Board of 
Governors of the Federal Reserve System and subject to enhanced 
prudential standards. 

Agency: National Credit Union Administration; 
Basic function: Charters and supervises federally chartered credit 
unions and insures savings in federally and most state-chartered 
credit unions. 

Source: OCC, Federal Reserve, FDIC, and National Credit Union 
Administration. 

[End of table] 

In addition, as will be discussed, the Dodd-Frank Act created CFPB as 
an independent bureau in the Federal Reserve System that is 
responsible for regulating the offering and provision of consumer 
financial products and services under federal consumer financial laws. 
Under the Dodd-Frank Act, certain authority vested in the prudential 
regulators and other regulators was transferred to CFPB on July 21, 
2011. 

The securities and futures industries are regulated under a 
combination of self-regulation (subject to oversight by the 
appropriate federal regulator) and direct oversight by SEC and CFTC, 
respectively. SEC oversees the securities industry's SROs, and the 
securities industry as a whole, and is responsible for administering 
federal securities laws and developing regulations for the industry. 
SEC's overall mission includes protecting investors; maintaining fair, 
orderly, and efficient markets; and facilitating capital formation. 
CFTC oversees the futures industry and its SROs. Under the Dodd-Frank 
Act, CFTC also has extensive responsibilities for the regulation of 
swaps and certain entities involved in the swaps markets, and SEC has 
comparable authority for markets in security-based swaps. CFTC and SEC 
have responsibility for administering federal legislation and 
developing comprehensive regulations to protect the public from fraud 
and manipulation, insure the financial integrity of markets, and help 
to foster better risk management, among other things. Further, state 
regulators oversee the insurance industry and contribute to the 
oversight of banks and securities as well. 

Certain housing market participants, including the housing finance 
government-sponsored enterprises--Fannie Mae and Freddie Mac (the 
enterprises)--and the Federal Home Loan Bank System, are supervised by 
FHFA. FHFA has authority to take enforcement actions against, appoint 
itself conservator or receiver for, and resolve these enterprises. 

Regulators Have Made Progress in Implementing Dodd-Frank Act Reforms, 
but Many Efforts Are Ongoing: 

Federal financial regulators are continuing to implement reforms 
pursuant to the Dodd-Frank Act. A key goal of the act was to promote 
the stability of the financial system, and the act puts forward a 
number of reforms to achieve this goal, such as provisions related to 
identifying and addressing systemic risk and enhancing supervision of 
large, complex financial institutions.[Footnote 6] Other reforms seek 
to expand protections for consumers and investors and expand oversight 
to entities that were less regulated. The implementation of the 
reforms is largely being driven by the rulemakings or other key 
actions of the various responsible financial regulators, and as figure 
1 shows, the status of the regulators' implementation of these reforms 
varies. As of December 2012, regulators had finalized rules for a 
little less than half of the 236 required rulemakings and other key 
rulemakings that we identified. The remaining required rulemakings and 
other key rulemakings have not been finalized or have yet to be 
proposed. Additionally, of the 236 provisions we identified, over two-
thirds (157) required regulators to take action by a specific date. 
Among the provisions with deadlines that passed as of December 2012 (a 
total of 134 provisions), regulators had missed the act's deadlines 
for the majority (119, or 89 percent) of the provisions. 

Figure 1: Status of Regulators' Efforts to Implement Dodd-Frank 
Provisions, as of December 2012: 

[Refer to PDF for image: illustrated horizontal bar graph] 

Total number of provisions: 236; 
Number of provisions with: 
Finalized rules: 113[a]; 48%; 
Proposed rules: 69; 29%; 
Yet-to-be proposed rules: 54; 23%. 

Source: GAO analysis of data from Davis Polk Wardwell, Federal Reserve 
Bank of St. Louis, and financial regulators. 

Notes: We used various sources and assumptions to compile a list of 
provisions requiring regulators to issue rulemakings and other key 
actions, including using our professional judgment to categorize 
information from a private law firm and financial regulators. Using 
different sources, assumptions, and judgments in compiling the list of 
provisions could result in different totals, and therefore the 
information we provide should not be taken as a definitive count of 
all actions required by the act. See appendix I for information on our 
methodology. 

[A] This amount includes 96 provisions for which regulators have 
finalized a rule that is also effective; 4 provisions for which 
multiple regulators are required to issue a rule, and at least one 
regulator has finalized a rule that is also effective; and 13 
provisions for which regulators have issued a final rule, but was not 
effective as of December 2012. 

[End of figure] 

Various Reforms That Could Enhance System Stability Are Underway but 
Remain Incomplete: 

The recent crisis highlighted several sources of systemic risk, 
including the potential for one financial firm's distress to spill 
over into the broader financial system and economy and for systemic 
risk to be generated and propagated outside of the largest financial 
firms. This was due, in part, to interconnections not only among firms 
but also among markets. To better monitor and contain the potential 
for such events to create systemic risk and increase overall system 
stability, the act mandated various reforms including creating FSOC 
and the Office of Financial Research (OFR); establishing heightened 
prudential requirements for certain nonbank financial companies and 
new capital standards for banks and bank holding companies; 
establishing the Orderly Liquidation Authority (OLA) to address 
failures of certain financial institutions; expanding the regulation 
of the swaps market; and banning banking entities from engaging in 
certain types of trading and investments. However, the implementation 
of many of these reforms remains ongoing and the effectiveness of some 
remains an open question. 

Creation of FSOC and OFR: 

The 2007-2009 financial crisis highlighted the lack of an agency or 
mechanism responsible for monitoring and addressing risks across the 
financial system and a shortage of timely information to facilitate 
this oversight. To address these limitations, the Dodd-Frank Act 
created FSOC to provide, for the first time, an entity charged with 
monitoring and identifying risks to financial stability throughout the 
entire financial system. The act also established OFR to serve FSOC, 
its member agencies, and the public by improving the quality, 
transparency, and accessibility of financial data and information; 
conducting and sponsoring research related to financial stability; and 
promoting best practices in risk management.[Footnote 7] 

The act tasks FSOC with identifying risks to the financial stability 
of the United States, promoting market discipline by eliminating 
expectations of government shields against losses, and responding to 
emerging threats to the stability of the U.S. financial system. The 
Dodd-Frank Act provides that FSOC consists of 10 voting members and 5 
nonvoting members.[Footnote 8] The 10 voting members provide a federal 
regulatory perspective and an independent insurance expert's view. The 
5 nonvoting members offer different insights, including state-level 
representatives from banks, securities, and insurance regulators and 
directors of some new offices within Treasury--OFR and the Federal 
Insurance Office--that were established by the Dodd-Frank Act. FSOC is 
chaired by the Secretary of the Treasury. The Dodd-Frank Act requires 
that the council meet at least once a quarter; however, FSOC has met 
more frequently, with FSOC reporting that it met 12 times from July 
2011 to July 2012. FSOC has fulfilled statutory requirements for 
issuing various studies, including those on regulating proprietary 
trading, contingent capital, and concentration limits on large 
financial companies.[Footnote 9] FSOC has also issued two annual 
reports addressing market and regulatory developments across the 
financial system. In addition, FSOC voluntarily issued rulemakings 
explaining the processes and criteria that it will follow in 
designating financial market utilities--entities that provide critical 
services to the markets such as clearinghouses that process trading 
information and facilitate payments associated with trades--as 
systemically important and nonbank financial companies for supervision 
by the Federal Reserve. 

OFR--created by the act to support FSOC, its member agencies, 
Congress, and the public by improving financial data and conducting 
research related to financial stability--has taken a number of steps 
to help fulfill its mission.[Footnote 10] For example, in July 2012 
OFR released its first annual report, which assessed the state of the 
U.S. financial system.[Footnote 11] OFR has also begun a process to 
assemble an inventory of data that FSOC member agencies obtain, which 
OFR staff described as a first step toward standardizing data, 
reducing duplication, and eventually lowering costs for industry and 
regulators. OFR has also collaborated with industry, foreign 
government entities, and international bodies in efforts to create a 
legal entity identifier (LEI), which OFR describes as an emerging 
global standard that will enable regulators and companies around the 
world to quickly and accurately identify parties to financial 
transactions. Additionally, OFR has initiated a working paper series 
in which OFR researchers often collaborate with outside academics. 
Three papers have been published, including one that catalogs systemic 
risk monitoring systems and another that describes ways to improve 
risk management at financial institutions. Several more papers will be 
published in the coming months. 

Although the creation of FSOC and OFR could assist the U.S. regulatory 
system in identifying systemic threats, they will have to overcome 
various challenges to help ensure that these reforms achieve their 
intended goals. First, FSOC's key missions--to identify risks to 
financial stability and respond to emerging threats--are inherently 
challenging. For example, key indicators, such as market prices, often 
do not reflect these risks; such threats do not develop in precisely 
the same way in successive crises; financial innovations are not well 
understood; and according to experts, effectively monitoring and 
mitigating systemic risk is a very large and procedurally complex 
undertaking. Additionally, actions to preemptively mitigate threats 
may appear unnecessary or too costly at the time they are proposed or 
taken. Second, FSOC's effectiveness hinges to a large extent on 
collaboration among its many members, almost all of whom come from 
federal and state agencies with their own specific statutory missions. 
In testifying before Congress on Dodd-Frank rulemakings, the 
chairperson of FSOC recognized this challenge, noting that 
coordination in the rulemaking process was hard because the act left 
in place a financial system with a complex set of independent agencies 
with overlapping jurisdictions and different responsibilities. Third, 
OFR faces the challenge of trying to build a world-class research 
organization from the ground up while meeting shorter-term goals and 
responsibilities. Those researchers who supported the creation of OFR 
have suggested that it will take many years for the new entity to 
provide the insights that will ultimately be expected of it. 

In addition, in a September 2012 report, we concluded that the ability 
of FSOC and OFR to fundamentally change the way the federal government 
monitored threats to financial stability remains to be seen.[Footnote 
12] The uncertainty partly stemmed from the newness of the entities, 
as both were continuing to develop needed management structures. But 
we also noted that limits in FSOC's and OFR's transparency contributed 
to questions about their effectiveness. We made 10 recommendations to 
FSOC and OFR to strengthen their accountability and transparency. 
These include FSOC and OFR clarifying their monitoring 
responsibilities to better ensure that the monitoring and analysis of 
the financial system are comprehensive and not unnecessarily 
duplicative, and FSOC systematically sharing key financial risk 
indicators among member agencies to assist in identifying potential 
threats for further monitoring or analysis. In responding to the 
recommendations in this report, Treasury emphasized the progress that 
FSOC and OFR have made since their creation, including preparing rules 
and guidance, promoting transparency and accountability by testifying 
before Congress, providing information to oversight bodies, and making 
information available on websites. Treasury also stated that officials 
would carefully consider the report's findings and recommendations, 
and would share them with the council for their review and 
consideration. 

New Heightened Prudential Requirements and Capital Standards: 

The recent financial crisis revealed weaknesses in the existing 
regulatory framework for overseeing financial institutions. For 
example, although large, interconnected financial firms were subject 
to some form of federal supervision and regulation, the oversight 
proved inadequate and inconsistent. The crisis also showed that 
regulators did not require financial firms to hold sufficient capital 
to cover their trading and other losses or plan for a scenario in 
which liquidity was sharply curtailed. 

To address these shortcomings, the Dodd-Frank Act requires the Federal 
Reserve to supervise and develop enhanced capital and prudential 
standards for bank holding companies, including foreign banking 
organizations, with $50 billion or more in consolidated assets and 
nonbank financial companies designated by FSOC for supervision by the 
Federal Reserve.[Footnote 13] The act also requires the Federal 
Reserve to establish a regulatory framework for the early remediation 
of financial weaknesses for these companies. The act requires the 
enhanced prudential standards to be more stringent than standards 
applicable to other bank holding companies and financial firms that do 
not present similar risks to U.S. financial stability.[Footnote 14] 
The act further requires the enhanced standards to increase in 
stringency based on the risk characteristics of each firm. In general, 
the Federal Reserve has authority to tailor the application of the 
prudential standards, including differentiating among companies on an 
individual basis or by category. 

