II 111th CONGRESS 2d Session S. 3098 IN THE SENATE OF THE UNITED STATES March 10, 2010 Mr. Merkley (for himself, Mr. Levin, Mr. Kaufman, Mr. Brown of Ohio, and Mrs. Shaheen) introduced the following bill; which was read twice and referred to the Committee on Banking, Housing, and Urban Affairs A BILL To prohibit proprietary trading and certain relationships with hedge funds and private equity funds, to address conflicts of interest with respect to certain securitizations, and for other purposes.

1.

Short title

This Act may be cited as the Protect Our Recovery Through Oversight of Proprietary Trading Act of 2010 or the PROP Trading Act.

2.

Prohibitions on proprietary trading and certain relationships with hedge funds and private equity funds; conflicts of interest

The Bank Holding Company Act of 1956 (12 U.S.C. 1841 et seq.) is amended by inserting after section 5 the following:

6.

Prohibitions on proprietary trading and certain relationships with hedge funds and private equity funds

(a)

In general

(1)

Prohibition

Unless otherwise provided in this section, a banking entity shall not— (A)engage in proprietary trading; or (B)take or retain any equity, partnership, or other ownership interest in or sponsor a hedge fund or a private equity fund. (2)

Specified nonbank financial companies

Any specified nonbank financial company that engages in proprietary trading or takes or retains any equity, partnership, or other ownership interest in or sponsors a hedge fund or a private equity fund shall be subject to additional capital requirements for and additional quantitative limits on such proprietary trading and taking or retaining any equity, partnership, or other ownership interest in or sponsorship of a hedge fund or a private equity fund. (b)

Regulations

Not later than 180 days after the date of enactment of this section, the Board and the Federal Deposit Insurance Corporation shall, in consultation with the Securities and Exchange Commission and the Commodity Futures Trading Commission, jointly adopt rules to effectuate the provisions of this section. Such rules shall give full effect to the prudential intent of the Congress regarding this section. (c)

Effective date

(1)

In general

The provisions of this section shall take effect 18 months after the date of adoption of final rules under subsection (b), but not later than 24 months after the date of enactment of the PROP Trading Act. (2)

Transition period

The Board and the Federal Deposit Insurance Corporation shall provide a grace period, not to exceed 24 months after the date of enactment of the PROP Trading Act, during which subsection (a) shall not apply to banking entities and specified nonbank financial companies, so that such entities and companies may come into compliance with this section. (d)

Excluded activities

(1)

In general

Subject to the limitations of paragraph (2), in promulgating rules pursuant to subsection (b), the Board and the Federal Deposit Insurance Corporation may exclude from the restrictions of subsection (a) any transaction, class of transactions, or activity (in this section referred to as excluded activities), including but not limited to— (A)the purchase or sale of obligations of the United States or any agency thereof, obligations, participations, or other instruments of, or, issued by the Government National Mortgage Association, the Federal National Mortgage Association, and the Federal Home Loan Mortgage Corporation, and obligations of any State or, of any political subdivision thereof; (B)underwriting and market-making to serve clients, customers, or counterparties; (C)risk-mitigating hedging activities; (D)investment in one or more small business investment companies or investments designed primarily to promote the public welfare, as provided in paragraph (11) of section 5136 of the Revised Statutes of the United States (12 U.S.C. 24); and (E)proprietary trading conducted by a person pursuant to paragraph (9) or (13) of section 4(c), provided that the trading occurs solely outside of the United States and that the person is not directly or indirectly controlled or beneficially owned by a United States person. (2)

Limitation on excluded activities

No transaction, class of transactions, or activity may be deemed an excluded activity under paragraph (1) if it— (A)would result in a material conflict of interest between the banking entity or the nonbank financial company and its clients, customers, or counterparties; (B)would result, directly or indirectly, in exposure to high risk assets or high risk trading strategies, as such terms are defined jointly by rule by the Board and the Federal Deposit Insurance Corporation; (C)would pose a threat to the safety and soundness of such banking entity or the nonbank financial company; or (D)would pose a threat to the financial stability of the United States. (e)

Limitations on relationships with hedge funds and private equity funds

(1)

