Alert October 20, 2011

SPECIAL EDITION: Federal Banking Agencies and SEC Issue Proposed Volcker Rule Regulations

The FRB, OCC, FDIC and SEC (the “Agencies”, and each an “Agency”) have requested comment on a proposed rule (the “Proposed Rule”) to implement restrictions and limitations required by the Dodd-Frank Act on proprietary trading and certain relationships with hedge funds and private equity funds.  The Agencies adopted a common text of the Proposed Rule, although each Agency plans to separately issue a rule incorporating the final version of the common text that will apply to entities for which the Agency is the primary financial regulatory agency.  This summary provides a high level overview of the Proposed Rule. 

Scope and Coverage of the Proposed Rule 

The Proposed Rule implements Section 619 of the Dodd-Frank Act, commonly known as the “Volcker Rule” and described in detail in the July 28, 2010 Special Edition of the Financial Services Alert.  The Volcker Rule amends the Bank Holding Company Act (the “BHC Act”) by prohibiting a “banking entity” from engaging in proprietary trading and investing in, or having certain relationships with, any fund that would be an investment company but for Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act of 1940 (the “Investment Company Act”), and other such similar funds designated by the Agencies, subject to certain exceptions.  The Volcker Rule applies to any “banking entity”, which it defines broadly to include (1) any insured depository institution, as defined in Section 3 of the Federal Deposit Insurance Act (other than certain limited purpose trust institutions); (2) any company that controls an insured depository institution; (3) any company treated as a bank holding company for purposes of Section 8 of the International Banking Act of 1978, as amended; and (4) any affiliate or subsidiary of such an entity (other than certain funds a covered banking entity is permitted to sponsor or invest in, as described below).  The Proposed Rule refers to these entities as “covered banking entities.”  The OCC’s version of the Proposed Rule treats a federal branch or agency of a foreign bank as a covered banking entity for which the OCC is the primary financial regulatory agency. 

The Volcker Rule does not apply to entities such as investment advisers, broker-dealers, insurance companies and limited purpose, nondepository trust companies that do not control an insured depository institution and are not otherwise a covered banking entity (for example, as a result of being controlled by a company that controls an insured depository institution); therefore, these types of entities are not subject to the Volcker Rule and would not be subject to the Proposed Rule. 

The Volcker Rule does not prohibit a nonbank financial company supervised by the FRB from engaging in proprietary trading or sponsoring or investing in a hedge fund or private equity fund. However, it allows the FRB or other Agencies, as appropriate, to impose additional capital charges, quantitative limits or other restrictions as a result of engaging in such activities.  The FRB did not include in the Proposed Rule any such additional capital charges, quantitative limits or other restrictions because the Financial Stability Oversight Council has neither finalized criteria for designating nonbank financial companies subject to supervision by the FRB nor yet designated any such nonbank financial company.   

Proprietary Trading Restrictions and Permitted Trading Exceptions 

The Proposed Rule prohibits a covered banking entity from engaging in “proprietary trading”, which it defines as engaging as principal for a “trading account” of such covered banking entity in any purchase or sale of one or more covered financial positions.  For purposes of the Proposed Rule, a “covered financial position” includes long, short, synthetic and other positions in securities, derivatives, commodity futures, and options on such instruments, but not loans, spot foreign exchange or spot commodities.  Engaging in trading as agent, broker, or custodian for an unaffiliated third party is excluded from the definition of proprietary trading.  

The Proposed Rule treats an account as a “trading account” if:  

  • The account is used to acquire or take one or more covered financial positions principally for the purpose of short-term resale, benefitting from actual or expected short-term price movements, realizing short-term arbitrage profits and/or hedging one or more of the foregoing activities;
  • The account is used to acquire or take one or more covered financial positions for any purpose if the covered banking entity is a registered securities dealer, municipal securities dealer or government securities dealer, or a CFTC- or SEC-registered swap dealer engaging in activities that require such swap dealer to be registered; or
  • The account is that of a bank holding company or an affiliate used to acquire or take one or more covered financial positions, other than positions that are foreign exchange derivatives, commodity derivatives, or contracts of sale of a commodity for future delivery, that are market risk capital rule covered positions, if the covered banking entity, or any affiliate of the covered banking entity that is a bank holding company, calculates risk-based capital ratios under the market risk capital rule.

