II 

111TH CONGRESS 

2D SESSION S. 3098 

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. 

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 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Protect Our Recovery 

5 Through Oversight of Proprietary Trading Act of 2010’’ 

6 or the ‘‘PROP Trading Act’’. 


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1 SEC. 2. PROHIBITIONS ON PROPRIETARY TRADING AND 

2 CERTAIN RELATIONSHIPS WITH HEDGE 

3 FUNDS AND PRIVATE EQUITY FUNDS; CON4 FLICTS OF INTEREST. 

5 The Bank Holding Company Act of 1956 (12 U.S.C. 

6 1841 et seq.) is amended by inserting after section 5 the 

7 following: 

8 ‘‘SEC. 6. PROHIBITIONS ON PROPRIETARY TRADING AND 

9 CERTAIN RELATIONSHIPS WITH HEDGE 

10 FUNDS AND PRIVATE EQUITY FUNDS. 

11 ‘‘(a) IN GENERAL.— 

12 ‘‘(1) PROHIBITION.—Unless otherwise provided 

13 in this section, a banking entity shall not— 

14 ‘‘(A) engage in proprietary trading; or 

15 ‘‘(B) take or retain any equity, partner16 ship, or other ownership interest in or sponsor 

17 a hedge fund or a private equity fund. 

18 ‘‘(2) SPECIFIED NONBANK FINANCIAL COMPA19 NIES.—Any specified nonbank financial company 

20 that engages in proprietary trading or takes or re21 tains any equity, partnership, or other ownership in22 terest in or sponsors a hedge fund or a private eq23 uity fund shall be subject to additional capital re24 quirements for and additional quantitative limits on 

25 such proprietary trading and taking or retaining any 

26 equity, partnership, or other ownership interest in or 


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1 sponsorship of a hedge fund or a private equity 

2 fund. 

3 ‘‘(b) REGULATIONS.—Not later than 180 days after 

4 the date of enactment of this section, the Board and the 

5 Federal Deposit Insurance Corporation shall, in consulta6 tion with the Securities and Exchange Commission and 

7 the Commodity Futures Trading Commission, jointly 

8 adopt rules to effectuate the provisions of this section. 

9 Such rules shall give full effect to the prudential intent 

10 of the Congress regarding this section. 

11 ‘‘(c) EFFECTIVE DATE.— 

12 ‘‘(1) IN GENERAL.—The provisions of this sec13 tion shall take effect 18 months after the date of 

14 adoption of final rules under subsection (b), but not 

15 later than 24 months after the date of enactment of 

16 the PROP Trading Act. 

17 ‘‘(2) TRANSITION PERIOD.—The Board and the 

18 Federal Deposit Insurance Corporation shall provide 

19 a grace period, not to exceed 24 months after the 

20 date of enactment of the PROP Trading Act, during 

21 which subsection (a) shall not apply to banking enti22 ties and specified nonbank financial companies, so 

23 that such entities and companies may come into 

24 compliance with this section. 

25 ‘‘(d) EXCLUDED ACTIVITIES.— 


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1 ‘‘(1) IN GENERAL.—Subject to the limitations 

2 of paragraph (2), in promulgating rules pursuant to 

3 subsection (b), the Board and the Federal Deposit 

4 Insurance Corporation may exclude from the restric5 tions of subsection (a) any transaction, class of 

6 transactions, or activity (in this section referred to 

7 as ‘excluded activities’), including but not limited 

8 to— 

9 ‘‘(A) the purchase or sale of obligations of 

10 the United States or any agency thereof, obliga11 tions, participations, or other instruments of, 

12 or, issued by the Government National Mort13 gage Association, the Federal National Mort14 gage Association, and the Federal Home Loan 

15 Mortgage Corporation, and obligations of any 

16 State or, of any political subdivision thereof; 

17 ‘‘(B) underwriting and market-making to 

18 serve clients, customers, or counterparties; 

19 ‘‘(C) risk-mitigating hedging activities; 

20 ‘‘(D) investment in one or more small busi21 ness investment companies or investments de22 signed primarily to promote the public welfare, 

23 as provided in paragraph (11) of section 5136 

24 of the Revised Statutes of the United States 

25 (12 U.S.C. 24); and 


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1 ‘‘(E) proprietary trading conducted by a 

2 person pursuant to paragraph (9) or (13) of 

3 section 4(c), provided that the trading occurs 

4 solely outside of the United States and that the 

5 person is not directly or indirectly controlled or 

6 beneficially owned by a United States person. 