Some key actions to implement these reforms have not been completed. 
The Federal Reserve has issued proposed and final rules implementing 
certain elements of these requirements. In January 2012, the Federal 
Reserve proposed regulations on enhanced prudential standards and 
early remediation requirements for U.S. bank holding companies with 
total consolidated assets of $50 billion or more and U.S. nonbank 
financial companies supervised by the Federal Reserve. These proposed 
regulations included risk-based capital and leverage requirements, 
liquidity requirements, single-counterparty credit limits, overall 
risk management and risk committee requirements, stress test 
requirements, early remediation requirements, and debt-to-equity ratio 
requirements for companies that FSOC has determined pose a grave 
threat to financial stability. In October 2012, the Federal Reserve 
issued a final rule implementing the supervisory and company-run 
stress test requirements included in the December 2011 proposal. 
[Footnote 15] In December 2012, the Federal Reserve issued proposed 
regulations that would implement the enhanced prudential standards and 
early remediation requirements required to be established by the Dodd-
Frank Act for foreign banking organizations and foreign nonbank 
financial companies supervised by the Federal Reserve. According to 
the Federal Reserve, the proposed standards for foreign banking 
organizations are broadly consistent with the standards proposed for 
large U.S. bank holding companies and U.S. nonbank financial companies. 

In addition to the enhanced prudential standards for certain U.S. bank 
holding companies and identified U.S. nonbank financial companies, 
under the act, the regulators are also required to establish minimum 
leverage and risk-based capital requirements, on a consolidated basis, 
that apply to insured depository institutions, bank and thrift holding 
companies, and systemically important nonbank financial companies. 
[Footnote 16] In June 2012, OCC, the Federal Reserve, and FDIC 
proposed comprehensive revisions to their regulatory capital framework 
through three concurrent notices of proposed rulemaking. The proposals 
would revise the agencies' current capital rules to incorporate 
changes made by the Basel Committee on Banking Supervision--a body 
that sets international standards for bank capital and liquidity--to 
the Basel capital framework consistent with relevant provisions of the 
Dodd-Frank Act.[Footnote 17] According to the regulators, the reforms 
contained in the rule would, among other things, improve the 
resilience of the banking sector in times of stress. The proposed 
rules, which were published in August 2012, include an extended 
comment period that ended in October 2012. The provisions in U.S. 
regulators' implementation of these capital requirements are intended 
to conform to these international standards and are proposed to phase 
in over the next 10 years. The agencies received thousands of comment 
letters from the public, including banking organizations of all sizes, 
trade groups, academics, public interest advocates, and private 
individuals, through the comment period. According to testimony before 
Congress given by the Federal Reserve's banking supervision director, 
the breadth of the proposed changes has raised concerns among many 
industry participants that a January 2013 implementation date for the 
rules would not provide sufficient time for them to understand the 
rules or make necessary system changes. As a result, the banking 
agencies announced in November 2012 that they did not expect to 
finalize the proposal by January 2013--as expected in the Basel 
Agreement. 

Establishment of Resolution Reforms: 

During the recent crisis, the federal government took unprecedented 
actions to address the financial difficulties of several large 
financial firms, including making equity investments in some firms or 
placing others in government-administered conservatorships. The Dodd-
Frank Act provides a new option for resolving failing financial firms 
whose disorderly resolution would have serious adverse effects on U.S. 
financial stability by creating a process under which FDIC has the 
authority to liquidate large financial firms, including nonbanks, 
outside of the bankruptcy process--called the Orderly Liquidation 
Authority (OLA). Under this authority, FDIC may be appointed receiver 
for a financial firm if the Treasury Secretary determines that the 
firm's failure threatens U.S. financial stability. SIFIs also must 
formulate and submit to the Federal Reserve, FSOC, and FDIC resolution 
plans (or "living wills") that detail how they could be resolved in 
the event of material financial distress or failure.[Footnote 18] 

Progress has been made to implement the reforms related to resolving 
large, complex financial companies. For instance, FDIC finalized 
several rules to implement OLA. The Federal Reserve and FDIC finalized 
and made effective rules relating to resolution plans, and the large 
financial institutions that were the first firms required to prepare 
such plans submitted these to regulators as expected in July 2012. 
However, work remains to be completed in other important areas. Rules 
that either remain in proposed form or have not yet been proposed 
include those that establish a program to guarantee obligations of 
solvent depository institutions and their holding companies and 
affiliates during times of severe economic stress, and implement OLA 
for broker-dealers. In addition, regulators have not yet completed 
their reviews of the large bank holding companies' resolution plans. 

Although many market observers expect that these resolution reforms 
will help mitigate threats to the financial system posed by the 
failure of a SIFI or other large, complex, interconnected financial 
firm, some questions about their potential effectiveness have been 
raised. Some observers noted that OLA is new and untested, and its 
effectiveness in reducing risky behavior by institutions will depend 
on the extent to which market participants believe that FDIC will use 
OLA to make an institution's creditors and shareholders bear losses of 
any SIFI failure. Furthermore, others questioned whether FDIC has 
sufficient capacity to use OLA to handle multiple SIFI failures and 
thus prevent further systemic disruption. Others have raised concerns 
over whether any FDIC-imposed losses on some creditors of a failed 
firm could threaten the soundness of other important financial 
institutions or how FDIC would handle the non-U.S. subsidiaries of a 
failed firm. 

Experts also expressed mixed views on the usefulness of the living 
wills. One market expert expressed doubt that these living wills would 
prove useful for resolving a complex firm's failure, but was more 
optimistic that the documents could serve to encourage regulators to 
make such firms simplify their organizational structures and become 
more transparent. Experts further noted that resolution plans may 
provide regulators with critical information about a firm's 
organizational structure that could aid the resolution process or 
motivate SIFIs to simplify their structures and this simplification 
could help facilitate resolution. However, other experts commented 
that although resolution plans may assist regulators in gaining a 
better understanding of SIFI structures and activities, the plans may 
not be useful guides during an actual liquidation--in part because the 
plans could become outdated or because the plans may not be helpful 
during a crisis. Resolution plans also may provide limited benefits in 
simplifying firm structures, in part because tax, jurisdictional, and 
other considerations may outweigh the benefits of simplification. 

Regulation of the Swaps Market: 

FSOC has found that over-the-counter (OTC) derivatives, particularly 
credit default swaps, generally were a factor in the propagation of 
risks during the recent crisis because of their complexity and 
opacity, which contributed to excessive risk taking, a lack of clarity 
about the ultimate distribution of risks, and a loss in market 
confidence.[Footnote 19] Although some standardized swaps, such as 
certain interest rate swaps, have been cleared through clearinghouses--
which stand between counterparties in assuming the risk of 
counterparty default--credit default swaps and most other swaps 
traditionally have been traded in the OTC market where holders of 
derivatives contracts bear the risk of counterparty default.[Footnote 
20] Title VII of the Dodd-Frank Act establishes a new regulatory 
framework for swaps to reduce risk, increase transparency, and promote 
market integrity in swaps markets by, among other things, moving 
trading to exchanges (or similar trading platforms), requiring that 
many trades are to be centrally cleared, and providing for greater 
public dissemination of trading information. To implement the act's 
reforms, SEC is responsible for any security-based swaps, SEC and CFTC 
are jointly responsible for mixed swaps, and CFTC is responsible for 
all other types of swaps.[Footnote 21] 

Progress has been made in implementing derivatives reforms. CFTC 
officials noted that swap reform has involved multiple rulemakings 
including rules, such as defining swaps, registering dealers and 
reporting to CFTC on the size of positions in swaps held by such 
dealers. The swaps definition rules are in place and effective, and 
dealer registration is ongoing. As of April 2012, rules requiring 
dealers to publicly report their swaps positions to CFTC were final, 
and in December 2012 the CFTC Chairman testified that CFTC had 
finalized approximately 80 percent of Dodd-Frank swaps rules. However, 
the rules that will specify how much margin--funds posted with a 
clearinghouse that can serve to absorb losses as the value of the 
swaps position changes--and how much capital a swaps dealer must hold 
to absorb losses on its swaps remain incomplete. 

Because swaps are globally traded, the regulatory developments in 
overseas markets also have affected implementation of the swaps 
reforms. Although many other jurisdictions have been developing new 
regulatory regimes, the United States has been one of the first 
jurisdictions to have enacted legislation in this area. The Financial 
Stability Board (FSB)--which is an organization of representatives of 
national authorities responsible for financial stability that has been 
established to coordinate and promote the implementation of effective 
regulatory, supervisory, and other financial sector policies--reported 
to the Group of Twenty leaders in October 2012 that regulatory 
uncertainty remains the largest impediment to timely implementation of 
swaps regulatory reforms across countries.[Footnote 22] FSB urged 
continued discussions to identify and address any conflicts in rules 
affecting cross-border activities. According to SEC staff, SEC and 
CFTC have been active participants in these ongoing discussions. In 
some cases, international bodies have requested the delay of some 
derivatives-related regulations because of the importance of 
coordination. For example, CFTC officials noted that one of the 
reasons their Commission voted to reopen the comment period for the 
swaps capital and margin requirement rule was to allow European 
regulators to complete similar rules, potentially by early 2013. 

Restrictions on Proprietary Trading: 

The role that proprietary trading--trading activities conducted by 
banking entities for their own accounts as opposed to those of their 
clients--played in the recent crisis is a matter of debate. Some 
experts have stated that the ability of banking entities to use 
federally insured deposits to seek profits for their own accounts 
provides incentives for them to take on excessive risks. In 
particular, academics have noted that commercial banks benefit from 
government-insured deposits that subsidize their funding and thus do 
not bear the full risks of their proprietary activities.[Footnote 23] 
We previously reported that proprietary trading provided revenues but 
also produced large losses for some financial institutions during the 
recent crisis.[Footnote 24] However, others dispute that proprietary 
trading creates significant risks. For example, one market observer 
questioned the role of proprietary trading in the crisis--noting that 
losses by banks came from holdings of mortgage-related securities and 
not their proprietary trading activities. In addition, he noted that 
banks have expertise and add value in conducting trading activities 
and that such trading is likely not more risky than lending. 

To address potential risks of proprietary activities, the act 
generally prohibits proprietary trading by insured depository 
institutions and their affiliates and restricts the extent to which 
these companies can sponsor or invest in hedge and private equity 
funds. Regulators have taken some steps to implement this reform. For 
instance, the Federal Reserve issued the final rule and subsequent 
policy statement on the time frame for the effective dates (beginning 
in July 2014 unless extended by the Federal Reserve) after which 
banking entities must fully conform their activities and investments 
with these requirements. FSOC also issued a study recommending the 
types of monitoring metrics that regulators could use to help ensure 
compliance. In addition, the regulators responsible for issuing a rule 
specifying how affected institutions must comply--the Federal Reserve, 
FDIC, OCC, SEC, and CFTC--issued proposed rules in November 2011 and 
February 2012.[Footnote 25] The proposed rules have generated debate 
and interest from thousands of commenters, and some in Congress have 
called for a repeal of the law or delay of its implementation, and 
others have called for regulators to issue a revised proposal. As of 
November 2012, staff from some of the regulators responsible for 
preparing the rules related to proprietary trading and fund investment 
restrictions told us that they were considering the public comments 
and next steps, but could not estimate when the next action would 
occur. In our 2011 report on proprietary trading, we recommended that 
regulators collect and review more comprehensive information on the 
nature and volume of activities potentially covered by the act. 
[Footnote 26] 

Reforms to Address Consumer and Investor Protection and Other Areas 
Have Begun but Remain Incomplete: 

Regulators have also been implementing Dodd-Frank Act reforms to 
improve protections for consumers and investors. In addition to 
creating a new regulatory body--CFPB--that will consolidate certain 
rulemaking, supervision, and enforcement authorities relating to 
various consumer financial laws, including many of those relating to 
mortgage lending, the act also included changes to securitization 
practices to better protect investors. In addition, the act expands 
regulatory oversight of credit rating agencies and advisers of private 
funds. 

