Thursday’s dizzying stock market plunge is a sign that the U.S. financial system still needs serious reform, advocates for tougher regulation of the financial industry say.

The market swoon – the steepest drop in U.S. stocks since the 2008 financial crisis – comes amid a continuing debate over the economic impact of regulations to carry out the Wall Street reform law.

If the Democrats “had anything on the ball they would be hammering away at the notion that it was because of the lack of oversight that the market is crashing,” John Taylor, executive director of the National Community Reinvestment Coalition, told iWatch News.

“The roots of our recession and continuing economic decline are firmly dug into the soil of deregulation.  Every day the market drops is an opportunity for those who passed Dodd-Frank to remind people that oversight, accountability and the rule of law matter immensely – we need a free market, free to compete but also free from abuse and unsavory practices,” Taylor said.

GOP critics of the Dodd-Frank financial reform law contend that uncertainty about the effects of hundreds of new regulations are slowing the U.S. economic recovery.

Republican Spencer Bachus of Alabama, chairman of the House Financial Services Committee, has said that the economy is suffering under the weight of a “regulatory tsunami” that is discouraging U.S. banks from loaning money that could help spur investment and create jobs. “We've heard repeatedly how hard it is for small businesses to get loans and this law is certainly playing a role,” Bachus said last week.

The GOP-led committee has approved more than a dozen bills to kill or weaken various sections of the Dodd-Frank reform bill this year. None have advanced in the Democratic-controlled Senate.

A federal appeals court ruled last month that the Securities and Exchange Commission didn’t properly weigh the costs and benefits to support an SEC rule making it easier for shareholders to nominate board directors. Now, with one eye on that ruling, regulators are steeling themselves for more court challenges related to Dodd-Frank financial reform regulations.

"I was afraid of this all along," Commodity Futures Trading Commission commissioner Jill Sommers told Reuters. "The SEC had a rule that was challenged on grounds that I think there are concerns in our rules about, and I feel like we could equally have the same kind of challenges."

The SEC’s rule in question would have made it easier for shareholders to appoint directors to the corporate board, but other SEC and CFTC rules are also likely candidates for litigation. Plaintiffs may attack regulators for failing to follow federal rule-making procedures, such as not properly considering all public comments on a rule or failing to conduct a proper cost-benefit rule analysis.

Other rules at stake:  The SEC’s conflict minerals proposal, which would require company disclosure of the sources of certain ores and metals, and the CFTC's speculative trading curbs.

Derivatives databases – The Commodity Futures Trading Commission voted (CFTC) is expected to approve a rule for registering information databases central to the $601 trillion swaps market, reports Bloomberg. The rule  was initiated by a Dodd-Frank law requirement that companies must make information on their trading volumes and prices available to financial regulators.

Some big U.S. companies have used the same auditing firms for decades, while others like Procter & Gamble and General Electric have each kept the same firm for more than a century.

Those long-time, cozy relationships have some critics urging the U.S. Public Company Accounting Oversight Board to encourage tougher, more independent audits by requiring a periodic rotation in auditing firms hired by companies, Reuters reports. 

"When you look at some of the big audit failures over the years, whether it's Enron or Waste Management, you find instances where they've had the same auditor for in some cases decades," said Barbara Roper, head of investor protection for the Consumer Federation of America.

But the Big Four accounting firms -- Deloitte, Pricewaterhouse Coopers, KPMG and Ernst & Young -- are likely to fight any mandatory rotation, which could rob them of lucrative and loyal clients. The firms also contend that good auditing work comes from a detailed understanding of a client company’s operations, which takes time to acquire.

Currently, the partner on an auditing job must be switched every five years, but there is no term limit on the audit firms themselves.

CFTC pick moves forward – The Senate Agriculture Committee yesterday approved President Barack Obama’s Democratic pick for the newest member of the Commodity Futures Trading Commission, an agency tasked with writing rules for the $600 trillion over-the-counter derivatives under the Dodd-Frank financial reform law.

The financial industry has spent more than $100 million so far this year on lobbying to influence how the financial reform law is carried out, reports The New York Times. The biggest individual spenders: American Bankers Association at $4.6 million and JP Morgan Chase & Co. with $3.3 million.

Spending is down just 5 percent from last year, when lawmakers were writing the Dodd-Frank law amid an all-out lobbying campaign by banks, mortgage companies, companies that trade derivatives contracts, payday lenders and other financial services affected by the broad legislation.

“In 2010, the Dodd-Frank financial reform was one of the biggest shows in town, and that continues this year,” Michael Beckel of the Center for Responsive Politics told the newspaper. “Until it is chiseled in stone, the lobbying continues.”