7 ‘‘(2) LIMITATION ON EXCLUDED ACTIVITIES.— 

8 No transaction, class of transactions, or activity may 

9 be deemed an excluded activity under paragraph (1) 

10 if it— 

11 ‘‘(A) would result in a material conflict of 

12 interest between the banking entity or the 

13 nonbank financial company and its clients, cus14 tomers, or counterparties; 

15 ‘‘(B) would result, directly or indirectly, in 

16 exposure to high risk assets or high risk trading 

17 strategies, as such terms are defined jointly by 

18 rule by the Board and the Federal Deposit In19 surance Corporation; 

20 ‘‘(C) would pose a threat to the safety and 

21 soundness of such banking entity or the 

22 nonbank financial company; or 

23 ‘‘(D) would pose a threat to the financial 

24 stability of the United States. 


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1 ‘‘(e) LIMITATIONS ON RELATIONSHIPS WITH HEDGE

2 FUNDS AND PRIVATE EQUITY FUNDS.— 

3 ‘‘(1) IN GENERAL.—No banking entity that 

4 serves, directly or indirectly, as the investment man5 ager or investment adviser to a hedge fund or pri6 vate equity fund may enter into a covered trans7 action, as defined in section 23A of the Federal Re8 serve Act (12 U.S.C. 371c) with, or provide custody, 

9 securities lending, or other prime brokerage services 

10 to, such person. 

11 ‘‘(2) TREATMENT AS MEMBER BANK.—A bank12 ing entity that serves, directly or indirectly, as the 

13 investment manager or investment adviser to a 

14 hedge fund or private equity fund shall be subject to 

15 section 23B of the Federal Reserve Act (12 U.S.C. 

16 371c–1), as if such person were a member bank and 

17 such hedge fund or private equity fund were an affil18 iate thereof. 

19 ‘‘(f) LIMITATION ON CONTRARY AUTHORITY.—No 

20 activity that is authorized for a banking entity or a speci21 fied nonbank financial company under any other provision 

22 of law may be engaged in, directly or indirectly, by a bank23 ing entity or a specified financial company under such au24 thority or under any other provision of law, if such activity 

25 is prohibited or restricted under this section. 


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1 ‘‘(g) RULE OF CONSTRUCTION.—Nothing in this sec2 tion may be construed to limit the inherent authority of 

3 any other Federal agency under otherwise applicable pro4 visions of law. 

5 ‘‘(h) DEFINITIONS.— 

6 ‘‘(1) PROPRIETARY TRADING.— 

7 ‘‘(A) IN GENERAL.—As used in this sec8 tion, the term ‘proprietary trading’ means en9 gaging as a principal in any transaction to pur10 chase or sell, or which would put capital at risk 

11 as a principal in or related to any stock, bond, 

12 option, contract of sale of a commodity for fu13 ture delivery, swap, security-based swap, or any 

14 other security or financial instrument which the 

15 Board and the Federal Deposit Insurance Cor16 poration shall jointly, by rule, determine. 

17 ‘‘(B) CONSIDERATION.—The Board and 

18 the Federal Deposit Insurance Corporation 

19 shall, prior to the adoption of rules pursuant to 

20 this subsection, consider, in consultation with 

21 the Securities and Exchange Commission and 

22 the Commodity Futures Trading Commission— 

23 ‘‘(i) the length of time that the rel24 evant asset or combination of assets is 

25 held; 


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1 ‘‘(ii) the size and direction of the in2 ventory of the relevant asset, relative to 

3 the size and direction of client demand in 

4 the relevant asset; 

5 ‘‘(iii) whether the asset is for invest6 ment or trading purposes; 

7 ‘‘(iv) any leverage applied to or em8 bedded in an asset; 

9 ‘‘(v) the maximum loss exposure of an 

10 asset; 

11 ‘‘(vi) the total holdings of assets for 

12 market-making purposes; 

13 ‘‘(vii) the total holdings of over-the14 counter derivatives; 

15 ‘‘(viii) the total leverage of the institu16 tion; and 

17 ‘‘(ix) any other factors that the Board 

18 and the Federal Deposit Insurance Cor19 poration may determine appropriate. 

