United States: Federal Reserve Board Announces Procedures To Request An Extended Transition Period To Conform Illiquid Funds To The Volcker Rule

On December 9, 2016, the Board of Governors of the Federal Reserve System ("Federal Reserve Board") issued SR 16-18, "Procedures for a Banking Entity to Request an Extended Transition Period for Illiquid Funds" ("SR 16-18").1 A related policy statement was issued on December 12, 2016 (the "Policy Statement").2

SR 16-18 and the Policy Statement provide guidance to banking entities3 on the procedures for requesting from the Federal Reserve Board an extension of the Volcker Rule's4 conformance period for illiquid funds. An illiquid fund is a covered fund5 that (1) as of May 1, 2010, was principally invested in illiquid assets or was invested in, and contractually committed to principally invest in, illiquid assets; and (2) makes all investments pursuant to an investment strategy to principally invest in illiquid assets.6 Requests pursuant to SR 16-18 are required to be submitted no later than January 22, 2017.7

The Federal Reserve Board expects that illiquid funds will generally qualify for extensions of the conformance period, although extensions will not be granted in certain cases, including where: (1) a banking entity has not demonstrated progress toward meaningful compliance with the Volcker Rule; (2) a banking entity has a deficient Volcker Rule compliance program; or (3) the Federal Reserve Board has concerns about evasion.

SR 16-18 and the Policy Statement also provide that a banking entity seeking to qualify for an extension for an illiquid fund is not required to exercise a "regulatory out" provision or otherwise seek consent from third parties to terminate an investment.

BACKGROUND

The Volcker Rule generally prohibits a banking entity from engaging in proprietary trading or from sponsoring or investing in covered funds, subject to a number of exemptions.8 In December 2013, the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and the Commodity Futures Trading Commission (each an "Agency") issued a final rule (the "Final Rule") to implement the Volcker Rule.9

The Volcker Rule became effective on July 21, 2012, and by July 21, 2015, banking entities were required to conform to its requirements all of their investments in and relationships with covered funds made on or after December 31, 2013, and any proprietary trading activities. For covered funds that were in place prior to December 31, 2013 ("legacy covered funds"), however, the Federal Reserve Board extended the conformance deadline to July 21, 2017. 10

In addition, the Federal Reserve Board is authorized, upon application by a banking entity, to grant an extension of the conformance period for up to five years for certain investments in certain illiquid funds.11 The extension is only available with respect to illiquid funds where the acquisition or retention of an interest, or provision of additional capital, is necessary to fulfill a contractual obligation of the banking entity that was in effect on May 1, 2010.12

Under this authority, the Federal Reserve Board may grant only one extension for up to five years.13 SR 16-18 and the Policy Statement state that the length of any extension granted for illiquid funds will be the shortest of: (1) five years from the date of the expiration of the general conformance period (i.e., until July 21, 2022); (2) the date that the illiquid fund is expected to mature by its terms or be conformed to the Volcker Rule; or (3) a shorter period as determined by the Federal Reserve Board.

REQUIREMENTS FOR SUBMITTING REQUESTS

SR 16-18 and the Policy Statement explain that the Federal Reserve Board will follow a simplified and streamlined process for handling extension requests for holding illiquid funds. In this connection, the Federal Reserve Board will require an extension request to contain the following information: 14

  • A description of the banking entity's specific efforts to divest or conform its illiquid funds;
  • A certification by the General Counsel or Chief Compliance Officer of the banking entity that (1) each fund meets the definition of an illiquid fund; and (2) an extension is necessary to fulfill a contractual obligation in effect on May 1, 2010;
  • The length of the requested extension;
  • A description of the banking entity's plan for divestment or conformance prior to the end of the extension period; and
  • The name, phone number, and email address of the banking entity's point of contact to which the Federal Reserve Board and the Federal Reserve Bank staff may submit all inquiries.

After an extension is granted, the Federal Reserve Board could require a banking entity to provide a progress report on fund sales, maturities, or other conformance efforts at any time during the extended conformance period.

