On December 18, pursuant to its statutory authority under the Dodd-Frank Act, the Board of Governors of the Federal Reserve System issued an order that provided for an extension of the Volcker Rule conformance period for ownership interests and sponsorship of covered funds until July 21, 2016. The Federal Reserve expressed its intention to grant the last available statutory extension until July 21, 2017, by an order to be issued next year. This two-year extension is welcome news to banks and their affiliates that have investments in or sponsor covered funds that are illiquid or otherwise difficult to unwind.

Below are several key points:

  • The extension only pertains to divesting or otherwise conforming ownership interests in or sponsorship of covered funds.
  • The extension does not apply to the restrictions on proprietary trading or to the requirement to implement a six- point compliance program, which must be in place by July 21, 2015.
  • The extension only applies to “legacy” investments and sponsorship relationships that existed prior to December 31, 2013.
  • The extension also applies to employees or directors of banking entities who have legacy ownership interests in sponsored funds, including when those employees or directors are not directly engaged in providing investment advisory or other services to the covered fund.
  • Despite the extension, banking entities are still expected to make good faith efforts to comply during the conformance period. This means banking entities must develop and implement a conformance plan that is appropriate to its covered funds activities and will result in full conformance with the rule by the end of the applicable conformance period. The Federal Reserve indicated that it expects such plans for covered funds to be made “well in advance” of the extended conformance period.
  • The extension of the conformance period by the Federal Reserve applies to the other agencies that also enforce the Volcker Rule, including the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities Exchange Commission and the Commodity Futures Trading Commission.
  • Note that the extension of the conformance period for legacy covered funds activities does not limit the agencies’ flexibility to limit certain covered funds activities in advance of the end of the conformance period if the activity raises safety and soundness concerns.