20 ‘‘(2) BANKING ENTITY.—The term ‘banking en21 tity’ means any insured depository institution (as de22 fined in section 3 of the Federal Deposit Insurance 

23 Act (12 U.S.C. 1813)), person that controls an in24 sured depository institution, bank holding company, 

25 institution that is treated as a bank holding comVerDate Nov 24 2008 03:38 Mar 11, 2010 Jkt 089200 PO 00000 Frm 00008 Fmt 6652 Sfmt 6201 E:\BILLS\S3098.IS S3098

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1 pany for purposes of any other provision of law, and 

2 any affiliate or subsidiary of any such entity. 

3 ‘‘(3) SPECIFIED NONBANK FINANCIAL COM4 PANY.—The term ‘specified nonbank financial com5 pany’ means any U.S. nonbank financial company or 

6 foreign nonbank financial company subject to pru7 dential supervision by the Board. 

8 ‘‘(4) INVESTMENT COMPANY RELATED

9 TERMS.—The terms ‘hedge fund’ and ‘private equity 

10 fund’ mean a company or other entity that is exempt 

11 from registration as an investment company pursu12 ant to section 3(c)(1) or 3(c)(7) of the Investment 

13 Company Act of 1940 (15 U.S.C. 80a–3(c)(1) or 

14 80a–3(c)(7)), or such similar funds as determined 

15 appropriate by the Board. 

16 ‘‘(5) SPONSORING.—The term ‘sponsoring’ a 

17 fund means— 

18 ‘‘(A) serving as a general partner, man19 aging member, or trustee of a fund; 

20 ‘‘(B) in any manner selecting or control21 ling (or having employees, officers, or directors, 

22 or agents who constitute) a majority of the di23 rectors, trustees, or management of a fund; or 


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1 ‘‘(C) sharing with a fund, for corporate, 

2 marketing, promotional, or other purposes, the 

3 same name or a variation of the same name.’’. 

4 SEC. 3. CONFLICTS OF INTEREST IN SECURITIZATION. 

5 The Securities Act of 1933 (15 U.S.C. 77a et seq.) 

6 is amended by inserting after section 27A the following: 

7 ‘‘SEC. 27B. CONFLICTS OF INTEREST RELATING TO CER8 TAIN SECURITIZATIONS. 

9 ‘‘(a) IN GENERAL.—An underwriter, placement 

10 agent, initial purchaser, or sponsor of an asset-backed se11 curity, shall not, during such period as the asset-backed 

12 security is outstanding and held by investors that are un13 affiliated with such underwriter, placement agent, initial 

14 purchaser, or sponsor, engage in any transaction that 

15 would— 

16 ‘‘(1) give rise to any material conflict of inter17 est with respect to any investor in a transaction aris18 ing out of such activity; or 

19 ‘‘(2) undermine the value, risk, or performance 

20 of the asset-backed security. 

21 ‘‘(b) COMMISSION RULES.—Not later than 180 days 

22 after the date of enactment of this section, the Commis23 sion shall, by rule, impose restrictions on the timing and 

24 extent of proprietary trading by an underwriter, placement 

25 agent, initial purchaser, or sponsor and any affiliates or 


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1 subsidiaries of such entity in any securities, security-based 

2 swaps, or similar financial instruments that are derived 

3 from, or related to, an asset-backed security for which the 

4 entity, its affiliate, or its subsidiary acts as underwriter, 

5 placement agent, initial purchaser, or sponsor.’’. 

Æ 


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