The U.S. Dodd-Frank Act will have game-changing implications for global financial markets, extending well beyond U.S. borders, according to Laura Unger, former commissioner of the U.S. Securities and Exchange Commission (SEC).
Unger, currently a special advisor at global financial services consulting firm Promontory Financial Group, LLC in Washington, spoke at the Investment Industry Association of Canada’s (IIAC) annual conference in Toronto on Thursday. She said the impacts of the hefty new regulatory reform bill will be felt by industry firms in Canada and other parts of the world.
“Contrary to Sarbanes Oxley, where no one felt compelled to adopt a similar regulatory regime, Dodd-Frank resonates a little bit more with the global regulatory community,” Unger said in an interview. “[Other countries] have experienced their own financial meltdowns. So I think they’re picking and choosing among the concepts that the legislation embodies.”
The Dodd-Frank Act was signed into U.S. federal law two years ago in response to the global financial crisis, as part of an effort to substantially beef up regulatory oversight of financial markets.
“The premise of Dodd-Frank,” Unger said, “is really that more government involvement and oversight will effectively de-risk the financial markets.”
The extent to which Canadian firms are impacted by the new legislation will depend on which aspects of the legislation securities regulators in this country decide to adopt, Unger said.
However, she added that certain aspects of Dodd-Frank will have global implications regardless of which other regulators adopt them. “There is an acknowledgement by all of the regulators that this does have a global reach.”
In particular, Unger expects three specific aspects of the bill to have global repercussions: Title I, which pertains to financial stability and systemic risk; Title VII, which involves a new regulatory regime for derivatives and swaps; and the Volker rule.
The systemic risk issue has already been addressed on a global scale, with regulatory bodies from many jurisdictions collaborating to identify “systemically important” financial institutions, and to find solutions to this issue.
“System risk, as addressed both in Dodd-Frank and by the Basel Committee, is where we’ve seen the most cohesive effort across the world,” Unger said.
She considers this collaboration a positive step. The financial crisis, she said, exposed the need for a global approach to the regulation of financial markets.
“As we’ve seen, the rest of the world was very much impacted by what happened in the U.S., and the U.S. is now impacted by what’s happening overseas,” she said. “The capital markets have a worldwide reach now.”
Unger acknowledged the challenges associated with cross-border regulatory regimes. Given the differences between the cultures and markets in each country, she said, it’s challenging to apply a single set of rules across multiple jurisdictions. A principles-based approach, however, could be an effective way of regulating global markets, she said.
Industry members should expect that in the next few years, regulatory oversight generally will continue to grow. Unger said that regulators around the world have become defensive, having been heavily criticized for failing to identify the problems that contributed to the financial crisis.
“They’re constantly being told that they didn’t do enough, and that they haven’t been sufficiently diligent,” she said. “So, if you’re on the defensive and you’re a regulator, you’re going to choose to be overly inclusive in what you regulate, so that you can’t be accused of having the opportunity to assert jurisdiction and not doing it.”