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Fed Clarifies Volcker Rule Conformance Period Expectations

April 20, 2012

Yesterday, the Federal Reserve Board issued guidance (the "Guidance") clarifying what is expected of entities subject to the Volcker Rule during the two-year conformance period provided by the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank").[1] The Guidance makes clear that no activities or investments will be prohibited by the Volcker Rule until the end of such period, which is scheduled to occur on July 21, 2014.

As it currently stands, the Volcker Rule will take effect on July 21, 2012.[2] However, Dodd-Frank provides that a covered entity has "not later than 2 years after the [effective date]" to bring its activities and investments into compliance with the Volcker Rule.[3] Until now, there has been uncertainty about what would be required during this two-year period. For example, guidance accompanying the joint Notice of Proposed Rulemaking to implement the Volcker Rule stated that the federal financial regulators "expect a banking entity to fully conform all investments and activities to the requirements of the proposed rule as soon as practicable within the conformance periods" (emphasis added).[4] This language resulted in ambiguity regarding whether covered entities would be given the full two-year period to bring their activities and investments into conformance with the Volcker Rule, or rather if they would be expected to do so as soon as practicable, with the end of the two-year period serving only as the outermost deadline.

The Guidance eliminated any such uncertainty by stating that during the two-year conformance period, "every banking entity that engages in an activity or holds an investment covered by [the Volcker Rule] is expected to engage in good-faith efforts, appropriate for its activities and investments, that will result in the conformance of all of its activities and investments to the requirements of [the Volcker Rule] by no later than the end of the conformance period." Thus, covered banking entities will have the full two-year period before any activity or investment would become impermissible under the Volcker Rule. However, the Guidance suggests that as part of the necessary "good faith efforts," covered entities may be required to comply with any reporting or recordkeeping requirements of the Volcker Rule prior to the end of the conformance period (if such elements are included in the final rules implementing the Volcker Rule).

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[1] The Volcker Rule is contained in Section 619 of Dodd-Frank and restricts the proprietary trading and private investment fund activities of: (a) U.S. banks and bank affiliates (with regard to their worldwide activities), and (b) foreign banks with banking operations in the United States and their affiliates (with regard to activities conducted in, or connected to, the United States). For more information please see previous SRZ Alerts, published Oct. 11, 2011 and Oct. 12, 2011, respectively summarizing the proposed regulation’s effect on fund activities and proprietary trading.

[2] On March 22, legislation was introduced that would delay the effective date of the Volcker Rule until 12 months after the federal financial regulators issue their final rule implementing the statutory provision. Thus far, such legislation does not appear to be gaining traction. A separate SRZ Alert published March 22, 2012, summarizes the proposed legislation.

[3] In addition, a covered entity may apply to the Federal Reserve Board for up to three one-year extensions to the conformance period for any particular impermissible investment or activity. An additional five-year extension is also potentially available for any investment in, or obligation to, an "illiquid fund" made prior to May 1, 2010.

[4] The Joint Notice of Proposed Rulemaking to implement the Volcker Rule was jointly published by the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Securities and Exchange Commission and can be found at 76 FR 68846 et seq. (Nov. 7, 2011). The U.S. Commodity Futures Trading Commission issued a substantially similar proposed rule which can be found at 77 FR 8332 (Feb. 14, 2012).

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