Volcker Rule: Agencies Release Guidance on Applicability of Volcker Rule “Super 23A” Provisions During Conformance Period; Clarify Application to Pre-Existing Covered Transactions

Sullivan & Cromwell LLP - November 22, 2015

On November 20, 2015, staffs of the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission and the Commodity Futures Trading Commission (collectively, the “Agencies”) provided an important addition to their existing list of Frequently Asked Questions (“FAQs”) addressing the implementation of section 13 of the Bank Holding Company Act of 1956, as amended, commonly known as the “Volcker Rule.”

The FAQ clarifies the applicability of the so-called “Super 23A” provisions to covered transactions that were initially entered into or subsequently amended during the Volcker Rule conformance period.  The FAQ states that, as a general matter (i.e., other than with respect to legacy funds as discussed below), on or after July 21, 2015, a banking entity may not enter into a new covered transaction with a covered fund that is subject to Super 23A.  However, an adjustment to a material term of an existing extension of credit—for example, an increase in the amount of, extension of the maturity of, or adjustment to the interest rate term of the extension of credit—would itself be viewed by staffs of the Agencies as entering into a new covered transaction and would be restricted by Super 23A if such adjustment were made on or after July 21, 2015.  An existing covered transaction with an organized and offered covered fund may also be prohibited if the covered transaction constitutes a guarantee, even if the covered transaction was entered into prior to July 21, 2015 and has not been materially modified after that date.

The FAQ reiterates that legacy investments in and relationships with a covered fund—that is, investments made and relationships entered into by a banking entity prior to December 31, 2013—should conform to Super 23A “by the end of the applicable conformance period,” which is currently July 21, 2016 and is expected to be further extended to July 21, 2017.  The FAQ appears to make clear that new covered transactions with legacy covered funds (including material amendments to existing covered transactions) may be entered into during the conformance period, so long as they are brought into conformance by the end of that period and the banking entity engages in good-faith efforts to achieve that outcome.