The Costs of Implementing Dodd-Frank Rules

The financial crash of 2008 brought many legislative changes designed to prevent its reoccurrance. Collectively known as the Dodd-Frank Law, foremost among them was the Volcker Rule that redefined which financial institution could register itself as a bank and therefore take deposits, and who could not thereby remaining a brokerage. This decision is a huge one as it changes what is required of these institutions in their transactional accounting in the future. It literally changes how they do business, what investments they can offer, how much money they must hold in reserve to remain solvent, and which financials they must disclose when asked. This literally creates a whole new department for many of them, and that is a major new cost of doing business.

But that was just the start of the changes. Dodd-Frank compliance required all financial institutions had to change how they recorded and stored each transaction they performed each day. The purpose behind Dodd-Frank compliance was to require those institutions ensure they had a system in place that enabled them to produce records up to 5 years old immediately if Congress requested that. Naturally, for many businesses still using antiquated financial management systems, implementation of these new rules was going to generate unexpected expenses. The only question was how large those debits would be, and whether those added costs would damage their business model?

There were also additional rules governing which financial advisors to a company must register with the Securities and Exchange Commission (SEC). According to the new rules, that depends on the financial status of each advisor. The list of rules making that determination is a long one that is complicated. Again, implementation will likely mean the accounting departments will need to vet each new advisor far more diligently to ensure the company remains in compliance with the new law. More costs to the corporate bottom line.

Of course, none of this touches the credit default swaps and derivatives that created the downfall in the first place. Their main selling point to clients was that no one could figure them out. That cannot remain the case with the new Dodd-Frank law. All the obfuscation has to be removed so that all the transactions are clear and straightforward. That, in itself, will create massive cost for these large corporations as the lawyers and accountants will be working overtime to figure them out.

In the end, the varied but necessary legislative changes that comprise the new Dodd-Frank financial recovery act, will make the cost of doing business far higher for most of the large corporations on Wall Street. It was designed to make investing more transparent to main street America. We will have to wait and see if that happens.

at 11:53 PM
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