In general

No banking entity that serves, directly or indirectly, as the investment manager or investment adviser to a hedge fund or private equity fund may enter into a covered transaction, as defined in section 23A of the Federal Reserve Act (12 U.S.C. 371c) with, or provide custody, securities lending, or other prime brokerage services to, such person. (2)

Treatment as member bank

A banking entity that serves, directly or indirectly, as the investment manager or investment adviser to a hedge fund or private equity fund shall be subject to section 23B of the Federal Reserve Act (12 U.S.C. 371c–1), as if such person were a member bank and such hedge fund or private equity fund were an affiliate thereof. (f)

Limitation on contrary authority

No activity that is authorized for a banking entity or a specified nonbank financial company under any other provision of law may be engaged in, directly or indirectly, by a banking entity or a specified financial company under such authority or under any other provision of law, if such activity is prohibited or restricted under this section. (g)

Rule of construction

Nothing in this section may be construed to limit the inherent authority of any other Federal agency under otherwise applicable provisions of law. (h)

Definitions

(1)

Proprietary trading

(A)

In general

As used in this section, the term proprietary trading means engaging as a principal in any transaction to purchase or sell, or which would put capital at risk as a principal in or related to any stock, bond, option, contract of sale of a commodity for future delivery, swap, security-based swap, or any other security or financial instrument which the Board and the Federal Deposit Insurance Corporation shall jointly, by rule, determine. (B)

Consideration

The Board and the Federal Deposit Insurance Corporation shall, prior to the adoption of rules pursuant to this subsection, consider, in consultation with the Securities and Exchange Commission and the Commodity Futures Trading Commission— (i)the length of time that the relevant asset or combination of assets is held; (ii)the size and direction of the inventory of the relevant asset, relative to the size and direction of client demand in the relevant asset; (iii)whether the asset is for investment or trading purposes; (iv)any leverage applied to or embedded in an asset; (v)the maximum loss exposure of an asset; (vi)the total holdings of assets for market-making purposes; (vii)the total holdings of over-the-counter derivatives; (viii)the total leverage of the institution; and (ix)any other factors that the Board and the Federal Deposit Insurance Corporation may determine appropriate. (2)

Banking entity

The term banking entity means any insured depository institution (as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813)), person that controls an insured depository institution, bank holding company, institution that is treated as a bank holding company for purposes of any other provision of law, and any affiliate or subsidiary of any such entity. (3)

Specified nonbank financial company

The term specified nonbank financial company means any U.S. nonbank financial company or foreign nonbank financial company subject to prudential supervision by the Board. (4)

Investment company related terms

The terms hedge fund and private equity fund mean a company or other entity that is exempt from registration as an investment company pursuant to section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940 (15 U.S.C. 80a–3(c)(1) or 80a–3(c)(7)), or such similar funds as determined appropriate by the Board. (5)

Sponsoring

The term sponsoring a fund means— (A)serving as a general partner, managing member, or trustee of a fund; (B)in any manner selecting or controlling (or having employees, officers, or directors, or agents who constitute) a majority of the directors, trustees, or management of a fund; or (C)sharing with a fund, for corporate, marketing, promotional, or other purposes, the same name or a variation of the same name.

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3.

Conflicts of interest in securitization

The Securities Act of 1933 (15 U.S.C. 77a et seq.) is amended by inserting after section 27A the following:

27B.

Conflicts of interest relating to certain securitizations

(a)

In general

An underwriter, placement agent, initial purchaser, or sponsor of an asset-backed security, shall not, during such period as the asset-backed security is outstanding and held by investors that are unaffiliated with such underwriter, placement agent, initial purchaser, or sponsor, engage in any transaction that would— (1)give rise to any material conflict of interest with respect to any investor in a transaction arising out of such activity; or (2)undermine the value, risk, or performance of the asset-backed security. (b)

Commission rules

Not later than 180 days after the date of enactment of this section, the Commission shall, by rule, impose restrictions on the timing and extent of proprietary trading by an underwriter, placement agent, initial purchaser, or sponsor and any affiliates or subsidiaries of such entity in any securities, security-based swaps, or similar financial instruments that are derived from, or related to, an asset-backed security for which the entity, its affiliate, or its subsidiary acts as underwriter, placement agent, initial purchaser, or sponsor.

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