Creation of CFPB: 

Many bank and nonbank mortgage lenders weakened their underwriting 
standards and made mortgage loans to homebuyers who could not afford 
them or engaged in abusive lending practices before the crisis. After 
many homeowners were unable to make their mortgage payments, many of 
these mortgages went into default and led to widespread foreclosures. 
To address these consumer financial protection failures, the act 
created CFPB, among other reforms. Before the passage of the act, 
consumer financial protection responsibilities were vested in multiple 
agencies across the federal government. The creation of CFPB brought 
many of the consumer financial protection rulemaking and other 
authorities of the federal government into one agency, with the 
purpose of increasing accountability for such responsibilities. The 
authority for many of these responsibilities transferred to CFPB in 
July 2011, but staff told us that it was not allowed to move forward 
with its full regulatory responsibilities until the appointment of its 
director in January 2012. CFPB has issued rules and begun taking 
enforcement actions, including obtaining refunds for consumers and 
imposing penalties on certain credit card issuers for practices that 
violated the law. For example, in January 2012, CFPB issued rules, 
which were formally published in February 2012, to protect consumers 
who send money electronically to foreign countries. In January 2013, 
the CFPB issued two rules that established numerous mortgage servicing 
requirements. 

Although CFPB's mission extends beyond the mortgage market, many of 
its initial rulemaking efforts have focused on this market as the 
bureau works to implement the act's reforms. For example, the act 
prohibits a creditor from making a residential mortgage loan unless 
the creditor makes a reasonable and good faith determination based on 
verified and documented information that, at the time the loan is 
made, the consumer has a reasonable ability to repay the loan 
according to its terms. When making that determination, the creditor 
must consider, among other things, the consumer's income and assets, 
debt obligations, and credit history. The act created a presumption of 
compliance with the repayment ability requirement when creditors make 
"qualified mortgages."[Footnote 27] The Federal Reserve issued a 
proposed rule in May 2011 that would implement the act's ability-to-
repay and qualified mortgage provisions; however, due to certain 
transfers of authority under the Dodd-Frank Act CFPB has 
responsibility for finalizing the proposal. After seeking additional 
public comments on new data and information related to this proposal 
in June 2012, CFPB issued a final rule in January 2013 that defines 
qualified mortgages using the criteria specified in the Dodd-Frank 
Act. This rule is to be effective in January 2014. Although intended 
to encourage responsible lending, many market observers (including 
consumer advocates and lenders) previously have expressed concern that 
the rule, as proposed, could result in overly restrictive requirements 
(such as debt service-to-income ratios) that would limit the 
availability of mortgages to lower-income and minority borrowers. 
However, in a prior report, we examined five of the nine qualified 
mortgage criteria specified in the Dodd-Frank Act for which sufficient 
data were available and generally found that, for each year from 2001 
through 2010, most mortgages would likely have individually met each 
specific criterion.[Footnote 28] 

New Securitization Practices and Disclosures: 

The act also attempts to improve investor protections through a 
variety of reforms, including reforming securitization practices and 
requiring additional disclosures. According to some market observers, 
institutions that created mortgage-backed securities in the lead-up to 
the crisis engaged in a number of practices that undermined the 
quality of their securities, including not adequately monitoring the 
quality of the underlying mortgages, because they did not bear the 
risk of significant losses if those mortgages defaulted.[Footnote 29] 
To address this risk and protect investors, the act imposes certain 
risk-retention obligations on securitizers to retain an economic 
interest of no less than 5 percent of the credit risk of any 
securitized asset (such as a residential mortgage) that they created 
unless the asset meets criteria (to be defined by the regulators) 
associated with a lower risk of default. Securitized mortgages that 
meet the criteria are exempt from the risk-retention requirement and 
are referred to as qualified residential mortgages. The act directs 
the Federal Reserve, FDIC, OCC, SEC, FHFA, and the Department of 
Housing and Urban Development (HUD) to jointly prescribe rules to 
implement these requirements. The act also requires additional 
disclosures to be made to investors about these asset-backed 
securities. Some market participants have expressed concern that 
restrictive criteria for qualified residential mortgages would subject 
some mortgages with relatively low default risks to risk retention and 
make mortgage credit less affordable for many borrowers, because the 
increased securitization costs would be passed on to borrowers in the 
form of higher mortgage interest rates and fees.[Footnote 30] However, 
FDIC officials have stated that risk retention should not result in 
substantially higher interest rates for non qualified residential 
mortgage borrowers and comes with the benefit of safer and sounder 
lending practices. Additionally, rulemaking agencies have indicated 
that a more restrictive definition could help ensure that a sufficient 
volume of non qualified residential mortgages subject to risk 
retention would be available for an active, liquid securitization 
market for such mortgages. 

Although regulators have finalized some rules in this area, they have 
not yet completed all of the rules that would implement the reforms 
described above. In January 2011, SEC published final rules that will 
require an issuer to perform a due diligence analysis of the 
underlying assets and disclose the results.[Footnote 31] However, 
other key reforms, such as the joint rulemaking requirement to define 
a qualified residential mortgage as well as the rulemaking requiring 
greater disclosure of information related to the loans backing 
specific portions of an asset-backed security remain incomplete. 
[Footnote 32] These rules likely will have a significant impact on the 
volume of private (non-enterprise) mortgage-backed securitizations. As 
a result, the rules likely will affect competition in the housing 
finance market, which is currently dominated by the enterprises. We 
discuss reforming the enterprises later in the report. 

Regulation of Credit Rating Agencies and Advisers of Private Funds: 

As the financial crisis unfolded in 2007 and 2008, questions were 
raised about the role that credit rating agencies played in the 
securitization of high-risk mortgages into investment-grade 
securities, the accuracy of the credit ratings assigned to these 
securities, and the integrity of these ratings processes. Critics of 
credit rating agencies also pointed to the conflict of interest 
created by the industry's predominant compensation model in which 
issuers of securities pay the rating agencies for their ratings as a 
contributing factor to the poor quality of ratings. In response, the 
Dodd-Frank Act mandated additional oversight over the credit rating 
agencies that issued these ratings. For example, the act created an 
Office of Credit Ratings within SEC, which is to provide oversight and 
enhanced regulation of the credit rating agencies registered with SEC 
as Nationally Recognized Statistical Rating Organizations. The act 
also requires that SEC study, among other things, an alternative means 
for compensating credit rating agencies that would create incentives 
for accurate ratings.[Footnote 33] SEC issued its study on alternative 
means for compensating credit rating agencies in December 2012. 
[Footnote 34] However, as of December 2012, SEC had yet to issue key 
rules related to credit rating agencies, several of which had 
statutory deadlines. For example, a rule preventing sales and 
marketing considerations of credit rating agencies from influencing 
the production of credit ratings and a rule that will require these 
entities to submit annual internal control reports to SEC remain in 
proposed form. 

Over the last decade, private funds--such as hedge funds and private 
equity funds--proliferated but generally were less regulated, raising 
questions about investor protection and systemic risk to financial 
markets. To address this gap, the act expands regulatory oversight to 
hedge and private equity funds by requiring the investment advisers to 
these funds to register with SEC. This would result in any such 
advisers that had not previously registered to begin providing reports 
to SEC on their activities and being subject to examinations by 
regulatory staff. SEC has completed all of its rulemaking requirements 
related to private fund oversight. SEC and CFTC also issued a joint 
rule, in consultation with FSOC, to establish the form and content of 
the reports required to be filed with SEC and CFTC by investment 
advisers that are registered under both the Investment Advisers Act of 
1940 and the Commodity Exchange Act. The completion of these rules 
helps to bring a largely unregulated part of the financial markets 
under regulatory supervision. 

Regulators Have Faced Various Challenges Implementing Reforms: 

A variety of challenges have affected regulators' progress in 
executing rulemaking requirements intended to implement the act's 
reforms. Regulators to whom we spoke indicated that the primary 
challenges affecting the pace of implementing the act's reforms 
include the number and complexity of the rulemakings required and the 
time spent coordinating with regulators and others. In addition, some 
regulators identified additional challenges, including extensive 
industry involvement through comment letters and litigation resulting 
from rulemakings, concurrently starting up a new regulatory body and 
assuming oversight responsibilities, and resource constraints. 

Number and Complexity of Rulemakings Has Delayed the Implementation of 
Certain Reforms: 

The regulators identified the number and complexity of the required 
rulemakings as a primary impediment to their implementation of 
financial regulatory reforms. In particular, regulators were tasked 
with a large volume of rulemakings and other key actions; in many 
cases, the act mandated their completion in relatively short time 
frames compared to the typical rulemaking process. For example, we 
identified more than 80 provisions of the act for which SEC is 
responsible for (solely or jointly) developing rules or taking other 
key actions. As of December 2012, SEC had proposed or finalized 
rulemakings for at least 70 of these provisions. Similarly, we 
identified more than 50 provisions for which CFTC is responsible for 
(solely or jointly) developing rules, all but one of which CFTC had 
proposed or finalized. According to SEC and CFTC staff, this 
represents a significant increase in their rulemaking agendas. 

In many cases, the rulemakings also involved complex issues, such as 
developing regulation for a previously unregulated market function. 
Implementing such complex regulatory reforms through the rulemaking 
process has resulted in delays, as the following examples illustrate. 

* One of the major reform areas of the act requires that previously 
unregulated OTC swaps be brought under the regulatory umbrella. 
Regulators indicated this presented a unique set of challenges because 
the swaps market is complex and involves a large number of domestic 
and international participants. According to SEC staff, they had to 
research and acquire expertise on a range of issues. To acquire 
diverse perspectives and information, staff also held meetings and 
roundtables with industry participants and other agencies and foreign 
regulators before proposing the rules. 

* Regulators responsible for implementing the restrictions on 
proprietary trading and hedge and private equity fund investing also 
indicated that developing rules on these topics has been challenging 
because of the knowledge they had to acquire and the multiple 
perspectives and interests of market participants they had to 
consider. The complexities of implementing the proprietary trading ban 
was highlighted in the rule proposed in November 2011 and February 
2012, which included more than 750 questions seeking input from market 
participants to help inform regulators' decision making. 

* In other cases, the complexity involved identifying and developing 
new frameworks or standards for market participants. For example, 
regulators must replace references to credit ratings in their 
regulations (that is, to regulated entities' use of or dependence on 
ratings) and substitute alternative standards of creditworthiness. 
[Footnote 35] According to the regulators, creating objective and 
consistent standards for creditworthiness and defining such standards 
by regulation is difficult and finding an alternative to the ratings 
these agencies produce requires a thorough understanding of how the 
process has functioned in capital markets. Additionally, replacing the 
credit ratings with an alternative standard affects other regulations 
and policies that rely on credit ratings. Because of the broad effects 
that removal of the references to credit ratings would have, 
regulators stated that they had to approach this task with great care 
to avoid unintended consequences, which is why some of these rules 
have yet to be finalized. 

Although the regulators have missed statutory deadlines to complete 
rulemakings, regulators told us that some of the mandated time frames 
were ambitious. For example, CFTC staff described the statutory 
timetable as a challenge, noting that they were required to issue a 
significant number of rules within the first year of the act's 
passage. According to some of the regulators with whom we spoke with, 
their staffs have prioritized "getting it right" over meeting 
statutory deadlines, which has resulted in missing a number of the 
act's deadlines. 

