On July 7, 2016, the Board of Governors of the Federal Reserve System (the Board) issued an order (the New Extension) that extends the Volcker Rule1 conformance period with respect to investments in, and relationships with, covered funds and foreign funds that were in place prior to December 31, 2013 (legacy covered funds). The Board originally provided a general conformance period extension, until July 21, 2015, covering all Volcker Rule requirements. It subsequently provided a limited conformance period extension, until July 21, 2016, covering only legacy covered funds (the 2014 Extension and, together with the New Extension, the Extensions).2 The Board stated in the 2014 Extension that it intended to extend, for an additional one-year period, until July 21, 2017, the limited conformance period for legacy covered funds; the New Extension effects that additional extension.
Limits on the New Extension
The New Extension applies to banking entities only with respect to legacy covered funds.3 All investments in, and relationships related to, a legacy covered fund made or established after December 31, 2013 were required to be in conformance with the Volcker Rule by July 21, 2015, and they do not benefit from the New Extension.
Transactions executed post-2013 will benefit from the New Extension only if they arise out of a transaction in place on December 31, 2013. Neither Extension provides guidance regarding which transactions and other activities will be deemed to be part of a pre-existing “relationship” with a legacy covered fund, although both Extensions focus on the existence of relationships at December 31, 2013, and not the completion of a particular transaction. In particular, there is no guidance regarding how the conformance period applies to “covered transactions” with legacy covered funds that are subject to the Volcker Rule’s “Super 23A” restrictions.4 However, a November 2015 FAQ published by the Board and other federal agencies, suggests that the Board may narrowly interpret the kinds of activities that will be deemed to be part of a pre-December 31, 2013 relationship (and thus benefit from the New Extension). The November 2015 FAQ stated that, following the end of the general conformance period in July 2015, Super 23A restrictions would apply to “any increase in the amount of, extension of the maturity of, or adjustment to the interest-rate or other material term of,” an existing extension of credit.5 Thus, careful consideration is required when a banking entity is considering whether a new transaction with a legacy covered fund benefits from the New Extension.
Next Steps and Extended Extension Periods
The New Extension is the last extension authorized for application to all banking entities under the Volcker Rule. The New Extension reiterates the Board’s statement in the 2014 Extension that banking entities are expected, during the conformance period, to make plans “well in advance of the end of the extended conformance period” regarding how they will conform or divest legacy covered fund investments and relationships. Banking entities that have not made substantial efforts to prepare and execute a conformance plan should start that process as soon as possible.
If a banking entity holds an ownership interest in an “illiquid fund” (a limited subset of legacy covered funds), it may seek an extension for up to five additional years after July 21, 2017.6 Such an extension must be filed at least 180 days prior to July 21, 2017.7 While the New Extension included a statement that the Board will “continue to consider whether to take action regarding illiquid funds,” there was no relief provided and it is not clear whether (or when) such relief will be issued.
1 The “Volcker Rule” refers to Section 13 of the Bank Holding Company Act of 1956, which was added by Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
2 See “Volcker Rule: Conformance Period Extended for Certain Legacy Covered Funds” (December 24, 2014). Proprietary trading activities were not covered by the 2014 Extension and are not covered by the New Extension. The conformance period for such activities expired on July 21, 2015.
3 Although the New Extension uses the phrase “prior to December 31, 2013,” the Board’s press release refers to “investments and relationships in a covered fund made after December 31, 2013” as those that were required to be conformed to the Volcker Rule by July 21, 2015. Based on this, it appears that a relationship put in place on December 31, 2013 would be eligible for the New Extension.
4 These restrictions preclude a covered fund sponsored by a banking entity from engaging in various transactions with that banking entity or any affiliate thereof.
5 See “Applicability of the Restrictions in Section 13(f) of the BHC Act” (November 20, 2015). Any transaction that constitutes a “covered transaction” that was not in place prior to December 31, 2013 was required to be conformed by July 21, 2015.
6 See “Conformance Period for Entities Engaged in Prohibited Proprietary Trading or Private Equity Fund or Hedge Fund Activities” (February 14, 2011) and “Statement of Policy Regarding the Conformance Period for Entities Engaged in Prohibited Proprietary Trading or Private Equity Fund or Hedge Fund Activities” (June 8, 2012).
7 This deadline is January 22, 2017, which is a Sunday. Any filing would need to be made by Friday, January 20, 2017.
If you have any questions regarding this Sidley Update, please contact the Sidley lawyer with whom you usually work, or
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