conformance period

Federal Reserve Announces Extension of Conformance Period under Section 13 of the Bank Holding Company Act

On July 7, 2016, the Federal Reserve announced that it will extend until July 21, 2017 the conformance period for banking entities to divest ownership in certain legacy investment funds and terminate relationships with funds that are prohibited under Section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule. The Board had announced in December 2014 that it would make this extension to provide for orderly divestitures and to prevent market disruptions. This is the final of the three one-year extensions that the Board is authorized to grant.

In making this announcement, the Federal Reserve emphasized that: “This extension would permit banking entities additional time to divest or conform only ‘legacy covered fund’ investments, such as prohibited investments in hedge funds and private equity funds that were made prior to December 31, 2013. This extension does not apply to investments in and relationships with a covered fund made after December 31, 2013 or to proprietary trading activities; banking entities were required to conform those activities to the final rule by July 21, 2015.”

The Federal Reserve also noted that the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and the Commodity Futures Trading Commission: “plan to administer their oversight of banking entities under their respective jurisdictions in accordance with the Board’s conformance rule and this extension of the conformance period.”

Finally, the Board noted that: “upon the application of a banking entity, the Board is permitted under section 619 to provide up to an additional five years to conform investments in certain illiquid funds, where the banking entity had a contractual commitment to invest in the fund as of May 1, 2010.” Release.

New FAQ’s Regarding the Scope and Implementation of the Volcker Rule Issued by the U.S. Banking, Securities and Commodities Regulatory Agencies

On February 27, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission and the Commodity Futures Trading Commission issued a new set of frequently asked questions and responses regarding the scope and implementation of Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly referred to as the “Volcker Rule.”  Among the issues addressed are:

  • Loan Securitization Servicing Assets:  Are the “rights or other assets” described in § 44.10(c)(8)(i)(B) of the Volcker Rule (“servicing assets”) limited to “permitted securities,” or can other assets be servicing assets for purposes of the loan securitization exclusion?
  • Mortgage-Backed Securities of Government-Sponsored Enterprise:  How are certain mortgage-backed securities issuers sponsored by government-sponsored enterprises treated under the final rule’s covered funds provisions?
  • Covered Fund Exemption; Marketing Restriction on Foreign Banking Organization:  The Volcker Rule provides an exemption for certain covered fund activities conducted by foreign banking entities (known as the “SOTUS Covered Fund Exemption”) provided that, among other conditions, “no ownership interest in such hedge fund or private equity fund is offered for sale or sold to a resident of the United States” (the “marketing restriction”).  Does the marketing restriction apply only to the activities of a foreign banking entity that is seeking to rely on the SOTUS covered fund exemption or does it apply more generally to the activities of any person offering for sale or selling ownership interests in the covered fund?
  • Conformance PeriodHow do the requirements of the Volcker Rule apply to a banking entity during the conformance period? For instance, must a banking entity deduct its investment in a covered fund from its tier 1 capital prior to the end of the conformance period?
  • Foreign Public Fund Seeding Vehicles:  The Volcker Rule excludes from the definition of covered fund a registered investment company and business development company, including an entity that is formed and operated pursuant to a written plan to become one of these entities.  Would an entity that is formed and operated pursuant to a written plan to become a foreign public fund receive the same treatment?

Link to the website of the Office of the Comptroller of the Currency that sets forth the FAQ’s.

Fed Final Rule Implementing Volcker Rule

On February 9, the Fed approved a final rule, as required by the Dodd-Frank Act, implementing the conformance period during which banking entities and nonbank financial companies supervised by the Fed must bring their activities and investments into compliance with the Volcker Rule. The final rule will become effective on April 1. Fed Release. Final Rule.