Although Coordination among Regulators Improves Rules, It Has Delayed 
Implementation of Some Reforms: 

Regulators' progress in implementing the act's reforms also has been 
delayed because of the need to coordinate with other domestic and 
foreign regulators. We identified 58 provisions in which the act 
specifically mandates that regulators issue joint rules or consult 
with other federal financial regulators during rulemakings or other 
key actions. In other cases, reforms require regulators to implement 
rules that impact or are impacted by the rulemakings of other 
regulators. For example, rules related to what constitutes a 
"qualified residential mortgage" for securitizations have been 
awaiting CFPB's issuance of the rule on what constitutes a "qualified 
mortgage" because the act stipulates that the definition of a 
"qualified residential mortgage" cannot be broader than the definition 
of a "qualified mortgage." CFPB issued the final "qualified mortgage" 
rule in January 2013. 

According to many regulators with whom we spoke, coordination among 
domestic regulators and between domestic and foreign regulators has 
improved the quality of the rulemakings. For example, these efforts 
likely have eliminated duplication and helped fill regulatory gaps to 
limit risks migrating to unregulated markets, according to the 
regulators. Nevertheless, coordination with other regulatory bodies 
lengthens the time required to implement reform. To facilitate 
domestic coordination, while financial regulators employed some formal 
communication methods, they mostly used informal communications 
strategies and tools. Regulators generally held formal interagency 
meetings early in the rulemaking process, then held recurring meetings 
at different staff levels and facilitated coordination through 
informal communications (e-mail, telephone conversations, and one-on-
one staff conversations). For example, FDIC, OCC, and the Federal 
Reserve held a principal-level meeting to discuss the major issues 
relating to development of risk-based capital rules. Afterwards, the 
agencies formed an interagency working group at the staff level that 
continues to work on these rules.[Footnote 36] In addition, FSOC has 
established a framework for consultation when it is required to be 
consulted or may make recommendations. 

On the international level, U.S. regulators also have coordinated with 
foreign regulators and with international standard-setting bodies. For 
example, in December 2012, FDIC and the Bank of England issued a joint 
paper that discusses their common view about how to resolve failures 
of large financial institutions. Also, CFTC and SEC coordinated with 
securities and futures regulators in other countries on various 
derivatives reform provisions by participating in several 
international groups as well as numerous conference calls and 
meetings.[Footnote 37] OFR staff have also coordinated with 
international regulators and financial market participants through the 
FSB to develop standards for a LEI that is intended to accurately 
identify parties to financial transactions.[Footnote 38] OFR played a 
key role leading work streams and working with other regulators and 
industry to provide recommendations to the Group of Twenty to guide 
the governance, development, and implementation of a global LEI 
system. During the implementation phase, OFR is serving as a vice-
chair on the LEI Implementation Group and will continue to provide 
leadership and support as this group works towards meeting the March 
2013 target for launching the LEI system. 

Although the federal financial regulators have developed and fostered 
several mechanisms to facilitate coordination and believe these 
efforts have improved the quality of the rulemakings, several 
regulators said that interagency coordination has increased the amount 
of time needed to develop and finalize several rulemakings. Regulators 
stated that working with other agencies--both domestically and 
internationally--can be difficult for a variety of reasons. For 
example, each regulator has different statutory authorities and 
obligations, jurisdictions, and missions. Each regulator has unique 
expertise and experience with the financial products or services it 
regulates and the supervisory structures of each agency are different. 
These differences can make reaching consensus (for instance, by 
aligning or reconciling regulations) difficult and time consuming. For 
example, although CFTC and SEC reached consensus on the text for the 
jointly issued swap entities rule, the regulators outlined different 
approaches in certain parts of the rule due to their regulatory 
jurisdiction over different products. In addition, regulators told us 
that they had to allow extra time for other regulators to review draft 
rules, hold discussions, and reach consensus. 

Volume of Comments and Industry Challenges Also Have Affected Pace of 
Implementation: 

The volume of comments that regulators have received on some rules 
also affected the pace of rule development. For example, regulatory 
staff told us that they had received more than 19,000 comment letters 
on the proposed proprietary trading ban rules, further complicating 
the rulemaking process. According to these staff, the volume of 
comments from market participants and consumer groups has presented 
challenges for deciding the content of a final rule--as in the case of 
market participants advocating opposing or disparate positions, which 
regulators then needed to consider and perhaps reconcile. CFTC staff 
cited the example of comments relating to the amount of business that 
could be done before an entity would be required to register as a 
swaps dealer. Suggested amounts for the de minimus exception ranged 
from the millions to the billions of dollars. Although some comments 
regulators received on rules were multiple versions of similar form 
letters, in other cases the letters were unique and could be lengthy 
(more than 200 pages). OCC staff noted that the proprietary trading 
rule received more than 400 nonform letters with substantive comments, 
some of which were more than 100 pages each. The capital rules 
generated fewer comments, but these letters were very lengthy and had 
to be carefully considered. Regulator staff told us that high comment 
volume lengthens the rulemaking process and requires more staff review 
and analyze because each regulator is legally required to consider 
every comment it receives. 

In addition, industry involvement, including filing legal challenges, 
has delayed some regulatory efforts. According to one public interest 
association, intense industry lobbying efforts and the threat of 
lawsuits have been roadblocks to successful implementation of consumer 
protection reforms. Also, an industry-sponsored study has criticized 
the impending reforms, such as the ban on proprietary trading. In 
other cases, legal challenges filed by the industry have affected the 
pace of reforms. For example, in October 2011, CFTC approved a final 
rule on position limits for futures, options, and swaps related to 28 
physical commodities, such as agricultural and energy products or 
metals, an action that the agency believed the act mandated.[Footnote 
39] However, in September 2012, the United States District Court for 
the District of Columbia overturned the final rule after finding that 
the agency did not prove that the Dodd-Frank Act granted CFTC 
authority to issue the regulations without first determining the 
regulation was "necessary" or "appropriate" and therefore the 
regulations were vacated.[Footnote 40] CFTC appealed the District 
Court's decision in November 2012, but until the appeal is completed 
CFTC's requirements are not in effect for market participants. 
[Footnote 41] In another example, in July 2011 the United States Court 
of Appeals for the District of Columbia Circuit overturned SEC's rule 
on proxy access requirements on the basis that SEC had failed to 
perform an adequate cost-benefit analysis of the rule's impact. 
[Footnote 42] Although this rule was not mandated by the Dodd-Frank 
Act, SEC staff told us that because of this decision, they have been 
spending additional time on developing cost-benefit analyses for the 
rules they must develop under the act, which has lengthened the time 
needed for rulemaking. 

Other Challenges to Reform Implementation Included Establishing New 
Entities: 

The need to establish new regulatory bodies or offices mandated by the 
act affected the pace of implementation of some reforms, as 
illustrated by the following examples: 

* The staff responsible for establishing the new federal consumer 
financial protection agency--CFPB--faced the challenge of 
simultaneously forming its agency structure, initiating supervision 
and oversight responsibilities, and creating rules mandated by the 
act. After the act was passed in July 2010, staff detailed from 
Treasury offices and other federal agencies began hiring new staff and 
establishing internal administrative procedures and structures. 
Although rulemaking and other authorities relating to the consumer 
financial laws transferred to CFPB in July 2011, the agency did not 
have a director until January 2012. Until then, it was limited in its 
ability to issue certain rules and conduct certain oversight of 
entities other than banks. As of October 2012, the agency had about 
1,000 staff and anticipates reaching approximately 1,300 staff 
sometime in 2013. While establishing regulatory operations, its staff 
also had to develop various rulemakings required by the act. As noted 
previously, CFPB had been working on a complex rule that would promote 
responsible mortgage lending by requiring creditors to consider a 
consumer's repayment ability before making a residential mortgage 
loan. CFPB staff acknowledged that establishing their agency, 
conducting its operations, and developing various rulemakings has been 
challenging and likely slowed progress in some areas. 

* The creation of new offices in SEC also has affected the pace of 
that agency's rulemakings. More specifically, the Dodd-Frank Act 
required the creation of five new offices in SEC--including an Office 
of Credit Ratings.[Footnote 43] This office was established when SEC 
named its director in June 2012. As a result, some activities were 
started by other SEC divisions and offices--including finalizing rules 
for credit rating agencies that require them to disclose the 
information and assumptions used in ratings they issue--according to 
SEC officials. 

* OFR also has faced the challenge of trying to build a world-class 
research organization from the ground up while meeting shorter-term 
goals and responsibilities. For example, as a new, relatively unknown 
entity OFR had to overcome a lack of name recognition as it has sought 
to hire researchers and other staff. OFR officials told us that the 
organization has been making steady progress to overcome this 
challenge, and has attracted highly qualified researchers and others 
to senior staff positions. The absence of a Senate-confirmed director 
for the organization until January 2013 slowed the process. While 
establishing itself, OFR also has been conducting work to further its 
mission to provide ongoing support to FSOC and standardize the types 
and format of data collected and reported by financial regulators. 

According to some regulators, their efforts to fully implement the 
reforms also have been delayed due to resource constraints their 
agencies face. For example, the Dodd-Frank Act increased SEC's and 
CFTC's responsibilities, including their rulemaking responsibilities. 
However, according to SEC and CFTC staff, their agencies did not 
receive commensurate increases in appropriations. As a result, staff 
from both CFTC and SEC told us that attempting to finalize so many 
interrelated and often complex rules with their existing staffing 
levels has been challenging. CFTC staff told us that personnel 
responsible for some rulemakings have had to do the work of more than 
one person, which increases the potential for errors and delays that 
interrupt the normal flow of rulemaking. Looking forward, CFTC and SEC 
staff expressed concerns about their ability to carry out rule 
enforcement. To mitigate these concerns, CFTC requested 305 additional 
full-time equivalent positions in its 2013 budget request. Likewise, 
SEC requested an additional 196 full-time equivalent positions in its 
2013 budget request. 

Various Areas Continue to Pose Risks, and Regulatory Actions to 
Mitigate These Risks Have Not Been Finalized or Implemented: 

Although the act addressed a number of weaknesses of the regulatory 
system that were exposed by the recent or past financial crises, some 
risks remain and others have emerged. In 2009, we reported on many of 
the limitations in the U.S. financial regulatory system that the 2007-
2009 crisis once again revealed.[Footnote 44] For example, we noted 
that regulators had struggled, and often failed, to mitigate the 
systemic risks posed by large or interconnected financial 
conglomerates and to help ensure they adequately manage their risks. 
Problems in financial markets also resulted from the activities of 
less-regulated market participants--such as nonbank mortgage lenders, 
hedge funds, and credit rating agencies--some of which played 
significant roles in the financial markets. In addition, we noted that 
the increasing prevalence of new and more complex investment products 
posed challenges for regulators, investors, and consumers. In our 
report, we offered a framework for evaluating regulatory reform 
proposals that described characteristics that should be reflected in 
any new regulatory system (see table 2). This framework can serve as a 
useful lens for examining how weaknesses were addressed through the 
act and where additional work remains. 

Table 2: GAO's 2009 Framework for Evaluating Financial Regulatory 
Reform: 

Characteristic: Clearly defined regulatory goals; 
Description: Goals should be clearly articulated and relevant, so that 
regulators can effectively carry out their missions and be held 
accountable. Key issues include considering the benefits of 
reexamining the goals of financial regulation to gain needed consensus 
and making explicit a set of updated comprehensive and cohesive goals 
that reflect today's environment. 

Characteristic: Appropriately comprehensive; 
Description: Financial regulations should cover all activities that 
pose risks or are otherwise important to meeting regulatory goals and 
should ensure that appropriate determinations are made about how 
extensive such regulations should be, considering that some activities 
may require less regulation than others. Key issues include 
identifying risk-based criteria, such as a product's or institution's 
potential to create systemic problems, for determining the appropriate 
level of oversight for financial activities and institutions, 
including closing gaps that contributed to the current crisis. 

Characteristic: Systemwide focus; 
Description: Mechanisms should be included for identifying, 
monitoring, and managing risks to the financial system regardless of 
the source of the risk. Given that no regulator is currently tasked 
with this, key issues include determining how to effectively monitor 
market developments to identify potential risks; 
the degree, if any, to which regulatory intervention might be required; 
and who should hold such responsibilities. 

