On December 18, 2014, the Federal Reserve Board (“Federal Reserve”) issued an Order (the “Order”) Approving Extension of Conformance Period Under Section 13 of the Bank Holding Company Act and its implementing regulation (the “Volcker Rule”). The Order may be found at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20141218a1.pdf.

The Order allows an extended period for a banking entity “to conform investments in and relationships with covered funds and foreign funds that may be subject to” the Volcker Rule “and that were in place prior to December 31, 2013 (“legacy covered funds”).” The Federal Reserve essentially extended the conformance period for legacy covered funds until July 21, 2017.

For legacy covered funds, the Order eliminates the need for banking entities to individually apply to the Federal Reserve to request the available two additional one-year extensions of the current conformance period. The only remaining potential extension for banking entities would be to request an additional transition period of up to five years to conform certain “illiquid funds” to the Volcker Rule.

Given that the current general Volcker Rule conformance period extension terminates on July 21, 2015, all investments and relationships in a covered fund made after the legacy period of December 31, 2013 must be in conformance with the Volcker Rule by that date. In addition, the Order noted that the extension would not apply to proprietary trading activities, and that banking entities must conform proprietary trading activities to the final rule by July 21, 2015.

Actions Permissible and Required During the Conformance Period

Super 23A. With respect to activities that are permitted during the extended conformance period, the Federal Reserve indicated that it will continue to permit the activities allowed under the current conformance period for legacy covered funds. Accordingly, during the extended conformance period, in a manner consistent with the required actions discussed below, it appears that a banking entity should be able to continue to engage in Super 23A and other transactions with legacy covered funds.1

Conformance Period Required Actions. During the conformance period, a banking entity is expected “to engage in good-faith efforts” to conform to the Volcker Rule, including by evaluating the extent of its covered activities and investments “as well as developing and implementing a conformance plan that is appropriately specific about how the banking entity will fully conform . . .” A banking entity is also “expected to make plans well in advance of the end of the extended conformance period” for orderly conformance, and is “encouraged to take steps” to conform during the extended conformance period.

Implication of the Order. As a result of the Order, banking entities and certain of their employees should be able to avoid the immediate risk of needing to sell covered fund interests in an unorderly manner at a risk of significant loss. This should also stabilize the market in general.

Banking entities will also be better able to accomplish their conformance requirements. For example, name changes, fund restructurings, or modification of sales practices will become more feasible.

In addition, the agencies are provided with the time to issue interpretations or additional Q&As to clarify the Volcker Rule. Finally, the Federal Reserve will have an opportunity to reconsider the criteria and requirements for banking entities to qualify for the “illiquid funds” additional five-year conformance extension.