The following brief updates exemplify trends and areas of current focus of relevant regulatory authorities:
Federal Reserve Extends Volcker Rule Deadline for Legacy Funds
The Federal Reserve Board (“FRB”) recently approved an order under section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (commonly known as the Volcker Rule) that extends the deadline for banking entities to conform investments in, and relationships with, covered funds and foreign funds that were in place before December 31, 2013 (“legacy covered funds”) from July 21, 2015, to until July 21, 2016. In general, Section 619 prohibits insured depository banks and their affiliates from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring, or having certain relationships with a hedge fund or private equity fund.
The order also stated that FRB intends to act next year to approve an additional extension of the compliance deadline to July 21, 2017. This extension grants banking entities additional time to divest or conform their legacy covered fund investments with the limitations imposed by the Volcker Rule. The extensions do not apply to investments in, and relationships with, covered funds put in place after December 31, 2013, or proprietary trading activities.
Financial Stability Oversight Council Seeks Comment on Asset Management Risks
The Financial Stability Oversight Council (“FSOC”) recently issued a notice inviting public comment on whether certain asset management products and activities could pose potential risks to the U.S. financial system (the “Notice”). The Notice states that as part of its ongoing evaluation of industry-wide products and activities associated with the asset management industry, the FSOC is seeking comments on risks posed to U.S. financial stability in the following areas: (i) liquidity and redemptions; (ii) leverage; (iii) operational functions; and (iv) resolutions (failures of an asset manager, investment vehicle or affiliate). Within these areas, the FSOC is interested in comments addressing risk management practices, metrics for assessing risk, methods to mitigate risks to financial stability, as well as the impact of interconnections between asset managers and other financial market participants that, in times of financial stress, could transmit risks. Comments must be submitted by February 23, 2015.
FINRA 2015 Examinations Priorities Letter
The Financial Industry Regulatory Authority (“FINRA”) recently issued its 2015 Regulatory and Examinations Priorities Letter (“FINRA Letter”). In the FINRA Letter, FINRA highlighted that some of the products offered to investors are complex and may be subject to substantial market, credit, liquidity or operational risks. In some cases, products previously available only to sophisticated investors have been modified and are now offered to retail investors. Accordingly, FINRA’s 2015 surveillance and examination activities will include product-related risk reviews and will routinely focus on due diligence, suitability, disclosure, supervision and training. These products include alternative mutual funds; products that are highly sensitive to interest rate increases; exchange-traded products that track alternatively weighted indices; structured retail products (including structured notes with complex payout structures and using proprietary indices as reference assets, complex features, long maturities, and linkages to less traditional or less well-understood reference assets); and floating-rate bank loan funds.