The Proposed Rule establishes a rebuttable presumption that an account is a trading account if it is used to acquire or take certain covered financial positions that a covered banking entity holds for a period of sixty days or less.  Under the Proposed Rule, the following accounts are excluded from the definition of “trading account”:  

  • Accounts used for certain repurchase and reverse repurchase transactions that operate in economic substance as secured loans;
  • Accounts used to hold securities pursuant to a written securities lending agreement;
  • Accounts used for bona fide liquidity management in accordance with a documented plan, which plan (a) authorizes the instrument being used for liquidity management, (b) requires that the transaction be principally to manage liquidity (not for short-term profits), (c) requires that any position taken for liquidity management purposes be highly liquid, (d) limits positions taken for liquidity management purposes to an amount that is consistent with the covered banking entity’s short-term needs and (e) is consistent with the liquidity management guidance from the relevant banking regulator; and
  • Accounts of a securities or derivatives clearing organization in connection with clearing securities or derivatives.

Notwithstanding the general prohibition on proprietary trading, the Proposed Rule contemplates several exceptions under which a covered banking entity may engage in certain types of permitted trading activities:

  • Permitted Underwriting and Market-Making Activities. Under the Proposed Rule, a covered banking entity may engage in proprietary trading in connection with the covered banking entity’s underwriting activities.  The Proposed Rule defines underwriting, describes the circumstances in which a covered banking entity’s trading will constitute market-making, and prescribes specific requirements a covered banking entity must comply with in order to avail itself of these exceptions.  An appendix to the Proposed Rule describes in more detail the features of permitted market-making activities and distinctions between permitted market-making activities and prohibited proprietary trading.
  • Permitted Risk-Mitigating Hedging Activities. The Proposed Rule permits a covered banking entity to engage in the purchase or sale of a covered financial position made in connection with and related to individual or aggregated positions, contracts or other holdings of a covered banking entity and designed to reduce the specific risks to the covered banking entity in connection with and related to such positions, contracts or other holdings, subject to certain requirements.
  • Trading in Government Obligations. Under the Proposed Rule, a covered banking entity may purchase or sell an obligation of the U.S. government or any agency thereof, an obligation of any state or political subdivision thereof, obligations, participations or other instruments issued or guaranteed by Fannie Mae, Ginnie Mae, Freddie Mac, a Federal Home Loan Bank, Farmer Mac or a Farm Credit System institution, including both general and limited obligations of these issuers.
  • Permitted Trading on Behalf of Customers. The Proposed Rule allows a covered banking entity to purchase or sell a covered financial position on behalf of customers if the purchase or sale is conducted by a covered banking entity as investment adviser, commodity trading adviser, trustee, or in a similar fiduciary capacity, is conducted for the account of a customer, and involves only covered financial positions of which the customer is beneficial owner.  The Proposed Rule also permits a covered banking entity to engage in certain riskless principal transactions and, in the case of a covered banking entity that is an insurance company, to purchase or sell covered financial positions in certain circumstances for a separate account.
  • Permitted Trading by an Insurance Company. The Proposed Rule permits a covered banking entity that is an insurance company to purchase or sell a covered financial position for its general account, subject to certain requirements.
  • Permitted Trading Outside of the United States. Under the Proposed Rule, a covered banking entity that is not directly or indirectly controlled by a covered banking entity that is organized under the laws of the U.S. may purchase or sell a covered financial position if the transaction is conducted pursuant to Section 4(c)(9) or Section 4(c)(13) of the BHC Act and occurs solely outside of the U.S.  The Proposed Rule clarifies that an activity will be considered to be conducted pursuant to Section 4(c)(9) or Section 4(c)(13) of the BHC Act if the covered banking entity is a qualifying foreign banking organization that conducts the activity in compliance with Subpart B of the FRB’s Regulation K or, in the case of a covered banking entity that is not a foreign banking organization, if the covered banking entity meets certain requirements that evaluate the extent to which the organization’s business is conducted outside of the U.S.  This test is similar to the qualifying foreign banking organization test in the FRB’s Regulation K, but it does not require a foreign entity to demonstrate that more than half of its business is banking conducted outside the United States.   The Proposed Rule specifies the circumstances in which a transaction will be considered to be conducted outside of the U.S., including a requirement no personnel involved in the purchase or sale may be physically located in the U.S.  A U.S. subsidiary or U.S. branch or agency of a foreign organization may not rely on this exception.

These exceptions reflect statutory exemptions included in the Volcker Rule.  The Volcker Rule allows the Agencies to provide other exemptions from the proprietary trading prohibition if the Agencies determine that the exemption would promote and protect the safety and soundness of the banking entity and the financial stability of the United States. The Proposed Rule does not include any such discretionary exemptions from the bar on proprietary trading.

