Senators Jeff Merkley (D-Ore.), Carl Levin (D-Mich.), Ted Kaufman (D-Del.), Sherrod Brown (D-Ohio), and Jeanne Shaheen (D-N.H.) have introduced a bill to limit banks and certain financial institutions from investing in or sponsoring a hedge fund or private equity fund. The Protect our Recovery through Oversight of Proprietary Trading Act (PROP Trading Act) also: (1) bars banks, bank holding companies, and their affiliates and subsidiaries from engaging in high-risk speculation involving any stock, bond, option, commodity, derivative, or other security or financial instrument; (2) requires certain large non-bank financial institutions to set aside additional capital to discourage them from engaging in high-risk speculation and investing or sponsoring hedge funds or private equity funds, and puts strict limits on the amount of such speculation; and (3) addresses conflicts of interest associated with asset-backed securities by prohibiting securities brokers from betting against the same packages of loans they are promoting to their clients. Although unofficial copies of the bill have been posted online, the official text has not yet been published.

The PROP Trading Act is similar in many respects to proposed legislative language reportedly sent by the Obama administration to Congress on March 3 to implement the “Volcker Rule” that was initially proposed by President Obama in remarks on financial reform on January 21. The proposed legislative language has not been officially released, but news outlets have published the purported text of the proposal. Among other things, the legislative text proposed by the Administration (1) directs appropriate federal banking agencies to prohibit banks from engaging in proprietary trading or sponsoring or investing in private equity or hedge funds and (2) directs the Federal Reserve Board to adopt rules applying capital and quantitative limits to any non-bank financial company under the Federal Reserve Board’s supervision that engages in proprietary trading or that sponsors or invests in private equity or hedge funds.

To read Senator Merkley’s press release on the PROP Trading Act click here.

To read Senator Levin’s floor statement on the PROP Trading Act click here.

To read the administration’s reported proposed legislative text implementing the “Volcker Rule” click here.

Click here for more information on the “Volcker Rule” in the January 22 edition of Corporate and Financial Weekly Digest.