Banks would be barred from trading for their own profit instead of their clients under a rule being proposed by federal regulators.
The Federal Deposit Insurance Corp. backed the draft rule on a 3-0 vote Tuesday. The ban on proprietary trading was required under last year's financial overhaul law.
For years, banks had bet on risky investments with their own money. But when those bets go bad and banks fail, taxpayers could be forced to bail them out. That's what happened during the 2008 financial crisis.
The Federal Reserve has also approved the draft of the so-called Volcker Rule, which was named after former Fed Chairman Paul Volcker.
The Securities and Exchange Commission and Treasury Department must still vote on it, and then the public has until January 13 to comment. The rule is expected to take effect next year after a final vote by all four regulators.
Congress and President Barack Obama had high hopes for the rule. But they left most of the details for regulators to sort out.
It's unclear how strictly the ban will be enforced. For example, it can be hard to tell whether an investment is intended to benefit a bank or its clients and whether federally insured deposits could be put at risk by these trades.
And in some cases, banks can get around the rule and continue making proprietary trades. For example, they can make such trades if they are intended to offset other risky trades made on behalf of clients.
Wall Street banks have complained that the ban on proprietary trading could prevent them from buying and selling investments that their customers might want. It would also put U.S. financial firms at a competitive disadvantage to those in other countries.
At the same time, several big U.S. banks have already shut down their proprietary trading operations in response to enactment of the financial overhaul.
The rule also would limit banks' investments in hedge funds and private equity funds, which are lightly regulated investment pools. Banks wouldn't be allowed to own more than 3 percent of such a fund. In addition, a bank's investments in such a fund couldn't exceed 3 percent of its capital.
Before Congress passed the financial regulatory overhaul, banks had no limit on how much of those funds they could own. Still, typically on Wall Street, such investments already fall below the 3 percent threshold.
Banks could still put their clients' money into those funds. They will still be able to manage such funds, and collect fees and a percentage of trading profits.
© Copyright 2015 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.