April 19, 2012
On Thursday, April 19, 2012, the Federal Reserve Board ("Fed"), the Office of the Comptroller of the Currency ("OCC"), the Federal Deposit Insurance Corporation (the "FDIC"), the Securities and Exchange Commission ("SEC") and the Commodity Futures Trading Commission ("CFTC" and, with the other agencies, the "Federal Agencies") issued a joint release announcing that the Fed has approved a statement clarifying that entities covered by section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Volcker Rule") have until at least July 21, 2014 to conform their activities and investments to prohibitions imposed by the Volcker Rule on proprietary trading and hedge fund and private equity funds activities.
The Joint Statement follows and clarifies the February 9, 2011 issuance by the Fed of a final rule implementing the provision of section 619 granting a two year period to conform activities. The statement also follows the October 11, 2011 joint Federal Agency approval and release of proposed rules implementing the Volcker Rule. The final rules implementing the Volcker Rule, to be issued jointly by the Federal Agencies, have not yet been issued amid rising concern that such rules would not be released until after the July 21, 2012 effective date of the Volcker Rule. The text of the Joint Statement is available at the following link: Conformance Guidance.
The Joint Statement addresses the concern of entities covered by the Volcker Rule ("Banking Entities") that the Volcker Rule provisions might become effective even before the final rules implementing the Volcker Rule are approved. The Joint Statement should largely assuage those fears. Specifically, the Joint Statement:
The Joint Statement’s focus on "good faith planning efforts" suggests that the Federal Agencies expect that Banking Entities will use the two year conformance period to identify activities that must be discontinued and investments that must be divested before the July 21, 2014 deadline (understanding that the Volcker Rule also provides for additional extensions of time, including specifically for illiquid funds, that could further extend the July 21, 2014 deadline in individual cases). It also appears that Banking Entities are expected to create plans that set out with some degree of specificity the processes they intend to follow in executing the discontinuations and divestitures. However, it seems clear that Banking Entities are not expected to consummate these discontinuations and divestitures prior to the July 21, 2014 date.
At least a couple of interesting questions remain after the Joint Statement. First, would a Banking Entity find itself in violation of the Volcker Rule were it to initiate engaging in a new prohibited activity or sponsor or acquire a new prohibited investment after the July 21, 2012 effective date if the intent were to divest the offending activity or investment by July 21, 2014? While such conduct does not appear to be prohibited it also does not seem consistent with engaging in "good-faith planning efforts" to divest and almost certainly would preclude receiving additional extensions of time from regulators. Second, the mention of a "conformance plan" in the Joint Statement leaves open whether such plans are intended solely for internal Banking Entity use or whether such plans will be required to be submitted to regulators. This second point, at least, will likely be resolved in the final implementing rules.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have about these developments. Please contact the Gibson Dunn lawyer with whom you work, Kimble Charles Cannon (213-229-7084, email@example.com) in the firm’s Los Angeles and Washington, D.C. offices, or C. F. Muckenfuss (202-955-8514, firstname.lastname@example.org) or Michael Bopp (202-955-8256, email@example.com) in the firm’s Washington, D.C. office.
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