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Date Created: 12/21/15
AY010258 SLC 111TH CONGRESS 21 SESSION S 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 Mr MERKLEY for himself and Mr LEVIN introduced the following bill Which was read twice and referred to the Committee on A BILL To prohibit proprietary trading and certain relationships With hedge funds and private equity funds to address con flicts of interest With respect to certain securitizations and for other purposes 1 Be it enacted by the Senate and House of Representa tives of the United States ofAmeqn39ca in Congress assembled SECTION 1 SHORT TITLE This Act may be cited as the Protect Our Recovery Through Oversight of Proprietary Trading Act of 2010 CNUIPUJN or the PROP Trading Act AY010258 SLC 2 1 SEC 2 PROHIBITIONS ON PROPRIETARY TRADING AND 2 CERTAIN RELATIONSHIPS WITH HEDGE 3 FUNDS AND PRIVATE EQUITY FUNDS CON 4 FLICTS OF INTEREST 5 The Bank Holding Company Act of 1956 12 USC 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 13 take or retain any equity partner 16 ship or other ownership interest in or sponsor 17 a hedge fund or a private equity fund 18 2 SPECIFIED NONBANK FINANCIAL COMPA 19 NIES Any specified nonbank financial company 20 that engages in proprietary trading or takes or re 21 tains any equity partnership or other ownership in 22 terest in or sponsors a hedge fund or a private eq 23 uity fund shall be subject to additional capital re 24 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 AY010258 H the OOOmIgtUJN NNNNNNHHHHHHHHHH mPUJNHOKDOOQOLhPUJNHO sLo 3 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 consulta tion With the Securities and Exchange Commission and 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 sec tion 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 enti ties and specified nonbank financial companies so that such entities and companies may come into compliance With this section d EXCLUDED ACTIVITIES AY010258 OOOmIgtUJNH NNNNNNHHHHHHHHHH mPUJNHOKDOOQOLhPUJNHO sLo 4 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 restric tions 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 obliga tions participations or other instruments of or issued by the Government National Mort gage Association the Federal National Mort gage Association and the Federal Home Loan Mortgage Corporation and obligations of any State or of any political subdivision thereof 13 underwriting and marketmaking to serve clients customers or counterparties 0 riskmitigating hedging activities D investment in one or more small busi ness investment companies or investments de signed primarily to promote the public welfare as provided in paragraph 11 of section 5136 of the Revised Statutes of the United States12 USC 24 and AY010258 OOOmIgtUJNH JNNNNHHHHHHHHHH mNr kOKDooqchIthI ko sLo 5 E proprietary trading conducted by a person pursuant to paragraph 9 or 13 of section 4c 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 cus tomers or counterparties 13 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 In surance Corporation 0 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 AY010258 SLO 6 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 man 5 ager or investment adviser to a hedge fund or pri 6 vate equity fund may enter into a covered trans 7 action as defined in section 23A of the Federal Re 8 serve Act 12 USC 371c With or provide custody 9 securities lending or other prime brokerage services 10 to such person 11 2 TREATMENT AS MEMBER BANK A bank 12 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 USC 16 371c 1 as if such person were a member bank and 17 such hedge fund or private equity fund were an affil 18 iate thereof 19 f LIMITATION ON CONTRARY AUTHORITY No 20 activity that is authorized for a banking entity or a speci 21 fied nonbank financial company under any other provision 22 of law may be engaged in directly or indirectly by a bank 23 ing entity or a specified financial company under such au 24 thority or under any other provision of law if such activity 25 is prohibited or restricted under this section AY010258 SLC 7 1 g RULE OF CONSTRUCTION Nothing in this sec 2 tion may be construed to limit the inherent authority of 3 any other Federal agency under otherwise applicable pro 4 Visions of law 5 h DEFINITIONS 6 1 PROPRIETARY TRADING 7 A IN GENERAL AS used in this sec 8 tion the term proprietary trading means en 9 gaging as a principal in any transaction to pur 10 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 fu 13 ture delivery swap securitybased swap or any 14 other security or financial instrument which the 15 Board and the Federal Deposit Insurance Cor 16 poration shall jointly by rule determine 17 13 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 rel 24 evant asset or combination of assets is 25 held AY010258 OOOmIgtUJNH NNNNNNHHHHHHHHHH mPUJNHOKDOOQOLhPUJNHO sLo 8 ii the size and direction of the in ventory of the relevant asset relative to the size and direction of client demand in the relevant asset iii whether the asset is for invest ment or trading purposes iv any leverage applied to or em bedded in an asset v the maximum loss exposure of an asset vi the total holdings of assets for marketmaking purposes vii the total holdings of overthe counter derivatives viii the total leverage of the institu tion and ix any other factors that the Board and the Federal Deposit Insurance Cor poration may determine appropriate 2 BANKING ENTITY The term banking en tity means any insured depository institution as de fined in section 3 of the Federal Deposit Insurance Act 12 USC 1813 person that controls an in sured depository institution bank holding company institution that is treated as a bank holding com AY010258 OOOmIgtUJNH JNNNr tr tr kr kr kr tr tr kr kr k WNHO OOOmIgtUJNHO sLo 9 pany for purposes of any other provision of law and any affiliate or subsidiary of any such entity 3 SPECIFIED NONBANK FINANCIAL COM PANY The term specified nonbank financial com pany means any US nonbank financial company or foreign nonbank financial company subject to pru dential supervision by the Board 4 TERMS The terms hedge fund and private equity INVEsTMENT COMPANY RELATED fund mean a company or other entity that is exempt from registration as an investment company pursu ant to section 3c1 or 3c7 of the Investment Company Act of 1940 15 USC 80a 3c1 or 80a 3c7 or such similar funds as determined appropriate by the Board 5 SPONSORING The term sponsoring a fund means A serving as a general partner man aging member or trustee of a fund 13 in any manner selecting or control ling or having employees officers or directors or agents Who constitute a majority of the di rectors trustees or management of a fund or AY010258 OOOmIgtUJNH NNNNNNHHHHHHHHHH mPUJNHOKDOOQOLhPUJNHO sLo 10 0 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 USC 77a et seq is amended by inserting after section 27A the following SEC 273 CONFLICTS OF INTEREST RELATING TO CER TAIN SECURITIZATIONS a IN GENERAL An underwriter placement agent initial purchaser or sponsor of an assetbacked se curity shall not during such period as the assetbacked security is outstanding and held by investors that are un affiliated with such underwriter placement agent initial purchaser or sponsor engage in any transaction that would 1 give rise to any material conflict of inter est with respect to any investor in a transaction aris ing out of such activity or 2 undermine the value risk or performance of the assetbacked security 10 COMMISSION RULES Not later than 180 days after the date of enactment of this section the Commis sion 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 AY010258 LhPUJN sLc 11 subsidiaries of such entity in any securities securitybased swaps or similar financial instruments that are derived from or related to an assetbacked security for which the entity its affiliate or its subsidiary acts as underwriter placernent agent initial purchaser or sponsor
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