Characteristic: Flexible and adaptable; 
Description: A regulatory system that is flexible and forward looking 
allows regulators to readily adapt to market innovations and changes. 
Key issues include identifying and acting on emerging risks in a 
timely way without hindering innovation. 

Characteristic: Efficient and effective; 
Description: Effective and efficient oversight should be developed, 
including eliminating overlapping federal regulatory missions where 
appropriate, and minimizing regulatory burden without sacrificing 
effective oversight. Any changes to the system should be continually 
focused on improving the effectiveness of the financial regulatory 
system. Key issues include determining opportunities for consolidation 
given the large number of overlapping participants now, identifying 
the appropriate role of states and self-regulation, and ensuring a 
smooth transition to any new system. 

Characteristic: Consistent consumer and investor protection; 
Description: Consumer and investor protection should be included as 
part of the regulatory mission to ensure that market participants 
receive consistent, useful information, as well as legal protections 
for similar financial products and services, including disclosures, 
sales practice standards, and suitability requirements. Key issues 
include determining what amount, if any, of consolidation of 
responsibility may be necessary to streamline consumer protection 
activities across the financial services industry. 

Characteristic: Regulators provided with independence, prominence, 
authority, and accountability; 
Description: Regulators should have independence from inappropriate 
influence, as well as prominence and authority to carry out and 
enforce statutory missions, and be clearly accountable for meeting 
regulatory goals. With regulators with varying levels of prominence 
and funding schemes now, key issues include how to appropriately 
structure and fund agencies to ensure that each one's structure 
sufficiently achieves these characteristics. 

Characteristic: Consistent financial oversight; 
Description: Similar institutions, products, risks, and services 
should be subject to consistent regulation, oversight, and 
transparency, which should help minimize negative competitive outcomes 
while harmonizing oversight, both within the United States and 
internationally. Key issues include identifying activities that pose 
similar risks, and streamlining regulatory activities to achieve 
consistency. 

Characteristic: Minimal taxpayer exposure; 
Description: A regulatory system should foster financial markets that 
are resilient enough to absorb failures and thereby limit the need for 
federal intervention and limit taxpayers' exposure to financial risk. 
Key issues include identifying safeguards to prevent systemic crises 
and minimizing moral hazard. 

Source: GAO. 

[End of table] 

In a number of ways, the act's reforms--if implemented effectively--
could address many characteristics of our framework. For example, the 
consistency of consumer protection could be increased through the 
establishment of CFPB, which consolidated certain of the consumer 
protection rulemaking, supervision, and enforcement authorities 
possessed by seven different federal agencies.[Footnote 45] The 
creation of FSOC could help to address the framework's call for a 
systemwide focus on risks. Other Dodd-Frank Act reforms also address 
additional areas on which the framework touches. For example, if the 
new resolution authority--OLA--is effective, it could reduce the 
potential for additional taxpayer exposure arising from the failure of 
large financial institutions. Furthermore, regulations that will 
expand disclosures about mortgage-backed securities and require 
issuers to retain a portion of the credit risk of these securities 
could improve investor protection. 

Nevertheless, some potential risks remain and others have emerged in 
the years following the 2007-2009 crisis, including the following: 

Regulatory structure. In the framework, we called for a more effective 
and efficient regulatory system. Specifically, we noted several 
characteristics of effective and efficient oversight, including 
eliminating overlapping federal regulatory missions where appropriate, 
and minimizing regulatory burden without sacrificing effective 
oversight. To this end, the Dodd-Frank Act abolished the Office of 
Thrift Supervision, transferring its functions to OCC, FDIC, and the 
Federal Reserve. However, the act did not otherwise extensively 
consolidate the roles and responsibilities of the financial regulators 
and created new entities, such as OFR and CFPB. Consequently, multiple 
regulators may oversee different components of the same large, complex 
financial institutions while retaining their independence, differing 
approaches, and specific statutory duties and authorities, including 
rulemaking and enforcement.[Footnote 46] 

Given the fragmented regulatory structure, regulators must continue to 
coordinate actions across multiple agencies and try to reconcile 
differing approaches and authorities to better ensure effective 
oversight of large financial firms. Without sufficient coordination, 
financial institutions could seek to take advantage of variations in 
how agencies implement regulatory responsibilities in order to be 
subject to less scrutiny. We have previously noted the role that FSOC 
could play in promoting coordination among its member agencies, 
including during the rulemaking process.[Footnote 47] However, FSOC's 
Chairperson has noted that he does not have the authority to force 
agencies to coordinate, and neither he, nor FSOC as a whole, can force 
agencies to adopt compatible policies and procedures. 

Fannie Mae and Freddie Mac. Our 2009 framework emphasizes that 
effective reform would minimize taxpayer exposure to financial risk, 
particularly when market participants encounter financial 
difficulties. However, the act did not address the futures of Fannie 
Mae and Freddie Mac that together support the majority of single-
family mortgage loans. Given mounting losses, in September 2008 the 
enterprises were put into conservatorship and provided access to 
federal assistance through Senior Preferred Stock Purchase Agreements 
with the U.S. Treasury; together they have received over $187 billion 
in federal assistance as of the end of fiscal year 2012. Although 
recently the enterprises began earning profits that are being returned 
to the U.S. Treasury, the act did not address the existing taxpayer 
exposure from the enterprises or provide a road map to mitigate 
potential future losses related to them.[Footnote 48] 

Although policymakers, regulators, and others have developed proposals 
for the future structure and operations of the enterprises, they have 
not taken any final actions to resolve their status. In February 2011, 
Treasury and HUD issued a plan that outlines a vision for the 
government's role in housing finance, including reducing the 
activities of the enterprises over time until they are eventually 
fully wound down. In addition, in February 2012, FHFA, which 
supervises and regulates the enterprises' operations, issued a 
strategic plan that identified three strategic goals for the next 
phase of the conservatorships. The goals were building a new 
infrastructure for the secondary mortgage market, gradually 
contracting the enterprises' dominant presence in the marketplace 
while simplifying and shrinking their operations, and maintaining 
foreclosure prevention activities and credit availability for both new 
and refinanced mortgages. 

In August 2012, FHFA took two actions affecting the enterprises. 
First, to encourage greater participation in housing markets by 
private firms, FHFA directed the enterprises to raise the fees they 
charge lenders for securitizing their mortgage loans to reduce the 
cost difference between securitizations done by the enterprises and 
those done by private firms. Second, FHFA, in conjunction with 
Treasury, revised the senior preferred stock purchase agreements to 
have the enterprises pay dividends to the U.S. Treasury based on their 
net worth (when positive) rather than a fixed percentage of the 
outstanding senior preferred stock. Among other things, this change 
should eliminate the need for the enterprises to borrow from Treasury 
to pay such dividends. In October 2012, FHFA also sought public 
comment on a proposal for developing a new mortgage securitization 
platform to process payments and perform other functions that could be 
used by multiple issuers that would replace the enterprises' 
proprietary systems. Although such proposals and plans have been put 
forward, as of December 2012, no definitive plan had been developed 
and the enterprises remain in conservatorship, which places taxpayers 
at continued risk. Furthermore, given the large role that the 
enterprises play in the mortgage market, the future of mortgage 
lending depends, in part, on how the enterprises are resolved. The 
Treasury and HUD plan acknowledges that changes in the role of the 
enterprises will also require changes in the activities of HUD's 
mortgage insurance and guarantee programs to ensure that the private 
market rather than the government expands its market share. 

Money market funds. The framework calls for improving the regulatory 
system by ensuring a focus on risks that could affect the system as a 
whole. However, one risk that continues to raise significant concerns 
is the potential systemic risk posed by money market funds (MMF). MMFs 
are mutual funds that seek to offer investors three primary features: 
return of principal, liquidity, and a market-based rate of return. 
During the financial crisis, runs on MMFs led to severe disruptions in 
the short-term credit markets in which the funds played a significant 
role. After a number of MMFs recorded significant decreases in the 
value of portfolio holdings when the market for asset-backed 
commercial paper collapsed in the summer and fall of 2007, these 
funds' sponsors absorbed these losses.[Footnote 49] However, in 2008, 
the sponsor of the Reserve Primary Fund did not provide support for 
the relatively small losses incurred by this MMF, which led to a 
general run of investors withdrawing their money from money market 
funds, creating severe funding pressures for issuers of commercial 
paper. The run was stopped by unprecedented interventions by Treasury 
and the Federal Reserve to provide guarantees and liquidity support to 
the industry.[Footnote 50] The former SEC Chairman--Mary Schapiro--
stated that the events of the financial crisis highlighted that the 
risks posed by MMFs stem from flaws inherent in the structure of these 
funds (such as valuation methods that make funds susceptible to runs 
and a reliance on discretionary sponsor support for stability). She 
further stated that she considers the structural reform of money 
market funds one of the pieces of unfinished business from the 
financial crisis. 

In 2010, the Commission adopted the first round of reforms to boost 
the resilience of MMF portfolios. For example, SEC required MMFs to 
hold more highly liquid assets and to disclose their portfolio 
holdings monthly. Some market observers contend these reforms are 
sufficient to address any risk from these funds and that further 
reforms are unnecessary. However, regulators and others continue to be 
concerned. According to a paper issued by the International Monetary 
Fund, strengthening the regulation of MMFs is critical especially 
because U.S. regulators are now prohibited from using the types of 
emergency authorities they employed in the recent crisis, such as the 
government-backed guarantees of MMFs' obligations to shareholders that 
prevented further problems. 

In June 2012, the SEC Chairman discussed the need for SEC to pursue 
additional reforms, including potentially requiring funds to have a 
floating net asset value per share or to maintain a capital buffer of 
assets to absorb day-to-day fluctuations in the value of the funds' 
portfolio securities. The group that represents mutual funds--the 
Investment Company Institute--issued a letter noting that SEC's 2010 
reforms improved the credit quality, maturity, liquidity, and 
transparency of money market funds and arguing that the additional 
changes contemplated by the SEC Chairman would effectively put an end 
to money market funds as an investment vehicle, which would harm 
investors and eliminate a funding source for many businesses. In 
August 2012, a majority of the SEC commissioners informed the SEC 
Chairman that they would not support a staff proposal to reform the 
structure of money market funds without further study. In September 
2012, these commissioners posed several questions to SEC staff 
regarding various aspects of money market funds, which were addressed 
in a study issued in November 2012.[Footnote 51] However, as of 
December 2012, no official agency action had occurred. 

FSOC has urged SEC and other members to take certain actions to 
address the risks posed by cash management vehicles similar to MMFs. 
For instance, in July 2012 FSOC recommended that its members align 
regulation of cash management vehicles within their regulatory 
jurisdiction to limit the susceptibility of these vehicles to the risk 
of runs. Furthermore, at a November 2012 meeting, FSOC--under its 
authority to recommend that a primary financial regulatory agency 
apply new or heightened standards or safeguards to financial 
activities or practices conducted by bank holding companies or nonbank 
financial companies that create or increase the risk of significant 
liquidity, credit, or other problems--issued several proposed 
recommendations for reforming MMFs for a 60-day public comment period. 
[Footnote 52] Similar to those proposed by the SEC Chairman, these 
proposed alternatives for reform include requiring MMFs to have a 
floating net asset value per share, maintain a buffer of assets of up 
to 1 percent of net asset value to absorb day-to-day fluctuations in 
the value of the funds' portfolio securities and allow the funds to 
maintain a stable net asset value.[Footnote 53] At the November 
meeting, the FSOC Chairman also noted that it was still preferable for 
the responsible regulator--SEC--to take the appropriate actions but 
absent such SEC actions, other regulators might have to act. However, 
although FSOC can make such recommendations and agencies must respond 
to such recommendations, FSOC cannot require that such changes be 
implemented. 

