On December 18, the Board of Governors of the Federal Reserve System issued an order extending the period by which banking entities must bring certain activities into conformance with the restrictions of the Volcker Rule (known as the “conformance period”). (Our summary of the Volcker Rule, as it applies to securitizations and other structured transactions, is available at http://www.morganlewis.com/pubs/final-volcker-rule-regulations-structured-transactions.)
Among other things, the Volcker Rule prohibits any banking entity from acquiring and retaining an ownership interest in, sponsoring, or having certain relationships with a “covered fund”—generally, any private fund (including a securitization vehicle) that would be an investment company under the Investment Company Act of 1940, but for the exemption provided by Section 3(c)(1) (the “100 holder” exemption) or Section 3(c)(7) (the “qualified purchaser” exemption). Banking entities are required to engage in good-faith efforts to conform their activities and investments with the Volcker Rule’s requirements, including the covered fund restrictions, before the end of the conformance period. As originally adopted, the conformance period was set to end on July 21, 2015.
Under the new extension, banking entities will have additional time to divest their ownership interests in or otherwise conform their activities with respect to legacy covered fund positions that were acquired before December 31, 2013. The initial extension lengthens the Volcker Rule conformance period for these purposes until July 21, 2016. Although the Board is only empowered by the Dodd-Frank Act to extend the conformance period for one year at a time, the Board stated that in 2015, it intends to grant an additional one-year extension until July 21, 2017.