The Federal Reserve has issued a final rule that gives banking organizations a limited period of time to conform their activities and investments to the prohibitions and restrictions on proprietary trading and relationships with hedge funds and private equity funds imposed by the provisions of Section 619 of the Dodd-Frank Act commonly referred to as the “Volcker Rule.” Under the final rule released on February 17, banking organizations generally have 2 years after the earlier of July 21, 2012 or the date that is 12 months after the date on which the Federal Reserve and other agencies jointly issue rules addressing definitional or other aspects of the Volcker Rule to conform their activities and investments to the prohibitions and restrictions on proprietary trading and relationships with hedge funds and private equity funds contemplated by Section 13(b)(2) of the Bank Holding Company Act (added by Section 619 of the Dodd-Frank Act). The meanings of certain defined terms and other issues related to implementation of the Volcker Rule will be the subject of that interagency rulemaking process; the current rule only addresses those matters that are related to implementation of the conformance period provisions of the Volcker Rule. The final rule becomes effective on April 1, 2011.
Notes: The Volcker Rule generally prohibits banking organizations from engaging in proprietary trading in securities, derivatives, or certain other financial instruments, and from investing in, sponsoring, or having certain relationships with hedge funds or private equity funds. The Dodd-Frank Act allows the Federal Reserve to extend the 2-year conformance period by up to 3 additional 1-year periods, for an aggregate conformance period of 5 years. In order to grant any extension, the Federal Reserve must determine that the extension is consistent with the purposes of the Volcker Rule and would not be detrimental to the public interest. The final rule requires that any banking organization that seeks a 1-year extension of the conformance period must first submit a written request to the Federal Reserve. Any such request must provide the reasons why the banking organization believes the extension should be granted and provide a detailed explanation of the banking organization’s plan for divesting or conforming the activity or investment. The final rule allows the Federal Reserve to impose conditions on any extension to protect the safety and soundness of banking organizations or the financial stability of the United States, among other factors.