Restrictions on Sponsoring and Investing in Hedge Funds and Private Equity Funds and Permitted Exceptions

The Proposed Rule prohibits a covered banking entity, as principal, from acquiring or retaining any ownership interest in or sponsoring any fund that would be an investment company but for the exceptions provided by Section 3(c)(1) or 3(c)(7) of the Investment Company Act, and other such similar funds designated by the Agencies and the Commodity Futures Trading Commission.  The Proposed Rule refers to a fund subject to this limitation as a “covered fund.”  In addition to the types of funds described in the Volcker Rule, the definition of “covered fund” in the Proposed Rule includes commodity pools, as defined in Section 1a(10) of the Commodity Exchange Act and any fund organized and offered outside of the U.S. that would be a covered fund if it were organized under the laws of the U.S. or offered to one or more U.S. residents.  The Agencies have not designated as “similar funds” other funds that are not treated as investment companies in reliance upon exclusions other than Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act.  Notably, the Proposed Rule does not refer to funds that invest in interests in real estate and rely on Section 3(c)(5) or Section 3(c)(6) of the Investment Company Act.

In the explanatory release that accompanied the Proposed Rule, the Agencies pointed out that the prohibition on investing in or sponsoring a covered fund applies to such activities conducted by a covered banking entity, as principal.  As a result, the Agencies pointed out that the Proposed Rule would not prohibit the acquisition or retention of an ownership interest in a covered fund (i) by a covered banking entity in good faith in a fiduciary capacity, except where such ownership interest is held under a trust that constitutes a company for purposes of the BHC Act; (ii) by a covered banking entity in good faith in its capacity as a custodian, broker, or agent for an unaffiliated third party; (iii) by a “qualified plan,” as defined in section 401 of the Internal Revenue Code of 1956, if the ownership interest would be attributed to a covered banking entity solely by operation of section 2(g)(2) of the BHC Act (which establishes a presumption that a company controls shares or assets held by a trustee for the benefit of employees of the company); or (iv) by a director or employee of a covered banking entity who acquires the interest in his or her personal capacity and who is directly engaged in providing advisory or other services to the covered fund, unless the covered banking entity financed the acquisition of the ownership interest.

The Proposed Rule includes a definition of “ownership interest” used to define the scope of the prohibition on investing in a covered fund and to measure the amount of a permitted investment subject to an ownership interest limitation.  For these purposes, “ownership interest” includes voting and nonvoting equity, partnership and similar interests as well as any derivative of an equity, partnership or similar interest in a covered fund.  In the explanatory release that accompanied the Proposed Rule, the Agencies explained that they could consider a debt security or other interest of a covered fund that has characteristics that are substantially similar to equity as constituting an ownership interest.  Notably, the definition of ownership interest excludes “carried interest” and other forms of incentive compensation that meet certain requirements.

The Proposed Rule also describes the activities and relationships between a covered banking entity and a covered fund that constitute sponsorship of the fund for purposes of the Volcker Rule.  The statutory definition of “sponsor” in the Volcker Rule includes (a) serving as general partner, managing member or trustee of a covered fund, (b) selecting or controlling (or having employees, officers or directors or agents who constitute) a majority of the directors, trustees or management of the fund, or (c) sharing the same name (or a variation thereof) with the fund.  In addition to these relationships, the Proposed Rule also includes serving as a commodity pool operator for a commodity pool within the definition of sponsor.   The Proposed Rule clarifies that, for purposes of determining whether a covered banking entity has sponsored a covered fund, the term “trustee” does not include a directed trustee that does not exercise investment discretion with respect to a covered fund.

The Volcker Rule contemplates several exceptions to the general prohibition on investing in and sponsoring a covered fund, and the Proposed Rule addresses these exceptions and provides for certain additional exceptions:

