One Year After Passage, Warning Flags Fly For Hurricane Dodd-Frank

Thursday, September 1, 2011 - 01:00
US Chamber Institute For Legal Reform
Lisa A. Rickard

Lisa A. Rickard

It's been a year since the storm clouds began to gather in the form of the Dodd-Frank Wall Street Reform and Consumer Protection Act known simply as "Dodd-Frank" - the so-called reform bill held up as the fix to the problems that created the economic crisis of 2008.

Opponents of the Dodd-Frank bill, believing the more than 2,000-page proposal represented the most damaging over-regulation of the financial industry in modern times, sounded the alarms about the potentially devastating effect of this bill.

While predicting the actual impact of major legislation, like predicting the strength of hurricanes, is difficult, it is nonetheless instructive to examine Dodd-Frank one year after passage as implementation moves closer.

The Mother Of Regulation And The Continuing Economic Storm

Dodd-Frank - at 2,319 pages the most far-reaching financial regulatory undertaking since the 1930s, authorizing or requiring agencies to enact 447 new rules and complete 63 reports and 59 studies - has the potential to develop into a Category Five, liability-expanding monster.

The U.S. economy already faces strong headwinds. Markets are reeling. Millions are unemployed. Our debt is soaring. Our entitlement programs are unsustainable.

And now Dodd-Frank brings a deluge of potential litigation-expanding regulation that threatens to capsize our economic ship, whose impact will come at a time when the U.S. Small Business Administration estimates that the overall cost of regulations to the United States is already as high as $1.75 trillion annually, costing $8,086 per employee and imposing an average of $10,585 a year on small businesses.

The number of economically significant regulations - those costing businesses, consumers and the economy more than $100 million - issued each year has increased more than 60 percent over the past five years, from 137 to 224.

Now, more than ever, the markets need certainty and predictability. Unfortunately, many Dodd-Frank provisions will only exacerbate the environment of uncertainty for American businesses and hinder their ability to promote economic growth and create jobs.

But while Dodd-Frank, when fully implemented, will impact virtually every aspect of the financial industry, one of the real costs may be its liability-expanding provisions that will cause corporate legal departments particular agony and cost their corporations potentially billions in new liability exposure.

Consumer Financial Protection Bureau

One Dodd-Frank centerpiece recently in the news is the Consumer Financial Protection Bureau (CFPB). This new agency was given unprecedented power and authority to regulate the market for consumer financial products, a budget coming from the Federal Reserve and thus not subject to any real review or approval by either the President or the Congress, and virtually no Congressional oversight.

The CFPB also has overlapping authority with the Federal Trade Commission, the banking regulators, and state regulators - conflicts and inefficient use of regulatory resources that will add more uncertainty for businesses.

Dodd-Frank gives sweeping enforcement authority to state attorneys general and other state regulatory agencies. Rules promulgated by the CFPB, for example, can be enforced by state AGs. This opens the door for AGs to get creative in expanding the scope of enforcement, creating a real risk of inconsistent, duplicative and politically motivated enforcement of key federal laws and regulations.

And to top it off, the CFPB can only "consult" with the state AGs but cannot stop a state lawsuit even if the case is based on interpretations of the CFPB's rules with which the CFPB itself disagrees.

Dodd-Frank also does nothing to prevent state AGs from "contracting out" to private law firms working on a contingency fee basis. If AGs contract out, it could increase the risk of spurious enforcement actions that have serious negative consequences for the business community and on the availability of credit for businesses and individuals.

The CFPA itself is vague. It has a broad mandate to enforce the prevention of "unfair, deceptive, or abusive acts or practices." What constitutes unfair, deceptive, or abusive acts, however, is not defined. With unclear mandates, virtually zero Congressional accountability, and the ability to basically set its own budget, the CFPB appears set to inject even more uncertainty into the compliance process that may lead to fewer, more expensive credit options for consumers and small business.

What's more, the CFPB will not be led by an independent bipartisan commission; it will be headed by one of the most unaccountable officials Washington has ever seen, with unprecedented powers to regulate a large part of our economy with virtually no checks and balances.

