Alert March 16, 2010

Senators Merkley and Levin Introduce Bill to Restrict Proprietary Trading by Banks and Large Non-Banks and to Prohibit Conflicts of Interest by Underwriters of Asset-Backed Securities

On March 10, 2010, Senator Jeff Merkley (D-OR) and Senator Carl Levin (D-MI) introduced the Protect our Recovery through Oversight of Proprietary Trading Act (the “PROP Trading Act”), a bill the Senators claim is designed to “make banking boring again.”

The PROP Trading Act would amend the Bank Holding Company Act to prohibit a banking entity from engaging in proprietary trading or taking or retaining any ownership interest in or sponsoring a hedge fund or private equity fund.  Specified nonbank financial companies that engage in proprietary trading or that take or retain any ownership interest in or sponsor a hedge fund or private equity fund would be subject to additional capital requirements.  Under the PROP Trading Act, the FRB and FDIC, in consultation with the SEC and CFTC, would be tasked with jointly adopting rules to effectuate the new provisions, and the FRB and FDIC would have the authority to exclude any transaction, class of transactions, or certain activities from the new provisions. 

The PROP Trading Act would amend the Securities Act to prohibit underwriters, placement agents, initial purchasers or sponsors of asset-backed securities from engaging in any transaction that, while such asset-backed security is outstanding and held by unaffiliated investors, would “give rise to any material conflict of interest with respect to any investor in a transaction arising out of such activity” or “undermine the value, risk, or performance of the asset-backed security.”  The SEC would have sole rulemaking authority to impose restrictions on the timing and extent of proprietary trading by an underwriter, placement agent, initial purchaser or sponsor and any affiliates or subsidiaries thereof.