  • Fiduciary Funds. The Proposed Rule permits a covered banking entity to organize and offer a covered fund, including serving as a general partner, managing member, trustee or commodity pool operator of the covered fund and selecting or controlling (or having employees, officers, directors or agents constitute) a majority of the fund’s management, if the covered banking entity provides bona fide trust, fiduciary or investment advisory or commodity trading services, the fund is organized or offered only in connection with the provision of such services and only to persons that are customers of such services, and if the covered banking entity meets certain additional requirements.  Notably, the Proposed Rule does not require a preexisting customer relationship with investors in such a fund and contemplates that the requisite customer relationship may be established through or in connection with the covered banking entity’s organization and offering of the fund.   Among other requirements, the Proposed Rule includes a requirement that the covered banking entity have in place a credible plan or similar document addressing the manner in which the covered banking entity intends to provide advisory or similar services through organizing and offering the fund, a prohibition on the covered banking entity guaranteeing the performance of the fund, a limitation on the covered banking entity and its affiliates sharing a name with the fund, a limitation on directors and employees of the covered banking entity acquiring an interest in the fund, and disclosure requirements.  A covered banking entity may make or retain an investment in a fund organized and offered pursuant to this exception for the purpose of seeding the fund or making a de minimis investment.  However, the covered banking entity must actively seek unaffiliated investors to reduce or dilute its aggregate ownership interest in the fund so that it does not exceed 3% of the total amount or value of outstanding ownership interests in the fund not later than one year after the date of establishment of the fund (which may be extended up to two years by the FRB).  The aggregate value of all ownership interests of a covered banking entity in all covered funds subject to the ownership interest limitation may not exceed 3% of the covered banking entity’s tier 1 capital.  The Proposed Rule includes provisions that address the manner in which a covered banking entity must measure its ownership interest and tier 1 capital for purposes of complying with the ownership interest limitation as well as a requirement that a covered banking entity deduct from tier 1 capital the aggregate value of all investments made in covered funds subject to the ownership interest limitation.   Importantly, as previously noted, the definition of ownership interest excludes a carried interest that meets certain requirements.  In addition, the definition of “covered banking entity” for purposes of the Proposed Rule excludes a covered fund that a covered banking entity organizes an offers pursuant to this exception as well as any entity controlled by such a covered fund.
  • Small Business Investment Companies and Public Welfare Investments. A covered banking entity may acquire or retain an ownership interest in or sponsor a covered fund that is a small business investment company, as defined in Section 102 of the Small Business Investment Act, that is designed primarily to make certain public welfare investments, or that is an investment that is a qualified rehabilitation expenditure with respect to a qualified rehabilitation building or certified historic structure.
  • Permitted Risk-Mitigating Hedging. A covered banking entity may acquire or retain an interest in a covered fund if the acquisition or retention of the interest is made in connection with and related to individual or aggregated obligations or liabilities of the covered banking entity that are taken by the covered banking entity when acting as an intermediary on behalf of a customer that is not itself a covered banking entity to facilitate exposure by the customer to the profits and losses of the covered fund or directly connected to a compensation arrangement with an employee that directly provides advisory or other services to the covered fund.   The covered banking entity’s acquisition or retention of an interest in the fund must be designed to reduce specific risks to the covered banking entity in connection with and related to such obligations or liabilities.
  • Permitted Covered Fund Activities Outside of the United States. The Proposed Rule permits a covered banking entity to acquire or retain an ownership interest in a covered fund or to sponsor a covered fund if the covered banking entity is not directly or indirectly controlled by a covered banking entity that is organized under the laws of the U.S. or one or more states, the activity is conducted pursuant to Section 4(c)(9) or Section 4(c)(13) of the BHC Act, no ownership interest in the fund is offered or sold to a resident of the U.S., and the activity occurs solely outside of the U.S.  The Proposed Rule describes the circumstances when an activity will be considered to be conducted pursuant to Section 4(c)(9) or Section 4(c)(13) of the BHC (similar to those described above with respect to proprietary trading by a foreign entity outside of the U.S.).  A U.S. subsidiary or U.S. branch or agency of a foreign organization may not rely on this exception.
  • Asset-Backed Securities. The Proposed Rule permits a covered banking entity to acquire or retain an ownership interest in or act as sponsor to (i) an issuer of asset backed securities, but only with respect to that amount or value of economic interest in a portion of the credit risk for an asset backed security retained by a covered banking entity that is an “originator” or “securitizer” as required by Section 15G of the Securities Exchange Act of 1934, and (ii) a covered fund that is an issuer of asset backed securities, the assets or holdings of which are comprised solely of loans, contractual rights or assets directly arising from those loans supporting the asset backed securities, and interest rate or foreign exchange derivatives that materially relate to the terms of such loans or contractual rights or assets and are used for hedging purposes with the respect to the securitization structure.
  • Liquidity Management. The Proposed Rule allows a covered banking entity to acquire or retain an ownership interest in or sponsor a wholly-owned subsidiary of the covered banking entity that is engaged principally in bona fide liquidity management activities and carried on the balance sheet of the covered banking entity.  The Proposed Rule describes the circumstances in which an activity will be considered a bona fide liquidity management activity.

