II 110th CONGRESS 2d Session S. 3739 IN THE SENATE OF THE UNITED STATES December 11 (legislative day, December 10), 2008 Mr. Dorgan (for himself and Mr. Feingold) introduced the following bill; which was read twice and referred to the Committee on Banking, Housing, and Urban Affairs A BILL To address the regulation of derivatives and unregistered hedge funds, and for other purposes.

1.

Short title

This Act may be cited as the Derivatives and Hedge Fund Regulatory Improvement Act of 2008.

2.

Coordinated rulemaking

(a)

Initiation of proceedings

Not later than 90 days after the date of enactment of this Act, the appropriate Federal banking agencies, in coordination with the Commission, after consultation with the Secretary of the Treasury and the Commodity Futures Trading Commission, shall initiate a coordinated rulemaking with respect to the entities under their respective jurisdictions that engage in transactions involving unregistered hedge funds or over-the-counter derivatives— (1)to extend the requirements of regulations relating to the safety and soundness of the financial system applicable to mutual funds under the Investment Company Act of 1940 (15 U.S.C. 80a–1 et seq.) to unregistered hedge funds, including— (A)requiring the fund to disclose its policies on borrowing money and requiring a shareholder vote to change such policy, as in section 5 of that Act (15 U.S.C. 80a–5); (B)strict record keeping and reporting rules, as in section 30 of that Act (15 U.S.C. 80a–29); and (C)capital structure requirements, as in section 18 of that Act (15 U.S.C. 80a–18); (2)to provide for the regulation of over-the-counter derivatives, including credit default swaps, interest rate swaps, currency swaps, mortgage-backed securities, asset-backed securities, collateralized debt obligations, and other derivatives that are not traded on a national securities exchange or by a registered securities association, in the public interest and for the protection of investors, the stability of the financial markets, and the well-being of the economy; and (3)to prohibit insured depository institutions from trading derivatives for their own accounts. (b)

Coordination, consistency, and comparability

Each of the agencies and authorities referred to in subsection (a) shall consult and coordinate with the other such agencies and authorities for the purpose of assuring, to the extent possible, that the regulations by each such agency and authority are consistent and comparable with those prescribed by the other such agencies and authorities.

3.

Scope and deadline

The appropriate Federal banking agencies and the Commission shall, not later than 12 months after the date of enactment of this Act, issue the rules required by this Act in final form that are designed— (1)to avoid systemic risks to the financial markets; (2)to ensure safe and sound operation of banks, including by requiring the maintenance of sufficient capital levels and limits on aggregate leverage and establishing appropriate restrictions on the buying, selling, or entering into derivatives by an insured depository institution for its own account; and (3)to provide means to prevent fraudulent, deceptive, or manipulative practices.

4.

Authority to grant exceptions

The regulations prescribed under this Act may allow an insured depository institution to purchase, sell, or engage in traditional hedging transactions or to purchase, sell, or engage in transactions involving de minimus interests in derivatives for the account of that institution, but only to the extent that such exceptions are consistent with the safety and soundness of such institution.

5.

Agency authority

The rules issued under this Act shall be enforced by the appropriate Federal banking agencies with respect to entities under their respective jurisdictions, and by the Commission with respect to any other entity that engages in transactions involving unregistered hedge funds or over-the-counter derivatives.

6.

Definitions

As used in this Act— (1)the terms appropriate Federal banking agency, Federal banking agencies, and insured depository institution have the same meanings as in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813); (2)the term Commission means the Securities and Exchange Commission; and (3)the term derivative— (A)means any financial contract or other instrument that derives its value from the value or performance of any security or other financial instrument, or of any excluded commodity (as that term is defined in section 1a of the Commodity Exchange Act (7 U.S.C. 1a)); and (B)does not include— (i)any security that is traded on a national securities exchange or on an automated interdealer quotation system sponsored by a securities association registered under section 15A of the Securities Exchange Act of 1934 (15 U.S.C. 78o–3); or (ii)any forward contract which has a maturity at a time of issuance of not longer than 270 days; (4)the term unregistered hedge fund— (A)means any pooled investment vehicle, or group or family of pooled investment vehicles, that— (i)has total assets under management of not less than $1,000,000,000 or such other amount as is determined to be appropriate by the appropriate Federal banking agency and the Commission with respect to the entities under their respective jurisdictions; and (ii)is excepted from the definition of an investment company by paragraph (1) or (7) of section 3(c) of the Investment Company Act of 1940, or is a foreign company that would be required to obtain an order from the Commission under section 7(d) of that Act if it made a public offering of its securities by use of the mails and means or instrumentalities of interstate commerce; and (B)does not include a commodity pool operator or futures commission merchant (as such terms are defined in section 1a of the Commodity Exchange Act (7 U.S.C. 1a)).