In 1933, during the first 100 days of President Franklin D. Roosevelt's New Deal, the Securities Act of 1933 and the Glass-Steagall Act (GSA) were enacted, setting up a pervasive regulatory scheme for the public offering of securities and generally prohibiting commercial banks from underwriting and dealing in those securities. GSA prohibited affiliations between banks (which, for the purposes of this report, means bank-chartered depository institutions, that is, financial institutions that hold federally insured consumer deposits) and securities firms (which are commonly referred to as "investment banks" even though they are not technically banks and do not hold federally insured consumer deposits); further restrictions on bank affiliations with non-banking firms were enacted in Bank Holding Company Act of 1956 (BHCA) and its subsequent amendments, eliminating the possibility that companies owning banks would be permitted to take ownership or controlling interest in insurance companies, manufacturing companies, real estate companies, securities firms, or any other non-banking company. As a result, distinct regulatory systems developed in the United States for regulating banks, on the one hand, and securities firms on the other. Banks are institutions of limited power; they may only engage in the activities permissible pursuant to their charter, which generally limits them to the "business of banking" and all powers incidental to the business of banking. Included in these activities restrictions are certain limitations on their ability to engage in proprietary trading, that is, investing as principal, rather than at the behest or for the benefit of customers, for the bank's own account. In addition to activity restrictions, banks are subject to capital standards, affiliation restrictions, management interlocking restrictions, and many other standards; they are subject to regular examinations to ensure they are being well-managed, conducting business in a safe and sound fashion, and complying with numerous consumer protection and other laws; and federal banking regulators have a full range of strong and flexible enforcement tools, such as prompt corrective action powers, to rectify problems that are found during examinations. One of the benefits of being a bank, and thus being subjected to heavy, expensive regulation, is access to what is referred to as the "federal safety net," which includes the Federal Deposit Insurance Corporation's (FDIC's) deposit insurance, the Federal Reserve's discount window lending facility, and the Federal Reserve's payment system. The regulation and oversight of securities firms are very different from that of banks. Securities firms may be primarily regulated by the Securities and Exchange Commission (SEC) at the federal level, or they may not be regulated directly at the federal level at all, which often is the case for hedge funds, private equity firms, and special purpose vehicles (SPVs). Rather than regulating for safety and soundness, the SEC's regulatory regime is predominately built around registration, disclosure of risk, and the prevention and prosecution of insider trading and other forms of fraud. SEC-regulated firms generally are not subject to capital and liquidity standards or to regular safety and soundness examinations. And aside from a general prohibition on accepting federally insured consumer deposits, securities firms generally are not subject to activity restrictions, as are banks. As a result, these institutions generally do not have access to the federal safety net. While there are two distinct regulatory systems, the distinguishing lines between the traditional activities engaged in by commercial and investment banks became increasingly difficult to discern as a result of competition, financial innovation, and technological advances in combination with permissive agency and judicial interpretation. Beginning in the late 1970s, the Board of Governors of the Federal Reserve System (FRB), as the primary regulator for bank holding companies (BHCs), and the Office of the Comptroller of the Currency (OCC), as the primary regulator for national banks, issued a series of regulations and orders, liberally interpreting the limitations imposed on the activities of commercial banks through laws such as the GSA and the BHCA. The result was the incremental expansion of the types and levels of securities activities permissible for BHCs and financial subsidiaries of banks. The Gramm-Leach-Bliley Act of 1999 (GLBA) continued this trend by repealing two of the four sections of the GSA and the BHCA and by establishing the financial holding company (FHC) structure, which permits commercial banks and full-service investment banks (as well as insurance companies) to coexist under common control. In the wake of the Great Recession of 2008, there have been calls to reexamine the activities that should be permissible for commercial banks in light of the fact that they receive governmental benefits through access to the federal safety net. Some have called for the reenactment of the repealed provisions of the GSA, which is discussed in greater