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From Banking and Finance Law Daily, December 18, 2014

Fed extends Volcker Rule conformance period to the max

By Richard A. Roth, J.D.

The Federal Reserve Board is extending the deadline for banking entities to conform to the Volcker Rule until July 21, 2016, and it intends to grant a further one-year extension as well, to July 21, 2017. However, the extensions apply only to investments in and relationships with “legacy covered funds”—investments in and relationships with covered funds and foreign funds that were in place prior to Dec. 31, 2013. All other investments and relationships, and all proprietary trading activities, must be brought into conformance by July 21, 2015, the Fed says.

The Volcker Rule, established by Dodd-Frank Act Section 619 (12 U.S.C. §1851), generally prohibits insured depository institutions and their affiliates from engaging in proprietary trading activities and from holding ownership interests in or sponsoring hedge funds and private equity funds. Originally, companies were expected to bring their activities in compliance no later than July 21, 2014. However, the Dodd-Frank Act gave the Fed the authority to grant up to three one-year extensions, to July 21, 2017.

Serial extensions. When the Fed adopted Reg. VV—Proprietary Trading and Certain Interests in and Relationships with Covered Funds (12 CFR Part 248), it allowed the first one-year extension, until July 21, 2015. Subsequently, the Fed announced an intent to grant two additional one-year extensions covering ownership interests in and sponsorship of collateralized loan obligations backed in part by non-loan assets, if those relationships were in existence by Dec. 31, 2013. According to the Fed, the new extension carries out that intent and broadens the extension to all types of legacy covered funds.

The Fed said the additional extensions are required because financial institutions need additional time to identify all of the covered funds and make necessary changes in an orderly manner.

Illiquid funds. During the extended period, the Fed also intends to consider whether a further extension is necessary to allow financial institutions to bring their investments in illiquid funds into conformance. The Dodd-Frank Act authorizes a single extension of up to five years for these investments.

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