Financial Services Spotlight

Action Required Under the Volcker Rule by January 22, 2017

Posted by Roy Andersen on Dec 14, 2016 12:00:00 PM

Action Required Under the Volcker Rule by January 22, 2017.

Late Monday afternoon, the Fed announced that banks may seek an extension of time (up to five years) to hold and presumably arrange to sell their investments in or holdings of so-called “illiquid funds” that were made impermissible under the Volcker Rule.  Under the most recent relief before Monday, these investments had to be “conformed” or sold by July 21, 2017.  Many banks and banking interest groups had complained to the Fed that a variety of hedge funds and private equity funds were sold and operated to invest in “illiquid” assets and that forced sales of such investments before maturity would be a financial burden.

Who may seek these extensions?

Any bank, bank holding company, foreign bank with a U.S. branch or agency or subsidiary of any of the above—i.e., a broker-dealer may apply for an extension. The extensions may cover funds sponsored or invested in by a bank or investments by bank employees in such funds

What funds are covered?

In a nutshell, Dodd-Frank prohibited a banking organization from owning, acquiring, sponsoring or having certain relationships with a covered fund (a hedge fund or a private equity fund).  Such activities had to be conformed to the new law for those investments or relationships that were in place before December 31, 2013.  These investments are referred to as “legacy covered funds.”  The Fed’s action on Monday is to cover a limited class of these “legacy covered funds” that are principally invested in illiquid assets.  The Dodd-Frank Act provides that this special exemption only applies to bank investments in such funds or banks with contracts to continue to provide capital to such funds that were in effect on May 1, 2010.

What does illiquid mean?

Dodd-Frank and the Fed’s rules define an illiquid fund as one that as of  May 1, 2010, is “principally invested” in illiquid assets and holds itself out as using a strategy to invest principally in illiquid assets.  Principally invested means 75%.  The Fed specifically mentions funds that invest in private equity, long-term real estate development and venture capital in start-ups as potentially illiquid.

What has to be done to obtain an extension?

At least 180 days before July 21, 2017, for each fund needing an extension, a bank has to file a request with its Reserve Bank and: (1) describe the fund, its size, when it matures or will be conformed, who owns it within the bank, the amount of the investment and how the bank is related to the fund; (2) describe efforts to divest or conform the fund, other funds that have been sold or conformed, the history of efforts to sell or conform funds; (3) obtain a certification from the fund that it is illiquid under the Fed’s rules and that the extension is needed to fulfill a contract in effect on May 1, 2010; (4) request the length of the extension required and the plan to divest or conform each fund  before the end of the extension.  This has to be filed with the local Federal Reserve Bank and a response can be expected within 30 days.

Can additional extensions be obtained?

Not unless Congress amends the Dodd-Frank Act.

Are the extensions automatic?

No, but the Fed expects that banks will generally qualify for the extensions.  The Fed may deny a request for an extension if the fund involved is not an illiquid fund or there have been issues with the bank’s Volcker rule compliance program or if another federal agency objects to the extension or if the bank has not made meaningful progress toward conforming most of its covered fund investments—liquid and illiquid or if the bank does not provide enough supporting information on its efforts to conform its illiquid investments, such as bids solicited and other actions or if the Fed suspects any effort to evade compliance with the Volcker Rule.

What are the Fed documents?

See the Fed’s SR Letter and Policy Statement at:

Topics: Dodd-Frank, Banking, Illiquid Funds, Investment, Volcker Rule

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The Financial Services Spotlight examines the regulatory and technology developments impacting banks, asset managers and other financial services providers—where challenges meet opportunities.


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Roy C. Andersen, of counsel in Sullivan & Worcester's New York office, is a member of the Corporate Department. Mr. Andersen focuses on bank regulatory and compliance matters, including international banks and their branches and agencies in New York.

Joel Telpner, partner in the firm's New York office, is a seasoned advisor, strategist and problem solver. Mr. Telpner brings more than 30 years of legal experience in a career that includes time as an AmLaw 100 partner, the former U.S. general counsel of a global financial institution, and a venture capitalist. He is recognized for his ability to deftly manage complex financial transactions, especially those involving sophisticated structured finance and derivatives matters and has an extensive and unique combination of transactional and regulatory experience.

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