Notably, the Proposed Rule only reflects statutory exemptions contained in the Volcker Rule that the Agencies determined apply, either by plain language or by implication, to investments in or relationships with a covered fund, but the Proposed Rule does not apply other statutory exemptions that the Agencies determined to be relevant only to covered trading activities and not to covered funds activities.  However, the Volcker Rule allows the Agencies to provide other exemptions from the limitation on investing in and sponsoring a covered fund if the Agencies determine that the exemption would promote and protect the safety and soundness of the banking entity and the financial stability of the United States.  The Proposed Rule includes exceptions for the following activities in reliance upon this authority:

  • Bank Owned Life Insurance. The Proposed Rule permits a covered banking entity to acquire or retain an ownership interest in or sponsor a separate account used solely for the purpose of allowing a covered banking entity to purchase an insurance policy for which the covered banking entity is the beneficiary, provided that the covered banking entity that purchases the insurance policy does not control the investment decisions regarding the underlying assets or holdings of the separate account and holds its ownership interest in the separate account in compliance with applicable supervisory guidance regarding bank owned life insurance.
  • Joint Ventures and Acquisition Vehicles. The Proposed Rule permits a covered banking entity to acquire or retain an ownership interest in or to sponsor a joint venture between the covered banking entity and any other person if the joint venture is an operating company and does not engage in any activity or make any investment that is prohibited by the Proposed Rule.  Under the Proposed Rule, a covered banking entity may also acquire or retain an ownership interest in or sponsor an acquisition vehicle, the sole purpose and effect of which is to effectuate a transaction involving the acquisition or merger of one entity with or into the covered banking entity.
  • DPC Acquisitions. Under the Proposed Rule, a covered banking entity may acquire or retain an ownership interest in or sponsor a covered fund in the ordinary course of collecting a debt previously contracted in good faith if the covered banking entity divests the ownership interest within the applicable time periods provided by its primary financial regulatory agency.

Affiliate Transaction Limitations for Covered Funds Activities

The Proposed Rule provides that a covered banking entity that serves, directly or indirectly as investment manager, investment adviser, commodity trading adviser or sponsor to a covered fund or that organizes and offers a covered fund under the exception for fiduciary funds described above, and any affiliate of such entity, may not enter into any transaction with such covered fund or any other covered fund controlled by such covered fund if the transaction would be a covered transaction as defined for purposes of Section 23A of the Federal Reserve Act, applied as if the covered banking entity or its affiliate were a member bank and the covered fund were an affiliate thereof and without regard to whether the covered transaction would qualify for an exemption under Section 23A of the Federal Reserve Act or would comply with the quantitative limitations and other requirements of Section 23A.   Generally, this means that a covered banking entity will not be able to extend credit to, purchase assets from, guarantee the obligations of, or otherwise enter into, a covered transaction with a covered fund subject to this limitation.  However, there is an important exception that permits a covered banking entity to enter into a prime brokerage transaction with any covered fund in which a covered fund managed, sponsored or advised by such covered banking entity has taken an ownership interest, subject to certain requirements.  The Proposed Rule defines “prime brokerage transaction” to mean one or more products or services, such as custody, clearance, securities borrowing or lending services, trade execution, or financing, and data, operational, and portfolio management support, provided by the covered banking entity to a covered fund.  In addition, the Proposed Rule clarifies that the prohibition on engaging in covered transactions with a covered fund does not preclude a covered banking entity from acquiring or retaining an ownership interest in a covered fund permitted by the Proposed Rule.   The Proposed Rule also requires that a covered banking entity that serves, directly or indirectly as investment manager, investment adviser, commodity trading adviser or sponsor to a covered fund or that organizes and offers a covered fund under the exception for fiduciary funds described above, and any affiliate of such entity, must comply with Section 23B of the Federal Reserve Act, applied as if the covered banking entity or its affiliate were a member bank and the covered fund were an affiliate thereof.  Generally, this means that a covered banking entity must structure permitted transactions and relationships with a covered fund on terms and under circumstances that are at least as favorable to the covered banking entity as prevailing market terms with respect to comparable transactions and relationships.