detail in another CRS report. While neither the House- nor the Senate-passed version of H.R. 4173 , the comprehensive financial regulatory reform proposals of the 111 th Congress, includes provisions that would reenact the GSA, both bills do propose curbs on "proprietary trading" by banking institutions. The bills would limit the ability of commercial banking institutions and their affiliated companies and subsidiaries to engage in trading unrelated to customer needs and investing in and sponsoring hedge funds or private equity funds. Such an approach has been referred to as the "Volcker Rule," having been urged upon Congress by Paul Volcker, former Chairman of the FRB and current Chairman of the President's Economic Recovery Advisory Board. This report briefly discusses the permissible proprietary trading activities of commercial banks and their subsidiaries under current law. It then analyzes the Volcker Rule proposals under both the House- and Senate-passed financial reform bills. Appendix A , Appendix B , and Appendix C of the report provide the full legislative language from both bills. The OCC and the FRB are empowered to implement, enforce, and, by extension, interpret (by regulation, guidance, or order) the subtleties and ambiguities of the GSA and the BHCA. For several decades after the enactment of the GSA, banks did not attempt to expand beyond traditional banking activities to a significant degree. This trend began to change in the 1970s. High inflation, coupled with a consumer movement to interest-bearing accounts and investment products, such as money market funds offered by securities firms, reduced the profitability of traditional bank products. Corporate consumers also began moving to securities firms for short-term lending (e.g., through the commercial paper market), which, for some, was less expensive than borrowing directly from banks. Facing lower profits and stiffer competition from securities firms, banks began seeking approval from regulators to engage in a greater universe of securities activities. Additionally, regulators may have become less cautious as time passed after the Great Depression. Beginning in the 1970s and 1980s, requests for approval to engage in a greater universe of securities activities were largely granted by the OCC and the FRB, and, in most cases, have been approved by courts. By the time that the GLBA was enacted in 1999, the FRB had authorized certain BHCs and their subsidiaries to underwrite and deal in an array of bank-ineligible securities, including municipal bonds, commercial paper, mortgage-backed securities and other consumer-related securities, corporate debt securities, and corporate equity securities. In addition to underwriting and dealing activities, the FRB also approved other securities activities such as the provision of investment advice, the brokering of securities, and others. The FRB promulgated the list of permissible nonbanking activities at 12 C.F.R. § 225.28(b). With respect to securities-related activities, the regulation includes two distinct categories: (1) agency functions for customers and (2) transactions as principal (i.e., for the company's own account, often referred to as "proprietary trading"). In the latter category are the following: (1) "[u]nderwriting and dealing in government obligations and money market instruments"; (2) "[i]nvesting and trading activities" in certain swaps, futures, options, foreign exchange, and other derivative contracts; and (3) "buying and selling bullion and related activities." The FRB requires banks to adhere to a number of limitations and conditions, largely spelled out in regulation, in order to engage as principal in each of these three categories. After GLBA, commercial banks were provided the authority to make proprietary investments in a broader array of securities, but to do so, they generally must either be organized as an FHC or the bank itself must establish a financial subsidiary. The permissible proprietary activities vary for FHCs and financial subsidiaries, so they are addressed in turn. The GLBA introduced the FHC, a separate form of BHC for companies wishing to expand beyond the business of banking and closely related activities to a broader array of financial services. The GLBA permits FHCs to engage in and own companies engaging in (1) activities that are "financial in nature or incidental to such financial activity" or (2) activities that are "complementary to a financial activity" and do "not pose a substantial risk to the safety and soundness of the depository." The GLBA listed certain activities as "financial in nature," including all the nonbanking activities which had already been authorized for BHCs. The GLBA empowered the FRB, in coordination with the Secretary of the Treasury, to issue orders or regulations supplementing that list. Merchant Banking Investments. Under the GLBA and rules promulgated jointly by the Secretary of the Treasury and the FRB, FHCs with a securities affiliate or an insurance affiliate with an investment adviser affiliate may engage in what is referred to as merchant banking activities, under certain conditions.