On December 12, 2016, the Federal Reserve Board announced the issuance of a Policy Statement and Supervisory Letter with instructions on how banking entities can request extensions of time to conform their legacy illiquid covered funds to the requirements of the Volcker Rule. Requests will have to be made by mid-January 2017.


The Volcker Rule, enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and its regulations, adopted by five financial regulators in December 2013, generally prohibit banking entities and affiliates from engaging in proprietary trading or sponsoring or acquiring ownership interests in certain private equity funds (“covered funds”). However, there are statutory and regulatory exceptions to these requirements, and since the finalization of the regulations, the Federal Reserve Board has used its discretionary authority under the statute to provide extensions of time for banking entities to divest or conform their covered fund investments that were made prior to December 31, 2013 (usually referred to as “legacy covered funds”). However, earlier this year, the Federal Reserve Board issued the last extension, until July 21, 2017, noting that it had reached the statutory limit on its authority to grant such extensions of time.

However, for certain funds, additional extensions of time to conform or divest may be available. The Volcker Rule provides authority to the Federal Reserve Board, on a case-by-case basis, to extend the conformance period for up to five years for a banking entity to retain its interests in, and provide additional capital to, an “illiquid fund,” to the extent necessary to fulfill a contractual obligation that was in effect on May 1, 2010. The term illiquid fund is defined as a covered fund that as of May 1, 2010, in accordance with its investment strategy was “principally invested in, or was invested and contractually committed to principally invest in, illiquid assets, such as portfolio companies, real estate investments, and venture capital investments.” So not all legacy covered funds will be able to take advantage of this provision.

How and when to apply

Affected banking entities need to act quickly to submit their applications. Requests must be submitted to the Applications Unit at the Federal Reserve Bank in the Federal Reserve district in which the banking entity is headquartered. Applications must be filed at least 180 days prior to July 21, 2017 (the end of the extended conformance period), which means by mid-January 2017. If the banking entity is supervised by another federal banking agency, the Securities and Exchange Commission or the Commodity Futures Trading Commission, a copy of the request also should be submitted to that agency.

The request should include the following information:

  • Contact information for the banking entity’s point person for any follow-up questions about the request from Federal Reserve Board and Federal Reserve Bank staff
  • A list or chart of the specific illiquid funds for which an extension is sought
  • A short description of each fund, including: (i) investment strategy and types of investments made by each fund, (ii) which entity within the firm holds the investment, (iii) the size of each fund, (iv) the total exposure of the banking entity to each fund, (iv) the date by which each remaining illiquid fund is expected to mature by its terms or be conformed to the Volcker Rule requirements, and (v) the banking entity’s relationship with the fund (e.g., general partner, sponsor, investment adviser, investor)
  • A description of the banking entity’s specific efforts to divest or conform its illiquid funds, including (i) a description of the overall covered funds (both liquid and illiquid) that have been divested or conformed to date and (ii) the progress that has been made towards divesting or conforming the investments for which an extension is being sought (e.g., the number of funds sold, the number of funds that continue to be held, and the amount of investments remaining in each fund and in aggregate)
  • A certification by the General Counsel or Chief Compliance Officer of the banking entity that each fund meets the definition of “illiquid funds” in the Volcker Rule and the requirements set forth in the Federal Reserve Board’s conformance regulations (12 CFR §§ 225.180-225.182), including that the extension is necessary to fulfill a contractual obligation of the banking entity that was in effect on May 1, 2010.
  • The length of the requested extension of the conformance period
  • A description of the banking entity’s plan for divesting or conforming each illiquid fund prior to the end of the requested extension period.

Processing of the Request

Under the Policy Statement, the authority to grant, but not deny, a banking entity’s extension request has been delegated generally to the Federal Reserve Bank, in consultation with Federal Reserve Board staff. Requests are expected to be acted upon within 30 days of the receipt of a complete request. While it is expected that most requests will be granted, extension requests may be denied if, for example, the Federal Reserve Board staff believe that the banking entity has not made meaningful progress to date in divesting or conforming the illiquid funds in question.

Each extension request also must meet the following conditions:

  • The extension request relates only to illiquid funds
  • No significant issues have been identified regarding the banking entity’s Volcker Rule compliance program
  • The primary federal agency (if not the Federal Reserve Board) responsible for the banking entity’s compliance with the Volcker Rule y does not object to the extension
  • The banking entity has made meaningful progress toward conforming the majority of all its covered fund investments (liquid and illiquid) as of the date of the extension request
  • The banking entity provides supporting information regarding the specific actions it has taken to conform the illiquid funds for which an extension is being sought

Any extension would be granted until the earlier of July 21, 2022, or the date by which each remaining fund is expected to mature by its terms or be conformed to the Volcker Rule, or any shorter period that may be determined by the Federal Reserve Board.