On November 17, 2010, the Federal Reserve Board (the “Fed”) proposed a rule (the “Proposed Rule”) regarding the conformance period applicable to certain restrictions on a banking entity’s proprietary trading and relationships with hedge and private equity funds (commonly known as the “Volcker Rule”) contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). The proposing release is available on the Fed’s website at the following address: www.federalreserve.gov/newsevents/press/bcreg/bcreg20101117a1.pdf. The Proposed Rule does not address any aspects of the Volcker Rule other than the applicable conformance periods and relevant extensions.

  •  Volcker Rule Effective Date. Under Dodd-Frank, the Volcker Rule’s restrictions take effect on the earlier of July 21, 2012 or one year after the issuance of final regulations by the relevant agencies.
  • General Conformance Period. Under the Proposed Rule, banking entities must generally comply with the Volcker Rule’s restrictions within two years of its effective date (or, in the case of nonbank financial companies supervised by the Fed, within two years of being designated as subject to supervision and regulation by the Financial Stability Oversight Council).
  • Potential One-Year Extensions of Conformance Period. Under the Proposed Rule, the Fed may extend the generally applicable two-year conformance period for a period of one year, up to three times (for an aggregate conformance period of up to five years), upon determining that an extension is consistent with the Volcker Rule’s purpose and would not be detrimental to the public’s interest.
  •  Potential Five-Year Extension of Conformance Period for Investments in “Illiquid Funds.” The Proposed Rule permits the Fed to extend the conformance period by up to an additional five years (from the expiration of any extension granted pursuant to the one-year extensions described above) with respect to a banking entity’s investment in an “illiquid fund” (as defined in the Proposed Rule) if, as of May 1, 2010, the banking entity was contractually obligated to make or maintain investments in the illiquid fund.
  • Definition of Illiquid Fund. An “illiquid fund” is defined under the Proposed Rule as a hedge or private equity fund that, as of May 1, 2010: (a) was “principally invested” in illiquid assets or was invested in, and contractually committed to invest in illiquid assets and (b) makes all investments pursuant to an investment strategy of principally investing in illiquid assets. “Illiquid assets” would generally be defined as assets not fitting within the Fed’s existing standards for “liquid assets,” i.e., assets that may be promptly bought and sold at a price reasonably related to their fair value. To qualify as “principally invested” in illiquid assets under the Proposed Rule, at least 75% of the fund’s consolidated total assets must be comprised of illiquid assets or hedges related thereto.
  •  Factors Used by the Fed to Determine Whether to Grant Extensions. Under the Proposed Rule, the Fed determines whether to grant the extensions described above by analyzing all relevant facts and circumstances relating to the activity or investment and an enumerated nonexclusive set of factors (the “Factors”), which include whether the activity or investment results in material conflicts of interest between the entity and its clients or exposes the bank to high-risk assets or trading strategies; the entity’s contractual obligations to make or retain an investment, the contractual terms governing such investment, and the entity’s degree of control over such investment; and the cost to the entity of compliance within the general conformance period.
  • Procedure for Requesting Conformance Period Extensions. Banking entities seeking extensions would be required to submit a written extension request to the Fed at least 90 days prior to the end of the applicable conformance period. The request must state the reasons justifying the extension, include a detailed explanation of the entity’s proposed plan for compliance with the Volcker Rule and address all relevant Factors.  

Comments to the Proposed Rule are due 45 days following the Proposed Rule’s publication in the Federal Register (which has yet to occur).