On December 18, 2014, the Federal Reserve Board issued an order allowing banking entities an additional year, from July 2015 to July 2016, to conform their relationships with certain covered funds and foreign funds subject to the Volcker Rule.
The Board also noted in its order that it will issue another order next year to further extend the conformance period to July 2017. 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. This extension is similar to one announced earlier this year with respect to banking entities that had sponsored or invested in certain collateralized loan obligations.
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.
The Federal Reserve Board in its December 18, 2014, order noted that banking entities requested an extension of the conformance period to allow them additional time to conform or divest covered fund investments and relationships, noting that extra time was needed to identify which of their funds were affected by the Volcker Rule, and whether they could be conformed or divested by July 2015, the general conformance date for Volcker Rule compliance. If interests had to be divested, the banking entities noted that they needed time to allow for the orderly sale of the interests not only by the banking entity, but in some cases, also by the banking entity’s employees, officers and directors.
In addition, non-U.S. funds with activities in the United States also requested additional time to be able to determine on a fund-by-fund basis what needed to be done in order to be able to conform their operations to the Volcker Rule.
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.
However, the extension is only applicable to those investments in, and relationships with, covered funds and foreign funds that were in place prior to December 31, 2013. Fund investments made and fund relationships created after that deadline still must be conformed or divested by July 2015, the general Volcker Rule conformance deadline.