Concentration of risks. The framework also calls for the U.S. 
regulatory system to subject all activities posing risks to 
appropriate oversight and protections. However, market observers have 
raised concerns that key areas--the tri-party repurchase (repo) market 
and swaps clearinghouses--in which financial risks have been 
concentrated lack adequate protections.[Footnote 54] The financial 
crisis revealed weaknesses in the design of the U.S. tri-party repo 
market, a funding mechanism used by major broker-dealers to finance 
their inventories of securities. However, currently only two 
institutions provide credit to facilitate transactions in this market. 
According to the Federal Reserve Bank of New York, these weaknesses 
could rapidly elevate and propagate systemic risk. For instance, it 
became apparent during the crisis that the market's infrastructure to 
settle transactions had fundamental flaws that could lead to serious 
instability during periods of market stress. In its 2012 Annual 
Report, FSOC notes that the elimination of most intraday credit 
exposure and the reform of collateral practices in this market 
continue to be areas of intense focus for the council. 

The resiliency of the tri-party repo market is important for a number 
of reasons. First, the market serves as a tool for cash and liquidity 
management and for short-term borrowing for a range of financial 
intermediaries, including money market funds, insurance companies, 
banks, and securities dealers, all of which play an important role in 
supporting the savings and investment programs of households, small 
businesses, and nonfinancial corporations. Second, the tri-party repo 
market is currently the source of funding for some $1.8 trillion in 
securities held by securities dealers and only two banks currently act 
as agents and clearing organizations in the vast majority of tri-party 
repurchase agreements.[Footnote 55] Managing the interdependency of 
financial products is an important factor in reducing systemic risk 
and enhancing the stability of the U.S. financial system. 

Market participants and regulators have made some progress in 
addressing the tri-party repo market shortcomings and enhancing 
protections. For instance, the current tri-party repo market is 
smaller than at its peak and generally funds higher-quality collateral 
than it did before the crisis. However, certain vulnerabilities 
remain. According to testimony by a Federal Reserve official, the 
reliance on discretionary intraday credit in the tri-party settlement 
process poses difficult dilemmas for cash lenders, borrowers, and 
clearing banks during periods of market stress, which could result in 
securities dealers experiencing a sudden and acute loss of funding. 
Furthermore, key stakeholders believe that not as much progress has 
been made--or made as quickly--as warranted by the seriousness of the 
risks this market poses. Consequently, a task force of market 
participants that regulators convened issued a final report in 
February 2012 calling for a settlement process that relies less on 
extensions of credit. The Federal Reserve also has acted to reduce the 
reliance of market participants on this form of funding by encouraging 
market participants over which it has direct authority to implement 
the task force recommendations in a timely fashion. However, in 
congressional testimony, a Federal Reserve official acknowledged 
continued work is needed to generate additional solutions for reducing 
systemic risk. 

Another source of concentrated financial risks arises from the 
activities of clearinghouses for financial products, and some of the 
reforms of the act could expand this risk. For instance, by requiring 
that most swaps be cleared through clearinghouses rather than the OTC 
market, the act attempts to reduce the vulnerability of the financial 
system to the failure of one or a few of the major swap dealers by 
transferring credit risk from the swap counterparties to the 
clearinghouse. However, some experts noted this reform concentrates 
credit risk at the clearinghouses and, in effect, creates a source of 
systemic risk. For example, a former regulatory official told us that 
clearinghouses in the new swaps market will be "too big to fail" and 
pose the same moral hazard problem as large financial institutions 
because the Dodd-Frank Act includes a provision allowing the Federal 
Reserve to assist certain clearinghouses. In addition, experts 
commented that clearinghouses that become engaged in clearing less-
standardized swaps could expose themselves to greater risks and more 
complex risk-management challenges. Regulators have taken some actions 
that could mitigate the risk posed by these clearinghouses. In July 
2012, FSOC designated several clearinghouses as systemically important 
financial market utilities, which will subject these entities to 
heightened prudential oversight by the Federal Reserve. 

Although many of the Dodd-Frank Act's reforms and these other 
regulatory efforts seek to address risks arising from large 
institutions and other concentrations of risk, some market observers 
noted that risks that could have systemic implications could also 
arise from other sources. For example, one academic noted that during 
the crisis the activities of some smaller institutions, such as those 
involved with asset-backed securitizations, were not individually 
problematic but became so as numerous institutions experienced losses, 
which, in turn, spread to affect others due to the interconnectedness 
of the system. Such threats to financial stability could stem from a 
large number of institutions that encounter trouble with certain risky 
products or from soundness problems that arise at a group of smaller 
institutions, such as regional banks. The act includes some reforms 
that, if effectively implemented, could minimize such threats, such as 
minimum capital standards for banks and FSOC's ability to monitor and 
respond to a broad range of threats. However, their effectiveness will 
be greatly affected by how they are implemented and the vigorousness 
of regulators' oversight efforts. 

Overall, the federal financial regulators have considerable work under 
way to implement reforms that could improve the financial system in 
many of the ways that our 2009 framework envisions. However, much work 
remains to implement the Dodd-Frank Act reforms. As of December 2012, 
regulators had finalized a little less than half of the provisions we 
identified as requiring rulemakings or other key actions. Moreover, 
completing the rulemaking process does not mean that reforms are fully 
implemented. Rather, it will take time--beyond the time spent on 
finalizing the rulemakings--for regulators and industry to adopt the 
reforms contained in the rulemakings, and even longer to determine 
whether the reforms have had their intended outcomes. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to CFPB, CFTC, FDIC, the Federal 
Reserve, FHFA, FSOC, OCC, OFR, and SEC for their review and comment. 
The SEC Chairman provided written comments on our draft. The 
Chairman's letter notes that implementation of the Dodd-Frank Act 
continues to be a major undertaking of SEC and other agencies. She 
also describes progress SEC has made in issuing required rules and 
studies. These comments are reprinted in appendix II. We also obtained 
technical comments from CFPB, FDIC, FSOC, OCC, OFR, and SEC, which we 
have incorporated as appropriate. The Federal Reserve, FHFA, and CFTC 
did not provide comments. 

We are sending copies of this report to CFPB, CFTC, FDIC, the Federal 
Reserve, FHFA, FSOC, OCC, OFR, and SEC, interested congressional 
committees, members, and others. This report will also be available at 
no charge on our website at [hyperlink, http://www.gao.gov]. 

Should you or your staff have questions concerning this report, please 
contact me at (202) 512-8678 or clowersa@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. Key contributors to this report are 
listed in appendix II. 

Signed by: 

A. Nicole Clowers: 
Director: 
Financial Markets and Community Investment: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

Our objectives in this report were to examine what is known about the 
(1) the overall status of U.S. financial regulatory reforms arising 
from the act, (2) challenges affecting the implementation of these 
reforms, and (3) areas that pose continued risk. 

To address our first two objectives, we synthesized GAO's body of work 
on the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act) reforms and other financial regulatory reform efforts and 
challenges. We also reviewed and analyzed government, academic, and 
other studies on Dodd-Frank Act reforms and implementation. To examine 
regulators' efforts to implement the provisions of the Dodd-Frank Act, 
we focused on eight major reform areas: capital requirements; 
resolution of financial institutions; proprietary trading; 
derivatives; consumer protection; mortgage reforms; expanded 
regulation of institutions and products; and investor protection. We 
also obtained and analyzed information from a database maintained by 
the law firm Davis Polk and Wardwell LLP that identified provisions of 
the Dodd Frank Act that require or authorize regulators to take 
actions, and tracks the status of regulators' efforts to implement 
these provisions. We focused our analysis on provisions that required 
rulemakings or other key actions, but excluded other requirements, 
such as those to publish studies. 

We took several steps to determine the number of provisions requiring 
regulators to issue rulemakings or take other key actions as well as 
the status of regulators' efforts to implement the provisions. For 
example, after we identified provisions that we believed required 
regulators to issue rulemakings or take other key actions, we 
discussed these provisions with staff from eight agencies that are 
responsible for implementation of the majority of these efforts. 
[Footnote 56] In some cases, the law firm's staff had identified 
provisions in the act as requiring separate actions, but which 
regulators saw as the same required action and had responded to the 
provisions by issuing a single rule. In other cases, regulators 
acknowledged that the act had called for separate actions but they had 
chosen to respond to these provisions in a single rule. For purposes 
of our report, we counted a provision as calling for a separate 
requirement if it appeared in our professional judgment to be a 
distinct requirement, regardless of how an agency combined or 
separated it for rulemaking purposes. In cases in which multiple 
regulators were required to implement one provision, we counted the 
provision as being finalized when at least one regulator had finalized 
a rule, and we counted a rule as having been proposed when at least 
one of the regulators had proposed a rule. Finally, our analysis 
focused on regulators' progress implementing rulemakings and taking 
other key actions from the act's passage through December 2012. Using 
different sources, assumptions, and judgments in compiling the list of 
provisions could result in different totals, and therefore the 
information we provide should not be taken as a definitive count of 
all actions required by the act. 

During the course of our work, staff from several regulatory agencies 
noted that the private law firm's data we used as the initial source 
to identify provisions of the Dodd-Frank Act that required rulemakings 
and other key actions by regulators overstates the number of required 
actions. This is because the database presents as separate 
requirements various Dodd-Frank Act provisions that regulators may 
view as one requirement with multiple elements and thus may be 
addressed through a single rule. However, because we have used various 
additional sources, including input from the relevant regulators, to 
compile the list of provisions requiring regulatory action, we 
maintain that the total we present in this report--which is 
significantly less than the total required actions reported by the 
original source--has been compiled using reasonable methods and treats 
requirements consistently across agencies. Moreover, we have disclosed 
the steps we took to compile the list of provisions and the 
limitations of our analysis. 

For our first two objectives, we also interviewed officials from seven 
financial federal regulators--Board of Governors of the Federal 
Reserve System (Federal Reserve), Bureau of Consumer Financial 
Protection (CFPB), Commodity Futures Trading Commission (CFTC), 
Federal Deposit Insurance Corporation (FDIC), Federal Housing Finance 
Agency (FHFA), Office of the Comptroller of the Currency (OCC), and 
Securities and Exchange Commission (SEC)--as well as staff from the 
Financial Stability Oversight Council (FSOC) about their 
implementation of various Dodd-Frank reforms, challenges they are 
facing, and areas that continue to pose risk. In addition, we 
interviewed industry and consumer groups about these same issues and 
obtained the views from market observers and experts who have written 
about various Dodd-Frank Act reforms. 

For the third objective, we compared key reforms (as identified for 
objective one) of the act against GAO's 2009 framework for evaluating 
regulatory reform.[Footnote 57] We analyzed documentation and reports 
issued by federal regulators, market participants and observers, GAO, 
and congressional committees that identify areas of the U.S. financial 
system that undermine its stability and were not addressed by recent 
reforms. Finally, we interviewed regulatory officials, market 
participants, and observers to obtain their viewpoints about what 
areas, issues, or products could decrease the stability of the 
financial system that would benefit from additional or enhanced 
reforms, and any progress taken by the regulators to address these 
issues. 

We conducted this performance audit from June 2012 to January 2013 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Comments from the Securities and Exchange Commission: 

United States Securities And Exchange Commission: 
The Chairman: 
Washington, D.C. 20549: 

January 9, 2013: 

A. Nicole Clowers: 
Director, Financial Markets and Community Investment: 
United States Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Ms. Clowers: 

Thank you for providing us with the opportunity to review and comment 
on GAO's draft report entitled Financial Regulatory Reform: Regulators 
Have Faced Challenges Finalizing Key Reforms and Unaddressed Areas 
Pose Potential Risks (GAO-13-195). We appreciate GAO's work on this 
important matter and the courtesy and consideration you have shown to 
the SEC staff in conducting this study. 

