Banking and Finance Law Daily Fed outlines Volcker Rule illiquid legacy investment extension process
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Tuesday, December 13, 2016

Fed outlines Volcker Rule illiquid legacy investment extension process

By Richard A. Roth, J.D.

The Federal Reserve Board has given banking entities more detailed information on how to apply for extensions of the deadline by which they are to divest investments that are not permitted by the Volcker Rule. According to the Fed, illiquid legacy investments generally will qualify for deadline extensions of up to five years, as long as the company has made appropriate efforts to deal with those investments and has an adequate compliance program and the Fed is not concerned that the company is attempting to evade the deadline.

The Volcker Rule, found in Dodd-Frank Act Section 619 (12 U.S.C. §1851), generally prohibits banking companies from engaging in proprietary trading or having interests in or other relationships with hedge or private equity funds. The effective date of the rule was July 21, 2012, but the Dodd-Frank Act allowed a two-year grace period and three additional one-year extensions. As a result of the Fed’s implementation of these extensions, banking companies must bring their investments in legacy covered funds into compliance by July 21, 2017.

Banking companies also can request one additional transition period of up to five years for interests in some legacy illiquid funds. These are funds:

  • that are principally invested in illiquid assets;
  • that describe following a strategy of investing principally in such assets; and
  • to which the banking company has an obligation to maintain an interest or provide capital under a contract that was in effect on May 21, 2010.

Application for extended transition period. The Fed has provided both a Supervision and Regulation Letter (SR 16-18) and a statement of policy that describe its expectations when an application for an extension is submitted. Five items are to be provided:

  • a list or chart showing all funds for which an extension is sought;
  • a short description of each fund and the banking company’s relationship to each fund;
  • a description of the efforts the company has made either to divest or bring into conformity with the Volcker Rule all of its covered fund investments, as well as of the progress that has been achieved so far;
  • a certification by an appropriate company officer that each fund meets the Dodd-Frank Act definition of an illiquid fund; and
  • the length of the extension desired, as well as the company’s plans to reach compliance by the end of that time.

The Fed added that, in some cases, it might require banking companies to provide periodic reports on its progress after an extension is granted.

Filing. Requests for extensions should be filed by the highest level banking entity in the organization with the Federal Reserve Bank for the district in which that entity is located. Applications should be filed at least 180 days before July 21, 2017. The Fed also noted that a banking company is not required to exercise any contractual provisions requiring a third party’s consent to withdraw from a fund before it applies for an extension.

MainStory: TopStory DoddFrankAct FederalReserveSystem FinancialStability PrudentialRegulation SecuritiesDerivatives VolckerRule

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