Limitation on Material Conflicts of Interest, High-Risk Assets and High-Risk Trading Strategy

The Proposed Rule also provides that, notwithstanding the exceptions provided by the Proposed Rule that permit a covered banking entity to engage in certain types of trading and covered fund activities, no transaction, class of transactions or activity is permissible under these exceptions if it would involve a material conflict of interest between a covered banking entity and its clients, customers or counterparties or if it would result in a material exposure by the covered banking entity to a high risk asset or high risk trading strategy or would pose a threat to the safety or soundness of the covered banking entity or to the financial stability of the United states.  The Proposed Rule defines material conflict of interest, high risk asset and high risk trading strategy for purposes of this limitation.  When a material conflict of interest exists between a covered banking entity and its client, customer or counterparty with respect to a transaction, class of transactions or activity, the Proposed Rule would nevertheless permit the covered banking entity to proceed with the transaction, class of transactions or activity if the covered banking entity first eliminates or substantially mitigates the conflict through timely and effective disclosure in the manner required by the Proposed Rule or through the establishment, maintenance and enforcement of information barriers in the manner required by the Proposed Rule.  However, if the covered banking entity knows or should reasonably know that a material conflict of interest arising out of a specific transaction, class of transactions, or activity may involve or result in a materially adverse effect on a client, customer, or counterparty, the covered banking entity may not rely on information barriers to address and mitigate any conflict of interest.

Compliance Program and Recordkeeping Requirements

The Proposed Rule requires that all banking entities that engage in activities covered by the Volcker Rule establish a compliance program. At a minimum, banking entities that engage in activities covered by the Volcker Rule must do the following:

  • Establish internal written policies and procedures reasonably designed to document, describe and monitor trading activities and investments in covered funds that are covered by the Volcker Rule;
  • Establish a system of internal controls reasonably designed to monitor and identify potential areas of noncompliance;
  • Establish a management framework that sets forth the responsibility for compliance;
  • Conduct independent testing of the efficacy of the compliance program;
  • Train managers and trading (and any other appropriate) personnel; and
  • Maintain compliance records. 

An appendix to the Proposed Rule details the required elements of the compliance program.  If a covered banking entity does not engage in activities covered by the Volcker Rule, the Proposed Rule permits the covered banking entity to satisfy the compliance program requirement by including in its compliance policies and procedures measures that are designed to prevent the covered banking entity from becoming engaged in such activities.

The Proposed Rule also specifies reporting and recordkeeping requirements applicable to trading activities, including more robust reporting requirements for a covered banking entity that has, together with its affiliates and subsidiaries on a worldwide consolidated basis, average gross trading assets of at least $1 billion, as measured on the last day of each of the four prior calendar quarters.  The Proposed Rule also describes the internal controls and reporting requirements applicable to covered funds activities.

Effective Date

The Volcker Rule becomes effective on the earlier of two years following its date of enactment (which was July 21, 2010) and one year following issuance of a final implementing rule. Because the Agencies did not adopt a rule prior to July 21, 2011, the Volcker Rule restrictions will become effective on July 21, 2012, and the Proposed Rule, if adopted, would become effective on that date. 

Conformance Period

The Volcker Rule provides for a two year period following its effective date during which banking entities may conform their activities and investments to the Volcker Rule’s limitations, and it provides for certain extensions to this conformance period.  The FRB issued a final rule addressing this conformance period that became effective on April 1, 2011 and that was described in the February 22, 2011 Financial Services Alert  (the “Conformance Rule”).  The Conformance Rule provides temporary relief for banking entities engaged in proprietary trading or that have relationships with hedge funds or private equity funds that would become prohibited upon expiration of the two year conformance period following the effectiveness of the Volcker Rule.  The Conformance Rule permits the FRB to extend this conformance period by up to three separate one year periods of time, if the FRB determines that such extensions are consistent with the purpose of the Volcker Rule and would not be detrimental to the public interest, and it permits the FRB to grant an additional period of time, up to five years, to permit a covered banking entity to conform its activities related to an investment in an illiquid fund made pursuant to a contractual obligation in effect on May 1, 2010.  The version of the Proposed Rule proposed by the FRB includes the substance of the Conformance Rule.

Deadline for Comments

The deadline for submitting comments on the Proposed Rule is January 13, 2012.   The Agencies’ proposal is expected to elicit numerous comments that may well result in changes before a final implementing regulation is adopted.  The magnitude of any such changes is, however, entirely uncertain.  For assistance in submitting comments on the Proposed Rule or with other matters related to the implementation of the Volcker Rule, please contact any of Bill SternTom LaFond or Bill Mayer.