On December 12, 2016, the US Board of Governors of the Federal Reserve System issued a statement of policy regarding how banking entities may seek an extension to conform their investments in certain illiquid hedge funds and private equity funds (covered funds) to the requirements of section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly known as the Volcker Rule. As noted below, any such extension requests must be submitted by January 21, 2017.
The Volcker Rule provisions of the Dodd-Frank Act permits the Federal Reserve Board, upon an application by a banking entity, to provide up to an additional five years to conform investments in certain legacy illiquid covered funds where the banking entity had a contractual commitment to invest in the fund as of May 1, 2010. The five-year extension for certain legacy illiquid covered funds is the last conformance period extension that the Federal Reserve Board is authorized to provide banking entities under the statute.
The Federal Reserve Board expects that illiquid funds will generally qualify for extensions. However, extensions may not be granted where the banking entity has not demonstrated meaningful progress to conform or divest its illiquid covered funds, has a deficient compliance program under the Volcker Rule or where the Federal Reserve Board has concerns about evasion.
According to the guidelines adopted by the Federal Reserve Board, firms seeking an extension should submit information including: (i) details about the covered funds for which an extension is requested; (ii) a certification that each covered fund meets the definition of illiquid covered fund; (iii) a description of the specific efforts made to divest or conform the illiquid covered funds; and (iv) the length of the requested extension and the plan to divest or conform each illiquid covered fund within the requested extension period. Such requests must be submitted 180 days in advance of the end of the current conformance date of July 21, 2017, for legacy covered funds (thus, January 21, 2017).
The Federal Reserve Board consulted with staffs of the other agencies charged with enforcing the requirements of section 619, 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 and the related guidance set forth in a Supervision and Regulation Letter.
The statement of policy is available at: https://www.federalreserve.gov/newsevents/press/bcreg/bcreg20161212b1.pdf;
and the related guidance is available at: https://www.federalreserve.gov/bankinforeg/srletters/sr1618.pdf.
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