Remember the Dodd-Frank Act? Sure you do. The law that brought us say-on-pay, the Volcker Rule, the SEC Whistleblower Office, and conflict minerals reports?

Well it’s now more than four years after it became law, and it’s still not fully in effect. Not by a long shot.

Even the staunchest proponent of the sweeping financial reforms would be hard-pressed to argue that rulemaking has been anything less than a slog.

The law firm Davis Polk has tracked Dodd-Frank rulemaking progress from the start. As of July, 45 percent of rule deadlines have been missed and 24 percent of the 398 total rulemaking requirements have yet to be proposed, according to the firm.

So what’s still to come? A look at the remaining rules seems to indicate that the Securities and Exchange Commission has, thus far, punted on several rules pertaining to executive compensation and corporate governance. Although the Commission did draft a controversial “pay-ratio rule,” requiring companies to disclose a comparison of CEO pay to that of the median worker, the final rule, perhaps bogged down by controversy and comment letters, has yet to emerge.

Still on the SEC’s plate: a mandated report to Congress that reviews the use of compensation consultants and the implications of that advice, the pay-ratio rule; rules regarding the disclosure of pay-for-performance policies; regulations requiring the recovery of executive compensation if a material mis-statement is made or an accounting restatement is required; rules regarding the disclosure of hedging by employees and directors; and prohibitions of certain executive compensation structures and arrangements.

Among the reasons for the delay could be efforts by the SEC to conduct cost-benefit analysis. Some of the still unwritten rules are also among the most controversial. Critics of these rules decry them as a distraction and last-minute additions to the legislation that have little to do with financial stability.

Other rules still not finalized are more technical or require input and cooperation by several regulators. The SEC, for example, is also lagging on rules governing the trading of derivatives required by the law. The laundry list of Dodd-Frank rules to be finalized in that area include: rules regarding the registration and regulation of security-based swap data repositories; defining an end-user exception to mandatory clearing of security-based swaps; anti-manipulation rules for security-based swaps; rules for the registration and regulation of security-based swap execution facilities; and capital, margin, and segregation requirements for security-based swap dealers and major security-based swap market participants.

The SEC must also write rules on real-time public reporting for security-based swaps; establish recordkeeping, reporting, and notification requirements for security-based swap dealers and swap participants; and create regulations regarding conflicts of interest at clearing agencies, execution facilities, and exchanges involved in security-based swaps.

“The SEC still has a ways to go on all of the rules related to securities-based swaps,” Anna Pinedo, a partner with the law firm Morrison Foerster, says. The Commission is, however, committed to finalizing most of Dodd-Frank’s derivatives related rules before the end of the year, she added.

The pace of SEC implementation stands in stark contrast to the relative speed the Commodity Futures Trading Commission tackled its responsibilities. But that agency’s aggressive pace, in no small part because former Chairman Gary Gensler wanted to leave office with little work left behind, may have hampered the SEC’s efforts. “The CFTC had a lot more to cover because there are more swaps than securities-based swaps,” Pinedo says, adding that the SEC then had to react and respond to the controversy over those rules here and abroad as it set to work on its tasks.

Rules for Raters

Many blame credit rating agencies, and the false imprint of security they gave to certain asset-backed securities, as a major contributing factor to the financial crisis. As such, the Dodd-Frank Act included numerous new regulations aimed directly at them. Very few of those measures pertaining to Nationally Recognized Statistical Rating Organizations have seen the light of day thus far.

Last month, the SEC finalized new rules requiring the more comprehensive disclosure of the underlying pieces of an asset-backed security. It also cracked into its first substantial piece of credit agency rulemaking with new requirements for internal controls, conflicts of interest, disclosure of credit rating performance statistics, and procedures to protect the integrity and transparency of rating methodologies. Considerably more is ahead, including rules regarding transparency of NRSRO ratings performance; requiring steps to follow when revising credit ratings procedures; and imposing training, experience, and competence standards for NRSRO analysts.

“The SEC still has a ways to go on all of the rules related to securities-based swaps. The CFTC had a lot more to cover because there are more swaps than securities-based swaps.”
Anna Pinedo, Partner, Morrison Foerster

In terms of market oversight, the SEC and bank regulators are still working through the application of stress testing requirements for non-bank financial companies and rules to provide for the “orderly liquidation” of brokers and dealers. Broker-dealers also face new, long-delayed and fiercely fought fiduciary duties.

Never Quite Final

Even rules that are final don’t always stay that way or go into effect as planned. Lawsuits have followed several major pieces of Dodd-Frank rulemaking and many others are likely to be filed.

Congress, too, adds to the uncertainty. Although calls for repeal have quieted among conservatives, both Democrats and Republicans have filed dozens of bills intended to “fix” or revise both new and pending rules. The Volcker Rule, a cornerstone of the Dodd-Frank Act, is final but still being revised to exempt certain securities. Similarly, a rule requiring banks with over $50 billion in assets write a "living will" detailing their liquidation plans in time of crisis is final. Banks and their regulators, however, still can’t seem to agree on what should be included in those plans.

Debate will also rage on for the foreseeable future about the designation of “systemically important financial institutions,” especially when it comes to singling out non-banks, including insurance companies and mutual funds, for heightened scrutiny and liquidity demands.

Why So Long?

Although it was released in 2013, a report by the Government Accountability Office, addressing Dodd-Frank rulemaking delays, remains prescient. Below are some excerpts:
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.
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.
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… Coordination with other regulatory bodies lengthens the time required to implement reform.
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.
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.
Source: GAO.

“There has been a lot of discussion in Congress on having more transparency and clarity regarding the process the Financial Stability Oversight Council goes through when evaluating when a non-bank is a SIFI, and that was brought to a head regarding the evaluation of asset managers,” Pinedo says. “It was actually a good dialog in the sense that it made people rethink how that process was taking shape.”

New faces at the Federal Reserve means, however, that some of what was expected from it and the bank regulators it works jointly with are likely delayed. These include long-term debt requirements for bank holding companies.

Gerald Epstein, a professor at the University of Massachusetts-Amherst and co-director of its Political Economy Research Institute, fears that the slow pace and continued delays give lobbyists even more time to shape forthcoming rules to their liking. “I was really disappointed that the Volcker rule, even though it came out, still left the door open for being watered down,” he says.

“From the point of view of the major banks, I think things are going exactly as they hoped; they wanted to delay and water it down as much as possible,” Epstein adds. “Ironically, uncertainty is their friend, when usually uncertainty is the enemy of business.”

A defense of the regulators and their rulemaking pace comes from the very law firm whose score card has fueled some of those debates. Annette Nazareth, a partner at DavisPolk and a former SEC commissioner, stresses the progress that has been made. “Obviously, when you look at the numbers they indicate that there is a great deal more work to be done, and that is true,” she says. “But not all rulemakings are equal in terms of their importance to systemic stability and the goals of the legislation. The regulators have prioritized their efforts, and a good deal of the major pieces are done.”

“If everything had been done at once it would have been even more difficult for the financial services industry to implement,” Nazareth adds. “On the other hand, what the firms didn’t want was the overhang of uncertainty about when the rules would be issued and what they would provide. In a perfect world, they would like to know what the final rules will provide, and then be given sufficient time to implement them. What they have now is a situation where they just don’t know when rules are going to be released and they aren’t particularly happy with that uncertainty.”

While four years is a long time, some argue that the size and number of reforms required the long time horizon. “There were just so many things the regulators had to do with such limited resources,” Epstein says. “They had to focus on those things where there was a chance it might make a difference. Maybe on the pay-ratio rule the pushback was just going to be too hard.”

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