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President Obama today proposed two new restrictions on financial firms:

- first, no bank or firm that owns a bank would be allowed to own, invest in or sponsor a hedge fund or private equity fund or engage in proprietary trading operations unrelated to serving customers; and

- second, the growth of the largest financial firms would be limited through an imposition of a cap on the market share of their liabilities.

The President announced he would work with Congress to get appropriate financial reform legislation adopted. The proposed restrictions would not be effective immediately.

Discussion

Funds: It appears the proposal's intent is to restrict the ability of financial companies that own a bank to invest in, and even sponsor, a private equity fund or a hedge fund. The proposal has yet to be described in meaningful detail but, based on the short Presidential statement, it is likely to have far reaching implications for the funds business of US banking organizations.

Proprietary Trading: A critical issue will be how "proprietary trading" is defined. The proposal specifically refers to proprietary trading unrelated to serving customers, which suggests that exposure incurred by banks as dealers would not be restricted. The proposal itself has no additional details.

Growth Limit: The proposed restriction on growth through liabilities limits is also not described in any detail in the proposal. The proposal states that the liabilities limits will supplement existing limits on the market share of deposits, so the structure of the liabilities limits may follow that of the deposit limit. Currently, a merger transaction between two banking organizations may not be consummated if following the acquisition the resulting institution would control more than 10% of the total amount of deposits in insured US banks.

Next Steps: The next step for the proposed restrictions is for consideration by Congress. It is difficult to predict whether these restrictions will make it into final financial reform legislation in their current form or whether they would even be a part of the final legislation. If they become part of the final legislation, it is likely that they will be watered down through compromise and it is also likely that some activities will be grandfathered. As with consideration of all of the proposals for regulatory reform, the next few months in Congress will be critical.

Clifford Chance Client Memorandum: Source

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