Implementation of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act ("Dodd-Frank Act") continues to be a major undertaking 
for the SEC and other government regulatory agencies. The Dodd-Frank 
Act requires or authorizes federal financial regulatory agencies, 
including the SEC, to promulgate hundreds of regulations. As the draft 
report notes, "a variety of challenges have affected regulators' 
progress in executing rulemaking requirements intended to implement 
the act's reforms." Those challenges include the number and complexity 
of the required rulemakings, as well as the relatively short 
timeframes imposed by the Dodd-Frank Act. Notwithstanding these 
challenges, we have made substantial progress in fulfilling our 
statutory obligations. Of the more than 90 mandatory rulemaking 
provisions that apply to the SEC, the SEC has proposed or adopted 
rules for over 80% of them -- not including rules stemming from the 
dozens of other provisions that give the SEC discretionary rulemaking 
authority. Additionally, the SEC has finalized 17 of the more than 20 
studies and reports that it is required to complete under the Act. 
While we have achieved a great deal, we are continuing to work 
diligently to implement all provisions of the Act for which we have 
responsibility, even as we continue to perform our longstanding core 
responsibilities as well as new responsibilities such as those under 
the Jumpstart Our Business Startups ("JOBS") Act. 

Thank you once again for the opportunity to review and comment on the 
draft report. I am committed to completing the challenging task of 
fully implementing the Dodd-Frank Act. 

Sincerely, 

Signed by: 

Elisse B. Walter: 
Chairman: 

[End of section] 

Appendix III: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

A. Nicole Clowers, (202) 512-8678 or clowersa@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Cody J. Goebel (Assistant 
Director), Anne A. Akin, William R. Chatlos, Camille K. Jennings, 
Waterankwa Kadzai, Jon D. Menaster, Marc W. Molino, Barbara M. 
Roesmann, and Jessica M. Sandler made significant contributions to 
this report. 

[End of section] 

Related GAO Products: 

Financial Regulatory Reform: Financial Crisis Losses and Potential 
Impacts of the Dodd-Frank Act. [hyperlink, 
http://www.gao.gov/products/GAO-13-180]. Washington, D.C.: January 16, 
2013. 

Dodd-Frank Act: Agencies' Efforts to Analyze and Coordinate Their 
Rules. [hyperlink, http://www.gao.gov/products/GAO-13-101]. 
Washington, D.C.: December 20, 2012. 

Community Banks and Credit Unions: Impact of the Dodd-Frank Act 
Depends Largely on Future Rule Makings. [hyperlink, 
http://www.gao.gov/products/GAO-12-881]. Washington, D.C.: September 
13, 2012. 

Financial Stability: New Council and Research Office Should Strengthen 
the Accountability and Transparency of Their Decisions. [hyperlink, 
http://www.gao.gov/products/GAO-12-886]. Washington, D.C.: September 
11, 2012. 

Municipal Securities: Options for Improving Continuing Disclosure. 
[hyperlink, http://www.gao.gov/products/GAO-12-698]. Washington, D.C.: 
July 19, 2012. 

Bankruptcy: Agencies Continue Rulemakings for Clarifying Specific 
Provisions of Orderly Liquidation Authority. [hyperlink, 
http://www.gao.gov/products/GAO-12-735]. Washington, D.C.: July 12, 
2012. 

Credit Rating Agencies: Alternative Compensation Models for Nationally 
Recognized Statistical Rating Organizations. [hyperlink, 
http://www.gao.gov/products/GAO-12-240]. Washington, D.C.: January 18, 
2012. 

Bank Capital Requirements: Potential Effects of New Changes on Foreign 
Holding Companies and U.S. Banks Abroad. [hyperlink, 
http://www.gao.gov/products/GAO-12-235]. Washington, D.C.: January 17, 
2012. 

Dodd-Frank Act Regulations: Implementation Could Benefit from 
Additional Analyses and Coordination. [hyperlink, 
http://www.gao.gov/products/GAO-12-151]. Washington, D.C.: November 
10, 2011. 

Federal Reserve System: Opportunities Exist to Strengthen Policies and 
Processes for Managing Emergency Assistance. [hyperlink, 
http://www.gao.gov/products/GAO-11-696]. Washington, D.C.: July 21, 
2011. 

Bankruptcy: Complex Financial Institutions and International 
Coordination Pose Challenges. [hyperlink, 
http://www.gao.gov/products/GAO-11-707]. Washington, D.C.: July 19, 
2011. 

Mortgage Reform: Potential Impacts in the Dodd-Frank Act on Homebuyers 
and the Mortgage Market. [hyperlink, 
http://www.gao.gov/products/GAO-11-656]. Washington, D.C.: July 19, 
2011. 

Dodd-Frank Act: Eleven Agencies' Estimates of Resources for 
Implementing Regulatory Reform. [hyperlink, 
http://www.gao.gov/products/GAO-11-808T]. Washington, D.C.: July 14, 
2011. 

Proprietary Trading: Regulators Will Need More Comprehensive 
Information to Fully Monitor Compliance with New Restrictions When 
Implemented. [hyperlink, http://www.gao.gov/products/GAO-11-529]. 
Washington, D.C.: July 13, 2011. 

Financial Assistance: Ongoing Challenges and Guiding Principles 
Related to Government Assistance for Private Sector Companies. 
[hyperlink, http://www.gao.gov/products/GAO-10-719]. Washington, D.C.: 
August 3, 2010. 

Financial Markets Regulation: Financial Crisis Highlights Need to 
Improve Oversight of Leverage at Financial Institutions and across 
System. [hyperlink, http://www.gao.gov/products/GAO-09-739]. 
Washington, D.C.: July 22, 2009. 

Systemic Risk: Regulatory Oversight and Recent Initiatives to Address 
Risk Posed by Credit Default Swaps. [hyperlink, 
http://www.gao.gov/products/GAO-09-397T]. Washington, D.C.: March 5, 
2009. 

Financial Regulation: A Framework for Crafting and Assessing Proposals 
to Modernize the Outdated U.S. Financial Regulatory System. 
[hyperlink, http://www.gao.gov/products/GAO-09-216]. Washington, D.C.: 
January 8, 2009. 

[End of section] 

Footnotes: 

[1] See GAO, High-Risk Series: An Update, [hyperlink, 
http://www.gao.gov/products/GAO-09-271] (Washington, D.C.: January 
2009) and Financial Regulation: A Framework for Crafting and Assessing 
Proposals to Modernize the Outdated U.S. Financial Regulatory System, 
[hyperlink, http://www.gao.gov/products/GAO-09-216] (Washington, D.C.: 
Jan. 8, 2009). 

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

[3] See Related GAO Products at the end of this report. 

[4] For the purposes of this report, the term financial regulators 
includes the federal financial regulators (the Federal Reserve, OCC, 
CFTC, SEC, CFPB, FDIC, and FHFA) as well as the Department of the 
Treasury and FSOC. 

[5] See for example, [hyperlink, 
http://www.gao.gov/products/GAO-09-216]; Financial Regulation: 
Modernization of the Financial Services Regulatory System, [hyperlink, 
http://www.gao.gov/products/GAO/T-GGD-95-121] (Washington, D.C.: Mar. 
15, 1995); Long-Term Capital Management: Regulators Need to Focus 
Greater Attention on Systemic Risk, [hyperlink, 
http://www.gao.gov/products/GAO/GGD-00-3] (Washington, D.C.: Oct. 29, 
1999); and Financial Regulation: Industry Changes Prompt Need to 
Reconsider U.S. Regulatory Structure, [hyperlink, 
http://www.gao.gov/products/GAO-05-61] (Washington, D.C.: Oct. 6, 
2004). 

[6] Systemic risk refers to the possibility that a single event could 
broadly affect the entire financial system, causing widespread losses 
rather than just losses at one or a few institutions. 

[7] For additional information on FSOC and OFR, see GAO, Financial 
Stability: New Council and Research Office Should Strengthen the 
Accountability and Transparency of Their Decisions,[hyperlink, 
http://www.gao.gov/products/GAO-12-886] (Washington, D.C.: Sept. 11, 
2012). 

[8] The voting members of FSOC include the Secretary of the Treasury 
and the heads of CFPB, CFTC, FDIC, Federal Reserve, FHFA, National 
Credit Union Administration, OCC, SEC, and an independent voting 
member with insurance expertise. The nonvoting members include the 
director of the Federal Insurance Office, the director of OFR, and a 
state banking supervisor, a state insurance commissioner, and a state 
securities commissioner. 

[9] Although contingent capital can be defined in various ways, it can 
refer to instruments that (1) are not regulatory capital instruments 
but convert into a regulatory capital instrument, (2) are regulatory 
capital instruments but convert into a more subordinate form of 
regulatory capital (such as common equity capital) that would absorb 
losses earlier, or (3) contractually require the holder of the 
instrument to purchase a regulatory capital instrument of the issuer 
upon the occurrence of a trigger event. In addition, contingent 
capital is sometimes used to describe a debt instrument subject to the 
"bail-in" or write-off at the point of failure of an institution to 
provide capital for an orderly resolution of the institution without 
government support. 

[10] The provisions dealing with OFR are contained primarily in 
subtitle B of title I, §§ 151-156, codified at 12 U.S.C. §§ 5341-5346. 

[11] Office of Financial Research, 2012 Annual Report (Washington, 
D.C.: July 20, 2012). 

[12] See [hyperlink, http://www.gao.gov/products/GAO-12-886]. 

[13] The Dodd-Frank Act does not use the term "systemically important 
financial institution" (SIFI). This term is commonly used by academics 
and other experts to refer to bank holding companies with $50 billion 
or more in total consolidated assets and nonbank financial companies 
designated by FSOC for Federal Reserve supervision and enhanced 
prudential standards under the Dodd-Frank Act. For purposes of this 
report, we refer to these bank and nonbank financial companies as bank 
systemically important financial institutions (bank SIFI) and nonbank 
systemically important financial institutions (nonbank SIFI), 
respectively. We also refer to nonbank SIFIs and bank SIFIs 
collectively as SIFIs when appropriate. 

[14] As we previously reported, the act provided that FSOC may 
determine whether a nonbank financial company shall be supervised by 
the Federal Reserve and subject to prudential standards if it 
determines that material financial distress at the nonbank financial 
company, or the nature, scope, size, scale, concentration, 
interconnectedness, or mix of the activities of the company, could 
pose a threat to the financial stability of the United States. The act 
lists specific factors for FSOC to consider in making these 
determinations along with any other risk-related factors it deems 
appropriate. Bank holding companies with $50 billion or more in total 
consolidated assets are also subject to the Federal Reserve's enhanced 
supervision and prudential standards. See [hyperlink, 
http://www.gao.gov/products/GAO-12-886]. 

[15] As required by the act, FDIC and OCC also issued rules in October 
2012 mandating stress testing by the institutions they supervise with 
assets of over $10 billion. 

[16] These capital requirements are subject to two floors. Regulators 
must apply to U.S. bank holding companies and other nonbank financial 
companies designated for supervision by the Federal Reserve the same 
minimum leverage capital and risk-based capital requirements that 
apply to federally insured depository institutions. In addition, the 
minimum capital requirements may not be quantitatively lower than the 
capital requirements that were in effect for insured depository 
institutions as of the date when the act was enacted. The Federal 
Reserve, FDIC, and OCC also issued Dodd-Frank Act-required rules 
establishing a minimum capital floor. 

[17] The Basel Committee has developed international standards for 
bank capital and liquidity for its member economies since the 1980s. 
The latest international proposal, known as Basel III, seeks to 
improve the quality of regulatory capital and introduces a new minimum 
common equity requirement, among other things. The Federal Reserve 
intends to satisfy some aspects of the Dodd-Frank Act requirements for 
heightened prudential standards for bank SIFIs by implementation of 
the standards of the Basel Committee on Banking Supervision. The 
Federal Reserve will separately implement consistent capital and 
liquidity standards for nonbank SIFIs. 

[18] As we previously reported this provision requires each nonbank 
financial company supervised by the Federal Reserve and each bank 
holding company with total consolidated assets of $50 billion or more 
to submit periodically to the Federal Reserve, FDIC, and FSOC a plan 
for the firm's rapid and orderly resolution in the event of material 
financial distress or failure. Such a firm also must submit a report 
on the nature and extent of credit exposures the company has to 
significant bank holding companies and significant nonbank financial 
firms and the same types of exposures such firms have to the reporting 
firm. See GAO, Bankruptcy: Complex Financial Institutions and 
International Coordination Pose Challenges,[hyperlink, 
http://www.gao.gov/products/GAO-11-707] (Washington, D.C.: July 19, 
2011). 

