As the SEC and CFTC work feverishly to implement the many provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, uncertainty will rule the day, according to Cleary Gottlieb partner and former Corporation Finance Division Director Alan Beller. The uncertainty will hinder the operation of the markets and of major financial institutions, he predicted. Beller was one of several panelists at the Practising Law Institute’s Securities Regulation Institute who discussed the far-reaching implications of the Dodd-Frank Act.

Former SEC Commissioner Annette Nazareth, now a partner at Davis Polk & Wardwell, addressed the law’s provisions for the regulation of swaps and OTC derivatives. She noted that the Dodd-Frank Act seeks to regulate an entire market that was previously mostly unregulated. Its provisions take for granted market practices that have been developed over many years, she said.

Beller agreed, noting that the industry has been working its way toward better regulation of the securities markets since 1933, and of the debt markets since the 1960s. With respect to OTC derivatives, the Dodd-Frank Act is asking regulators to do between 40 and 60 years of work “in the blink of an eye,” he said.

Nazareth said that the swaps jurisdictional allocation is awkward. Most of the market will be regulated by the CFTC, she noted, but practitioners will still have to deal with two parallel regimes. Another key issue, in her view, is defining the new term “major market participant.” These entities are going to have to register, she noted, so it is very important to industry participants how that term gets defined.

George Madison, the Treasury Department’s general counsel, discussed the Act’s attempt to address systemic risk through the creation of the Financial Stability Oversight Council (“FSOC”). He said that it is important to remember that in the autumn of 2008, the financial system was on the brink of collapse. Regulators had to make very difficult decisions over weekends, including in many areas where they did not have express authority, he said.

The Dodd-Frank Act tried to remedy this situation with the FSOC, a 15-member group charged with monitoring the financial services marketplace and coordinating regulatory efforts among many federal agencies and state regulators. The FSOC will collect information from various agencies, Madison noted, and will try to respond to emerging risks.

Beller said that for those industry participants that lived through the Lehman weekend, the FSOC seems like a leisurely bureaucratic process. He asked whether the FSOC will have a better risk radar system than was in place before.

Madison said that regulators did not have much data on financial services firms before, and the new framework improves the situation by pulling in that data and enabling the FSOC to identify potential threats to the system. With respect to the detection of risks, he noted that it is unlikely that a firm will be put into the liquidation process without already being designated as a potential problem and, therefore, being subject to enhanced scrutiny.

Derek Bush, a partner at Cleary Gottlieb, said that the dynamics of the FSOC should be fascinating. There will be many different federal agencies at the table, with the Treasury Secretary serving as chair and having veto authority. It will be interesting to see what voting blocks form among the many different agencies, he said.

Bush addressed the problems associated with trying to deal with financial institutions that are considered too big to fail. He said the first problem is determining how large and interconnected a firm needs to be to be considered too big to fail. He noted that there is still widespread disagreement on whether Lehman Brothers was too big to fail.

Size limits for financial institutions have generally been rejected, he said. Instead, a consensus has emerged that global standards are needed to address the issue. International organizations such as the G-20 and the Financial Stability Board have committed to global standards, but many industry participants fear that national sovereignty and protectionist impulses will interfere, he noted.

Among the questions that will have to be addressed, he said, is whether there is a way to prevent firms from becoming too big in the first place and, if they do, whether regulators should force them to shrink. When it is time to work out the details, it will be very hard for regulators to stay on the same page, and disputes are sure to arise, Bush said.