FRB Clarifies Volcker Rule Conformance Period (Financial Services Alert - April 24, 2012)

Developments of Note

FRB Clarifies Volcker Rule Conformance Period Third Circuit Affirms Dismissal of Excessive Fee Claims Under the Investment Company Act Because Plaintiffs Lacked Continuous Ownership in the Funds and No Private Right of Action Exists Under Section 47(b) SEC Approves FINRA Proposal to Consolidate and Amend NASD and NYSE Communications Rules and Interpretations OCC Issues Notice of Proposed Rulemaking that Would Revise Requirements for Short-Term Investment Funds ICI and U.S. Chamber of Commerce Challenge Changes to CFTC Exemption for Advisers to Registered Funds CFTC and SEC Approve Entity Definition Rules DEVELOPMENTS OF NOTE

FRB Clarifies Volcker Rule Conformance Period

The FRB issued a Statement of Policy (the "Statement") regarding the conformance period for entities engaged in prohibited proprietary trading or private equity fund or hedge fund activities covered by Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), which set forth a new Section 13 of the Bank Holding Company Act of 1956 that is commonly known as the "Volcker Rule." The Statement provides that a covered entity under the Volcker Rule has until July 21, 2014 (the "Conformance Period") to fully conform its activities and investments to the prohibitions and requirements set forth in the Volcker Rule, unless the Conformance Period is extended by the FRB. The FRB adopted rules governing the Conformance Period for the Volcker Rule on February 9, 2011. Please see the February 22, 2011 Financial Services Alert regarding such rulemaking. The federal banking agencies and the SEC issued a proposed rule implementing the Volcker Rule in October 2011, and the CFTC later released a substantially similar proposed rule. The FRB, OCC, FDIC, SEC and CFTC (the "Agencies") have received a large number of comments, but they have not yet issued a final rule implementing the Volcker Rule. Please see the October 20, 2011 Financial Services Alert and the February 14, 2012 Financial Services Alert regarding the proposed implementing regulations. Covered entities under the Volcker Rule will have to comply with any such final rule on July 21, 2014 as well. The Agencies each plan to administer their respective oversight responsibilities under the Volcker Rule in accordance with the Statement.

The FRB noted that the Statement was issued in response to requests that the FRB clarify how the Conformance Period would apply and how the prohibitions will be enforced. The commenters making such requests sought to confirm that a banking entity would have the full period of time permitted by the Dodd-Frank Act to conform all of its investments and activities to the Volcker Rule and the final implementing rules and that activities conducted and investments made during the Conformance Period would not be subjected to the requirements of the implementing rules for the Volcker Rule during the Conformance Period. The need for clarification arose in part because guidance accompanying the joint Notice of Proposed Rulemaking to implement the Volcker Rule stated that the Agencies expected banking entities to fully conform all investments and activities to the requirements of the proposed rule as soon as practicable within the Conformance Period. Such guidance had created 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 Conformance Period serving only as the final deadline. Other commenters expressed concern as to whether a banking entity would be able to engage in new activities restricted by the Volcker Rule during the Conformance Period, such as sponsoring a new covered fund.

The Statement provides that all proprietary trading activity conducted by each banking entity must conform to the prohibitions and requirements of the Volcker Rule and the related final implementing rules by no later than the end of the Conformance Period. Additionally, the Statement provides that all activities, investments and transactions with or involving a covered fund under the Volcker Rule, including a covered fund organized and offered or sponsored by the banking entity, must conform to the Volcker Rule and the related final implementing rules by no later than the end of the Conformance Period. The Statement provides that during the Conformance Period, banking entities should engage in good-faith planning efforts, appropriate for their activities and investments, to enable them to conform their activities and investments to the requirements of the Volcker Rule and final implementing rules by no later than the end of the Conformance Period.

The Statement provides limited guidance regarding such good-faith planning efforts, which the FRB states should include evaluating the extent to which the banking entity is engaged in activities and investments that are covered by the Volcker Rule, as well as developing and implementing a conformance plan that is as specific as possible about how the banking entity will conform fully all of its covered activities and investments with the Volcker Rule and any final implementing rules by July 21, 2014, unless the Conformance Period is extended by the FRB. The Statement further provides that the good-faith efforts should take into account the statutory provisions in the Volcker Rule as such provisions will apply to the activities and investments of the banking entity at the end of the Conformance...