On July 7, 2016, the Federal Reserve Board issued an order allowing banking entities an additional year, from July 21, 2016 to July 21, 2017, to conform their relationships with certain legacy covered funds subject to the Volcker Rule. The order is similar to the second extension granted in December 2014 that expires this month. The July 7 order is the third extension of the conformance period, which is the maximum number of extensions that can be made.

As noted previously, one of the key provisions in the 2010 Dodd Frank Wall Street Reform and Consumer Protection Act, commonly referred to as Dodd-Frank, is the so-called Volcker Rule, which generally prohibits banking entities (e.g., a bank that carries federal deposit insurance, and its affiliates such as its parent holding company) from engaging in proprietary trading and from acquiring or retaining an interest in, or sponsoring or having certain relationships with, certain hedge and private equity funds, which are referred to as “covered funds” in the rule. The Volcker Rule gives the Federal Reserve Board the authority to extend the conformance deadlines.

Banking entities only can take advantage of this extension for investments and relationships with those funds that were in place prior to December 31, 2013. In its order, the Federal Reserve Board noted that extending the conformance period with respect to these covered funds and foreign funds was consistent with the purposes of the Volcker Rule and would facilitate its effective implementation.

Even if the Federal Reserve Board has no authority to grant another extension of the conformance period for these legacy funds, the press release noted that the Volcker Rule gives the Federal Reserve Board the authority to grant up to an additional five years for a banking entity to conform its investments in certain illiquid funds, where the banking entity has a contractual commitment to invest in such funds as of May 1, 2010. Guidance on how to apply for such a specific exemption will be provided at a later date.