PROCEDURES FOR FILING AN EXTENSION REQUEST

SR 16-18 outlines the following procedures for filing extension requests:

  • How to File: In writing.15
  • Where to File: The Applications Unit of the appropriate Federal Reserve Bank in the district where the top-tier banking entity is headquartered.
  • Who to File: The top-tier banking entity.
  • When to File: At any time at least 180 days prior to the expiration of the general conformance period (i.e., on or before January 22, 2017).
  • Where to Send Copies: If the banking entity that sponsors or invests in the illiquid fund is supervised by another Agency, the top-tier banking entity should provide a copy of the extension request to that Agency.16
  • Action by the Federal Reserve Banks: The Federal Reserve Banks should act on an extension request within 30 days of receiving all information.17 If the request does not meet the requirements for delegated action, the Federal Reserve Bank will immediately refer the request to the Federal Reserve Board.
  • The primary federal agency responsible for supervising the banking entity's compliance with the Volcker Rule does not object to the extension;
  • The banking entity has made meaningful progress toward conforming its non-illiquid covered fund investments as of the date of the extension request; and
  • The banking entity provides sufficient supporting information regarding its efforts to conform the illiquid funds.

CONCLUSION

The Federal Reserve Board generally expects to grant extensions to illiquid funds so long as the applicable criteria are met. SR 16-18 and the Policy Statement provide a streamlined application process for requesting an extension of the conformance period for illiquid funds. This provides some relief to impacted banking entities which previously may have had to file separate extension requests for each illiquid fund in which they held investments or sponsored. Nevertheless, SR 16-18 and the Policy Statement do not resolve the issue that the definition of an "illiquid fund" is exceedingly narrow and excludes many illiquid funds that Congress likely intended should have been able to take advantage of an extended conformance period.18

Footnotes

 1 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, SR 16-18, "Procedures for a Banking Entity to Request an Extended Transition Period for Illiquid Funds," available at: https://www.federalreserve.gov/bankinforeg/srletters/sr1618.htm.

2 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, Statement of Policy Regarding Illiquid Fund Investments Under Section 13 of the Bank Holding Company Act, available at: https://www.federalreserve.gov/newsevents/press/bcreg/20161212b.htm.

3 Subject to certain exceptions, "banking entity" as defined in the Final Rule means: (i) any insured depository institution ("IDI"); (ii) any company that controls an IDI; (iii) any company that is treated as a bank holding company for purposes of section 8 of the International Banking Act of 1978; and (iv) any affiliate or subsidiary of any entity described in (i) through (iii). See 12 C.F.R. § 248.2(c).

4 The "Volcker Rule" is contained in section 13 of the Bank Holding Company Act of 1956, as amended.

5 See 12 C.F.R. § 248.10(b) (defining the term "covered fund").

6 See 12 C.F.R. § 225.180 (defining the term "illiquid fund").

7 See 12 C.F.R. § 225.181. Please note that January 22, 2017 is a Sunday so all extension requests should be submitted by Friday January 20, 2017.

8 See 12 U.S.C. § 1851(a)(1); see also 12 CFR §§ 248.3(a); 248.10(a).

9 See Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds, 79 Fed. Reg. 5536 (Jan. 31, 2014).

10 For a discussion of the 2016 extension of the conformance period to July 21, 2017, for legacy covered funds, see our client alert, available at: https://media2.mofo.com/documents/160708volckerrule.pdf; see also BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, Order Approving Extension of Conformance Period Under Section 13 of the Bank Holding Company Act (July 7, 2016), available at: http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20160707a1.pdf.

11 See 12 U.S.C. § 1851(c)(3); 12 C.F.R. § 225.181.

12 12 U.S.C. § 1851(c)(3)(A); 12 C.F.R. § 225.181.

13 12 U.S.C. § 1851(c)(3)(B); 12 C.F.R. § 225.181(b)(2).

14 Additional information on the requirements listed here is contained in SR 16-18.

15 For banking entities regulated by the Federal Reserve Board, requests may be submitted electronically through the Federal Reserve System's Electronic Applications System, E-Apps.

16 Attachment One to SR 16-18 provides a list of contacts at other agencies to which copies of the extension request should be sent.

17 Attachment Two to SR 16-18 provides a sample acknowledgement letter to be sent to the banking entity by the Federal Reserve Bank after receiving an extension request.

18 See The Securities Industry and Financial Markets Association and the American Bankers Association, Letter to the Board of Governors of the Federal Reserve System, dated: March 1, 2016, available at: http://www.sifma.org/issues/item.aspx?id=8589961730.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Marc-Alain Galeazzi
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.