[19] See Financial Stability Oversight Council, Financial Stability 
Oversight Council 2011 Annual Report (Washington, D.C.: July 2011). 
OTC credit derivatives are privately negotiated contracts that allow a 
party to transfer the risk of default on a bond or loan to another 
party without transferring ownership. For example, in a credit default 
swap a bond investor agrees to pay a periodic premium to a financial 
firm in exchange for the firm's agreement to compensate the bond 
investor for any losses if the bond issuer defaults on the bonds. 

[20] A derivatives clearinghouse or similar organization enables each 
party to a derivatives transaction to substitute the credit of the 
clearinghouse for the credit of the parties, provides for the 
settlement or netting of obligations from the transaction, or 
otherwise provides services mutualizing or transferring the credit 
risk from the transaction. Dealers participate in the derivatives 
market by quoting prices to, buying derivatives from, and selling 
derivatives to end users and other dealers. 

[21] Under the Dodd-Frank Act, SEC has regulatory authority over 
"security-based swaps," which are defined as swaps based on a single 
security or loan or a narrow-based group or index of securities 
(including any interest therein or the value thereof), or events 
relating to a single issuer or issuers of securities in a narrow-based 
security index. Security-based swaps are included in the definition of 
"security" under the Securities Exchange Act of 1934 and the 
Securities Act of 1933. CFTC has primary regulatory authority over all 
other swaps, such as energy and agricultural swaps. CFTC and SEC share 
authority over "mixed swaps," which are security-based swaps that have 
a commodity component. 

[22] The Group of Twenty is a forum for international cooperation on 
the important issues of the global economic and financial agenda and 
consists of the finance ministers and central bank governors from 19 
countries and the European Union. 

[23] Arnoud W.A. Boot and Lev Ratnovksi, Banking and Trading, IMF 
working paper, October 2012. 

[24] See GAO, Proprietary Trading: Regulators Will Need More 
Comprehensive Information to Fully Monitor Compliance with New 
Restrictions When Implemented, [hyperlink, 
http://www.gao.gov/products/GAO-11-529] (Washington, D.C.: July 13, 
2011). 

[25] The banking regulators and SEC published their proposed rule on 
November 7, 2011, and CFTC published a substantially similar rule on 
February 14, 2012. 

[26] [hyperlink, http://www.gao.gov/products/GAO-11-529]. 

[27] A qualified mortgage, generally, is a mortgage based on verified 
and documented borrower income, that is typically a 30-year fixed or 
adjustable rate loan with points, with fees that do not exceed 3 
percent of the total loan, and with payments that do not result in an 
increase in the principal balance. 

[28] These criteria address payment of loan principal, length of the 
mortgage term, scheduled lump-sum payments, documentation of borrower 
resources, and borrower debt burden. We were unable to determine the 
proportion of mortgages that would have met all of the criteria we 
examined due to data limitations. See GAO, Mortgage Reform: Potential 
Impacts of Provisions in the Dodd-Frank Act on Homebuyers and the 
Mortgage Market, [hyperlink, http://www.gao.gov/products/GAO-11-656] 
(Washington, D.C.: July 19, 2011). 

[29] To securitize mortgage loans, mortgage lenders or originators can 
sell their loans to third parties--either directly to securitizing 
institutions or loan aggregators that serve as intermediaries between 
originators and securitizers--generating funds that could be used to 
originate more loans. In addition to Fannie Mae and Freddie Mac, 
securitizing institutions include investment banks, retail banks, 
mortgage companies, and real estate investment trusts that bundle 
mortgages and sell them as investment products. 

[30] Restrictive criteria would limit qualified residential mortgages 
to mortgages with high credit quality, while less restrictive criteria 
would include mortgages with a wider range of credit quality 

[31] In January 2011, SEC published final rules requiring nationally 
recognized statistical rating organizations and issuers to provide 
additional disclosure about representations and warranties in asset-
backed transactions. In August 2011, SEC adopted final rules regarding 
ongoing reporting by asset-backed issuers. In September 2011, SEC 
proposed rules to prohibit material conflicts of interest in asset-
backed transactions. 

[32] The joint rule could not be finalized until CFPB issued its rule 
because its definition of a qualified residential mortgage cannot be 
broader than CFPB's definition of a qualified mortgage. 

[33] See GAO, Credit Rating Agencies: Alternative Compensation Models 
for Nationally Recognized Statistical Rating Organizations, 
[hyperlink, http://www.gao.gov/products/GAO-12-240] (Washington, D.C.: 
Jan. 18, 2012). Among other things, this report discusses alternative 
models for compensating nationally recognized statistical rating 
organizations that issue credit ratings. GAO identified seven 
alternative models for compensating these entities. 

[34] See SEC, Report to Congress on Assigned Credit Ratings 
(Washington, D.C.: December 2012). 

[35] [hyperlink, http://www.gao.gov/products/GAO-12-240]. 

[36] As we previously reported, agencies can use different types of 
collaborative mechanisms, such as interagency groups. Our report 
discusses key considerations for implementing these groups. See GAO, 
Managing for Results: Key Considerations for Implementing Interagency 
Collaborative Mechanisms, [hyperlink, 
http://www.gao.gov/products/GAO-12-1022] (Washington, D.C.: Sept. 27, 
2012). 

[37] See GAO, Dodd Frank Act: Agencies' Efforts to Analyze and 
Coordinate Their Rules, [hyperlink, 
http://www.gao.gov/products/GAO-13-101] (Washington, D.C.: Dec. 18, 
2012). 

[38] For additional information on the legal entity identifier, see 
GAO, Bankruptcy: Agencies Continue Rulemakings for Clarifying Specific 
Provisions of Orderly Liquidation Authority, [hyperlink, 
http://www.gao.gov/products/GAO-12-735 (Washington, D.C.: July 12, 
2012). 

[39] Futures are standard agreement contracts to buy or sell a 
particular amount of a commodity or financial instrument at a specific 
time in the future. An option is a contract that gives the holder of 
the option the right, but not the obligation, to buy (call option) or 
sell (put option) a specified amount of the underlying reference item 
at a predetermined price (strike price) at or before the end of the 
contract. A swap is a contract that typically obligates one party to 
make a stream of payments to another in exchange for a stream of 
payments from the other party, such as an interest rate swap in which 
one party agrees to exchange a stream of fixed interest-rate payments 
for a stream of variable interest-rate payments. 

[40] International Swap and Derivatives Assoc. et al. v. CFTC, 2012 
U.S. Dist. LEXIS 139788 (D.C. Dist., Sept. 28, 2012). 

[41] The case was appealed to the United States Court of Appeals for 
the District of Columbia Circuit on November 16, 2012. 

[42] Business Roundtable and Chamber of Commerce of United States of 
America v. SEC, 647 F. 3d 114, 1148-1149 (D.C. Cir. 2011). 

[43] The other four new offices within SEC are the Office of the 
Investor Advocate, Office of Minority and Women Inclusion, Office of 
the Whistleblower Protection, and Office of Municipal Securities. 

[44] [hyperlink, http://www.gao.gov/products/GAO-09-216]. 

[45] The agencies are the Federal Reserve, FDIC, HUD, OCC, NCUA, 
Federal Trade Commission, and the now defunct Office of Thrift 
Supervision. 

[46] In November 2012, a bill was introduced into Congress that would 
have combined SEC and CFTC into a new regulatory agency called the 
Securities and Derivatives Commission, which would have jurisdiction 
over securities, derivatives, options, futures, and related markets 
and instruments. This bill was not acted upon before the Congressional 
term ended, and therefore would need to be newly introduced in another 
Congressional term to be considered again. 

[47] [hyperlink, http://www.gao.gov/products/GAO-12-886]. 

[48] In late 2008, a combination of government-led actions ensured the 
secondary mortgage market kept functioning, including Treasury's 
financial backstop of these enterprises' debt and mortgage-backed 
securities (MBS) holders; and MBS purchases by Treasury and the 
Federal Reserve. 

[49] For an asset-backed commercial paper issuance, a company may sell 
receivables to a bank, that, in turn, will issue them to investors as 
commercial paper. Commercial paper securities are short-term 
investment vehicles with a maturity that is typically between 90 and 
180 days and are backed by the expected cash inflows from the 
receivables. As the receivables are collected, the originators are 
expected to pass the funds to the bank or conduit, which then passes 
these funds to the note holders. 

[50] On September 19, 2008, Treasury announced the Temporary Guarantee 
Program for Money Market Funds, which temporarily guaranteed certain 
investments in participating MMFs. Under this program, Treasury 
guaranteed that upon liquidation of a participating MMF, the fund's 
shareholders would receive the fund's stable share price of $1 for 
each fund share owned as of September 19. On the same day, the Board 
of Governors of the Federal Reserve System authorized the creation of 
the Asset-Backed Commercial Paper (ABCP) Money Market Mutual Fund 
Liquidity Facility under section 13(3) of the Federal Reserve Act of 
1913 to provide liquidity support to MMFs facing redemption pressures 
and to promote liquidity in the asset-backed commercial paper markets. 
To quickly support this market, the Board authorized loans to 
depository institutions eligible to borrow from the discount window 
and their primary dealer affiliates to purchase ABCP from MMFs. The 
Board provided these funds the option to sell their asset-backed 
commercial paper at amortized cost--the carrying value of the 
investment--rather than at deeply discounted prices. This program was 
intended to help MMFs raise cash in a way that did not exacerbate 
market stresses. 

[51] The study addresses the commissioners' specific questions related 
to MMFs including the funds' role in the 2008 crisis, changes in MMF 
characteristics around the 2010 reforms, and how future reforms could 
affect the demand for investments in MMFs. 

[52] FSOC's recommendations were published in the Federal Register on 
November 19, 2012 with a 60-day comment period. Proposed 
Recommendations Regarding Money Market Mutual Fund Reform, 77 Fed. 
Reg. 69455 (Nov. 19, 2012). 

[53] The 1 percent of net asset value requirement would be paired with 
a requirement that 3 percent of a shareholder's highest account value 
in excess of $100,000 during the previous 30 days be made available 
for redemption on a delayed basis. As an alternative, FSOC also 
proposed requiring MMFs to have a buffer of assets of up to 3 percent 
to provide explicit loss-absorption capacity that could be combined 
with other measures to enhance the effectiveness of the buffer and 
potentially increase the MMFs' resiliency. 77 Fed. Reg. 69455, 69456. 
After the comment period closes FSOC, will consider the comments and 
may issue a final recommendation to SEC, which pursuant to the Dodd-
Frank Act, would be required to impose the recommended standards, or 
similar standards that FSOC deems acceptable, or explain in writing to 
FSOC within 90 days why it has determined not to follow the 
recommendation. If SEC decides to accept FSOC's recommendation, it is 
expected that SEC would implement the recommendation through its own 
rulemaking process. 

[54] A repo is the sale of a security, or a portfolio of securities, 
by one party to another party, combined with an agreement to 
repurchase the security or portfolio on a specified future date at a 
prearranged price. A tri-party repo is distinguished by the 
involvement of a third party, a clearing bank that provides custody 
and settlement services related to the transaction. 

[55] The two clearing banks are JPMorgan Chase and The Bank of New 
York Mellon. 

[56] The eight regulators were the Board of Governors of the Federal 
Reserve System (Federal Reserve), Bureau of Consumer Financial 
Protection(CFPB), Commodity Futures Trading Commission (CFTC), Federal 
Deposit Insurance Corporation (FDIC), Federal Housing Finance Agency 
(FHFA), Financial Stability Oversight Council (FSOC), Office of the 
Comptroller of the Currency (OCC), and Securities and Exchange 
Commission (SEC), 

[57] [hyperlink, http://www.gao.gov/products/GAO-09-216]. 

[End of section] 

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