A new CFPB director will have the ability to use that perch to encourage the expansion of litigation by state attorneys general, or hire outside contingency fee counsel to file lawsuits on behalf of the CFPB.

All of these concerns merit close scrutiny by Congress. Congress should also continue to push for the CFPB to be led by a bipartisan commission to ensure political and policy balance and for its budget to be subject to the annual appropriations process. All of these concerns also lead to one conclusion: companies in the CFPB crosshairs should prepare for more litigation.

Whistleblower Activities

Another litigation-expanding creation of Dodd-Frank is the SEC's new whistleblower office, which launched in August. When it finalized its final whistleblower rule, the SEC commissioners voted 3-2 to reject calls to require that whistleblowers make reports through companies' internal compliance programs before going to the agency.

Instead, the rule encourages complaints to go directly to the SEC by permitting bounties for people who pass their tips along to the agency. Though the SEC will consider whether the employee voluntarily participated in, or interfered with, the employer's internal compliance and reporting systems in determining the size of a whistleblower's award, under this new regime, whistleblowers can be rewarded with 10 to 30 percent of the fines and penalties collected in enforcement cases.

So the new whistleblower office essentially provides a huge financial incentive for employees to bypass corporate compliance programs and go straight to the SEC with allegations of wrongdoing, keeping their companies in the dark. This puts trial lawyer profits ahead of expensive, robust compliance programs that will now collect dust.

The plaintiffs' bar is already pouncing on this new opportunity by actively recruiting whistleblowers online. If you Google "whistleblower" you're bound to come across a slew of online ads with pitches like, "You may be entitled to a substantial reward in exchange for providing such information to the federal government as a whistleblower. Anyone who believes they have such information is invited to contact the attorneys at" or "Our clients have received over $730 million in rewards!"

Incentivizing litigation this way and opening a Pandora's Box of unscrupulous trial lawyer pitches while bypassing the very compliance programs designed to root out wrongdoing is a troubling precedent and will surely have a negative impact on the financial well-being of U.S. companies.


Another area of concern is a push under Dodd-Frank to limit the usefulness, enforceability and availability of pre-dispute arbitration clauses in a number of types of contracts.

Title X of Dodd-Frank directs the Consumer Financial Protection Bureau to study the use of arbitration clauses in connection with "covered services." Following the study, the CFPB may then issue regulations that "prohibit or impose conditions or limitations on the use of an agreement between a covered person and a consumer for a consumer financial product or service providing for arbitration of any future dispute between parties."

Many believe that the CFPB study will almost certainly be biased and designed to provide a false justification for anti-arbitration rules. And it will likely gloss over the negative results of depriving consumers of arbitration as a means of resolving their individual disputes.

Arbitration has an 85-year history of offering a fair and inexpensive means of dispute resolution and is more likely than litigation to result in positive outcomes for consumers and employees. For example, the National Workrights Institute found that employees were almost 20 percent more likely to win employment cases in arbitration than those litigated in court.

For many consumers, arbitration is not only faster, fairer and more cost effective than going to court - it is also their only chance to have their disputes heard because they cannot afford to hire a lawyer to pursue a claim in court or cannot find a lawyer to take the case because not enough damages are at issue.

The ultimate goal of plaintiffs' lawyers on arbitration, however, is to get rid of it so they can skim off the top and bundle a few cases into class actions, leaving the bulk of small-dollar consumer cases without recourse.

The potential limits on arbitration the CFPB may seek to impose would increase litigation costs at a time when consumers and businesses are already struggling by forcing consumer claims into the more expensive, time-consuming and less efficient litigation system.

The Forecast: More Litigation

These are only a few examples that highlight the liability-expanding dangers of Dodd-Frank. Its ramifications will cover a wide swath of coastline, and the outer bands of Hurricane Dodd-Frank are already on the horizon and will soon be battering America's business community - killing investment and limiting economic growth. All signs point to more litigation for companies, and, unfortunately, we've only felt the first winds. The bulk of the storm is still moving towards us. Batten down the hatches and tie up those boats.