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.

SECTION 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''.

SEC. 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:

``SEC. 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.''.

SEC. 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:

``SEC. 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.''.

Summary: Protect Our Recovery Through Oversight of Proprietary Trading Act of 2010 or the PROP Trading Act - Amends the Bank Holding Company Act of 1956 to prohibit a banking entity from: (1) engaging in proprietary trading; or (2) having an ownership interest in or sponsoring a hedge fund or a private equity fund. Subjects any specified nonbank financial company holding such proprietary trading and ownership interests to additional capital requirements and additional quantitative limits.

Directs the Board of Governors of the Federal Reserve System (Board) and the Federal Deposit Insurance Corporation (FDIC) to adopt rules jointly to implement this Act.

Authorizes the Board and the FDIC to exclude from such prohibitions specified transactions or activities, including: (1) the purchase or sale of obligations of the United States or any federal agency; (2) instruments issued by the Government National Mortgage Association (Ginnie Mae), the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac); and (3) obligations of any state or its political subdivision.

Prohibits from the class of excluded activities any transactions that would: (1) result in a material conflict of interest between the banking entity or the nonbank financial company and its clients, customers, or counterparties; (2) result in exposure to high risk assets or high risk trading strategies; (3) threaten the safety and soundness of a banking entity or the nonbank financial company; or (4) threaten the financial stability of the United States.

Prohibits any banking entity that serves, directly or indirectly, as the investment manager or investment adviser to a hedge fund or private equity fund from entering into a covered transaction with, or provide custody, securities lending, or other prime brokerage services to, such person. Treats a banking entity that serves as investment manager or investment adviser to a hedge fund or private equity fund as if: (1) it were a member bank subject to the Federal Reserve Act; and (2) the hedge fund or private equity fund were an affiliate thereof.

Amends the Securities Act of 1933 to prohibit an underwriter, placement agent, initial purchaser, or sponsor of an asset-backed security, while the security is outstanding and held by unaffiliated investors, from engaging in any transaction that would: (1) give rise to any material conflict of interest with respect to any investor; or (2) undermine the value, risk, or performance of such security