On 7 April 2014, the Board of Governors of the Federal Reserve System ("Federal Reserve Board") announced that it intends to exercise its authority to give banking entities two additional one-year extensions (which together would extend to 21 July 2017) to conform their ownership interests in and sponsorship of certain collateralized loan obligations ("CLOs") covered by section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly referred to as the Volcker Rule.
Section 619 generally prohibits insured depository institutions and any company affiliated with an insured depository institution from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring, or having certain relationships with a hedge fund or private equity fund, subject to a number of statutory exemptions, restrictions, and definitions.
Only CLOs in place as of 31 December 2013 that do not qualify for the exclusion in the Volcker Rule for loan securitizations would be eligible for the extension. The Federal Reserve Board intends to act on these extensions in August of this year and the next year. Furthermore, a banking entity would not have to include ownership interests in CLOs to determine its investment limits under the Volcker Rule, and a banking entity would not be required to deduct CLO investments from Tier 1 capital under the Volcker Rule until the end of the relevant conformance period.
The Federal Reserve Board consulted with staffs of the other agencies charged with enforcing the requirements of section 619, including the Office of the Comptroller of the Currency ("OCC"), the Federal Deposit Insurance Corporation, the Securities and Exchange Commission ("SEC"), and the Commodity Futures Trading Commission, and the agencies plan to administer their oversight of banking entities under their respective jurisdictions in accordance with the Federal Reserve Board's conformance rule, including any extension of the conformance period applicable to CLOs.
The Federal Reserve Board press release is available at: http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20140407a1.pdf .
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