The Federal Reserve has requested comments on a proposed rule that would give banking organizations a certain 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 proposed rule released on November 17, banking organizations would 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 adopts final rules implementing the Volcker Rule to wind down, sell, or otherwise conform their activities, investments, and relationships to the requirements of the Volcker Rule. Certain defined terms and other issues related to implementation of the Volcker Rule are the subject of a separate interagency rulemaking process; the current proposed rule only addresses those matters that are related to implementation of the conformance period provisions of the Volcker Rule. Comments on the proposed rule are due by January 10, 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 a hedge fund or private equity fund. 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 under the proposed rule, 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 proposed rule requires that any banking organization that seeks a 1-year extension of the conformance period 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 proposed rule would allow 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 reasons.