The Volcker Rule1 has created significant uncertainty for financial institutions and for the financial markets generally. One discrete area of uncertainty was dispelled this past Thursday when the Federal Reserve Board (the “Board”) issued a statement of policy confirming that an entity covered by the Volcker Rule has the full two-year conformance period to bring its activities in line with the statute’s requirements.²
The Volcker Rule prohibits banking entities (as defined — broadly) and certain nonbank financial companies (collectively, “covered entities”) from engaging in proprietary trading activities and private fund investment and related activities, subject to exceptions. The statute includes a conformance period that begins for banking entities on July 21, 2012 (the effective date) and continues for two years, with the possibility of up to three one-year extensions by the Board.³ Covered entities are required to bring their activities into compliance with the Volcker Rule not later than the end of the conformance period. On its face, this language should allow covered entities the full conformance period to come into compliance with the statute.
Rulemaking and Questions about the Conformance Period
Implementation of the substantive provisions of the Volcker Rule requires coordinated multi-agency rulemaking. The statute makes the Board alone responsible for rulemaking to implement the conformance period, and the Board issued final implementing rules in February 2011.4 The Board’s final conformance rule was largely a restatement of the statutory provision, adding little of substance.
In October 2011, three Federal banking agencies (including the Board) and the Securities and Exchange Commission released a notice of proposed rulemaking, including proposed regulations, for implementing the Volcker Rule.5 In the notice, the regulators stated their expectation that covered entities conform their activities to the Volcker Rule’s requirements “as soon as practicable” within the conformance period. This understandably created uncertainty regarding what activities by covered entities would be permitted during the conformance period. Covered entities questioned whether they would have to cease all proprietary trading and fund investment activities prior to the end of the conformance period. Clarification was requested as to whether new trading activities and investments could be conducted during the conformance period or whether only the winding down of preexisting positions would be permitted.
Clarification from the Board
The Board's statement confirmed that, consistent with the statute, covered entities have the full two-year conformance period to bring their activities into compliance with the prohibitions and restrictions of the Volcker Rule. Put plainly, covered entities should be permitted to continue their proprietary trading and private fund activities until the last day of the conformance period. This would appear to permit covered entities to engage in new activities and make new investments during the conformance period that will be prohibited or restricted at the conclusion of the conformance period. The extent to which covered entities will take full advantage of the conformance period is a separate question.
The Board in its statement also addressed what covered entities should be doing during the conformance period to prepare for implementation. Specifically, the Board expects covered entities to develop and implement specific plans “appropriate for their activities and investments, to enable them to conform their activities and investments to the requirements of the [Volcker Rule] and final implementing rules by no later than the end of the conformance period.” This includes evaluating the extent to which a covered entity is engaged in prohibited investments and activities. Planning efforts during the conformance period may include complying with reporting or recordkeeping requirements if the final implementing rules establish such requirements; presumably, implementation of Volcker Rule compliance programs will be treated similarly, although the compliance program was not specifically mentioned in the Board’s statement. Nevertheless, until implementing rules are finalized, covered entities will face substantial difficulties in developing their conformance plans.
The Federal agencies responsible for implementation of the Volcker Rule issued a joint press release stating that they plan to follow the Board’s conformance rule and interpretive statement in oversight of the covered entities within their respective jurisdictions.6
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1Section 619, Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 11-203, 124 Stat. 1376 (2010) (codified as Section 13 of the Bank Holding Company Act of 1956, as amended).
²Statement of Policy Regarding the Conformance Period for Entities Engaged in Prohibited Proprietary Trading or Private Equity Fund or Hedge Fund Activities (Apr. 19, 2012), available at http://federalreserve.gov/newsevents/press/bcreg/20120419a.htm.
³The two-year conformance period for a nonbank financial company supervised by the Board will commence on the later of the effective date and the date when the company becomes subject to Board supervision.
4Final Rule, Conformance Period for Entities Engaged in Prohibited Proprietary Trading or Private Equity Fund or Hedge Fund Activities, 76 Fed. Reg. 8265 (Feb. 14, 2011), available at http://www.federalreserve.gov/reportforms/formsreview/RegY1_20110214_ffr.pdf.
5Notice of Proposed Rulemaking, Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships with, Hedge Funds and Private Equity Funds, 76 Fed. Reg. 68846 (Nov. 7, 2011), available at http://www.gpo.gov/fdsys/pkg/FR-2011-11-07/pdf/2011-27184.pdf. For a summary of this proposal, please see our prior publication, “Proposed Volcker Rule Regulations: A Summary”, available at http://www.bingham.com/Media.aspx?MediaID=13022. Note that the Commodity Futures Trading Commission issued a substantially similar notice of proposed rulemaking in February 2012. See 77 Fed. Reg. 8332, available at http://cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2012-935a.pdf.
6See Press Release, Volcker Rule Conformance Period Clarified (Apr. 19, 2012), available at http://federalreserve.gov/newsevents/press/bcreg/20120419a.htm.
This article was originally published by Bingham McCutchen LLP.