The pressure from Wall Street seems to be getting results.  

In June, the Federal Reserve agreed to set a higher ceiling than initially proposed on the fees banks charge retailers for debit card purchases. Other regulators facing intense lobbying clout have backed off the Dodd-Frank law’s specific deadlines for rules. The Commodity Futures Trading Commission and Securities Exchange Commission, for example, agreed in June to delay many derivatives trading rules for up to six months.

Conflict minerals – U.S. manufacturers haven’t given up trying to derail a reform law requirement that companies disclose if they use “conflict minerals” mined in the Democratic Republic of Congo.

Internet sites offering person-to-person lending have surged in popularity as borrowers look for help paying off credit card bills and investors search for double-digit returns.  What’s less clear, though, is how this new style of lending should be regulated as it evolves.

Prosper Marketplace, Inc. and LendingClub Corp. are the biggest for-profit companies offering online platforms that let individuals act as lenders by investing in loans to borrowers.

Both are overseen by a combination of state regulators plus the Securities and Exchange Commission (SEC), the Federal Deposit Insurance Corp. (FDC) and the new Consumer Financial Protection Bureau (CFPB), according to a new Government Accountability Office report.

Together, the two companies have connected borrowers and lenders for a total of about 63,000 unsecured loans totaling $469 million through March 2011.

“[Person-to-person lending platforms are] rather small right now, so they’re not at the scale that they could potentially represent any systemic risk,” Matthew Sciré, GAO director of financial markets and community investment, told iWatch News. “So the argument for moving towards more of a consolidated approach is not compelling. There are certainly arguments on both sides of this.”

A consolidated approach would designate one federal regulator, such as the CFPB, to take primary responsibility for both borrower and lender protection. The CFPB might, for example, set disclosure requirements for lenders and borrowers, impose restrictions on certain lending practices, and perform examinations of lenders.

When Dodd-Frank first became law one year ago, Republicans immediately began calling for complete repeal. Today, their strategy has shifted to a more nuanced attack that aims to delay deadlines for new regulations and gut agency funding needed to carry out the law.

For instance, Rep. Michelle Bachmann’s (R-Minn.) repeal bill, introduced in January, attracted  only nine co-sponsors and is currently “languishing in a House subcommittee,” reports the American Banker. Ditto for a broad repeal bill in the Senate, where Republican Leader Mitch McConnell and Richard Shelby, the top Republican on the Senate Banking Committee, are now focusing on relatively small parts of the Dodd-Frank law.

Republicans have carefully framed their attack on the independent Consumer Financial Protection Bureau, the new agency which is supported by nearly three-fourths of Americans, according to a recent Consumer Reports survey. The CFPB, according to Republicans, should be overseen by a five-member board rather than a single director to increase the agency’s transparency.

"What we are asking for is not radical," Republican Jerry Moran of Kansas said at a July 19 Senate Banking Committee hearing. "Transparency and accountability are our goals, goals that should be shared by every policymaker interested in protecting consumers from abuses of the past."

Mortgage bankers criticized - In an attempt to avoid another mortgage meltdown, the Dodd-Frank law requires lenders to verify borrowers’ ability to repay loans, and orders banks to have more “skin in the game” when bundling risky mortgages into securities.

The battle over financial industry reforms began in Congress two years ago, then moved into regulatory agencies writing rules to carry out the Dodd-Frank law. Next stop: Federal court.

The U.S. Chamber of Commerce and the Futures Industry Associaton are among the business groups considering potential lawsuits to challenge specific Dodd-Frank regulations, the Wall Street Journal reports.  Advocates of litigation also point to a major victory last week when a federal appeals court overturned a Securities and Exchange Commission rule giving shareholders more power to remove corporate directors.

"Suing a regulator is an expensive and slow process. It's not something we do gleefully," David Hirschmann, head of the Chamber's Center for Capital Markets Competitiveness, told the newspaper.

What are the most likely litigation targets?  

The SEC's new program and generous bounty to encourage corporate whistleblowers to report suspected misconduct is widely opposed by business groups. Other concerns center on the set of regulations still being developed by the SEC and the Commodity Futures Trading Commission to police derivatives trading, and requirements for companies to report the pay ratio of the chief executive versus an average employee.

In general, a federal regulation cannot be challenged in a U.S. appeals court until the rule has been finalized by an agency.

Credit history & remittances - The Consumer Financial Protection Bureau is studying whether data on electronic money transfers, or remittances, can be used to help construct credit scores for people who rely on them, reports The New York Times.