Federal Reserve grants blanket extension of the Volcker Rule conformance period
22 December 2014
Federal Reserve on December 18, 2014 issued an anticipated announcement that it
will extend until July 21, 2016 the period during which banking entities may
bring their investments in and relationships with certain covered funds into
compliance with the restrictions and prohibitions on such investments contained
in the Volcker Rule. The Federal Reserve also announced that it intends
to grant an additional blanket extension at a future time that will extend
until July 21, 2017. However, the current extension and the intended
extension apply only to “legacy covered funds,” i.e., investments in and relationships with
covered funds and foreign funds that were in place prior to December 31, 2013.
Section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule, provided
banking entities a grace period until July 21, 2014 to bring all of their
investments into compliance with the restrictions and prohibitions therein with
respect to proprietary trading and investing in and sponsoring covered
funds. The Volcker Rule also granted to the Federal Reserve the authority
to extend the conformance period for one year at a time, for a total of up to
three years. In addition, the Federal Reserve may extend the conformance
period a further period of five years for certain illiquid funds.
In December 2013, at the time that the Federal Reserve and the other federal financial agencies responsible for implementing the Volcker Rule issued final regulations, it issued an initial blanket one-year extension of the conformance period, until July 21, 2015. In April 2014, the Federal Reserve addressed numerous requests it had received regarding the status of collateralized loan obligations (CLOs) under the Volcker Rule. At that time, it announced that it intended to grant two additional one-year extensions of the conformance period for covered funds, until July 21, 2017, for a subset of CLOs, those backed in part by non-loan assets and that were “in place” as investments or sponsorship activities of the banking entity as of December 31, 2013. Other CLOs, including CLOs organized or acquired after December 31, 2013 regardless of the time at which the underlying investments were originated, would be treated like all other covered funds, as to which all investments and sponsorship activities would be required to be brought into compliance by July 21, 2015, subject to the possibility of obtaining individual one-year extensions of the conformance period. The deadline for compliance with the restrictions and prohibitions regarding proprietary trading remained at July 21, 2015 for all banking entities and all investments.
The recent announcement is consistent with the April 2014 announcement regarding legacy CLOs. Numerous banking entities, private equity funds, trade associations, and members of Congress have requested an extension of the conformance period beyond July 21, 2015 to allow additional time to identify covered funds, determine whether and how those funds can be brought into compliance, and make and execute plans to conform or divest investments as appropriate. In response, the Federal Reserve has announced that it has extended the conformance period for one year, or until July 21, 2016, for banking entities to conform their investments and relationships with covered funds that were “in place” prior to December 31, 2013 with the provisions of the Volcker Rule, and that it intends to extend the conformance period for these legacy covered funds for a final one-year period, or until July 21, 2017, sometime in the future.1 The Federal Reserve also stated that the current or intended extensions would not apply to proprietary trading activities, which must be brought into compliance not later than July 21, 2015.
The Federal Reserve’s decision to give banking entities until July 21, 2016 to conform investments in and relationships with legacy covered funds with the Volcker Rule is good news for banking entities, other investors, and the financial markets generally.
1 The Federal Reserve in its announcement is noticeably silent regarding its treatment of non-legacy covered funds, i.e., investments in and relationships with covered funds in place on or after December 31, 2013. Presumably, few non-legacy covered funds exist, but it is not clear what type of showing a banking entity may be required to make to obtain an individual extension of the conformance period for such funds.