Volcker Rule: Federal Reserve Issues Policy Statement Regarding Volcker Rule Conformance Period Extensions for “Illiquid Funds”

Sullivan & Cromwell LLP - December 13, 2016

Yesterday afternoon, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) issued a statement of policy (the “Policy Statement”) and a related supervisory letter (the “Supervisory Letter”) regarding the extended conformance period available for legacy covered funds that qualify as “illiquid funds” under Section 13 of the Bank Holding Company Act of 1956, commonly known as the “Volcker Rule.”  Citing the legislative history of Sec. 619 which “indicates that Congress intended to permit an extended transition period for illiquid funds to minimize market disruptions,” the Policy Statement notes that the Federal Reserve “expects that the illiquid funds of banking entities will generally qualify for extensions” of up to an additional five years beyond the current conformance deadline for covered funds (i.e., July 21, 2022) and outlines a “simplified and streamlined process” for requesting an extended transition period.  Critically, the Policy Statement and accompanying Supervisory Letter address a key concern that was raised by banking entities in response to the Federal Reserve’s final rule implementing the Volcker Rule conformance period (the “Final Conformance Rule”), clarifying that a banking entity is not required “to exercise a regulatory-out provision or otherwise seek consent from third parties (such as the general partner or other investors in the fund) to terminate an investment in an illiquid fund in order to qualify for the extended transition period.”