Federal Reserve Board issues guidance on illiquid funds under the Volcker Rule

Since the December 2013 finalization of an interagency rule implementing Section 619 of Dodd-Frank (i.e., the Volcker Rule), covered banking entities have sought guidance on many related interpretive issues. The agencies have issued 21 responses to Frequently Asked Questions (FAQs) during this period,1 but none of the FAQs addressed key questions about investments in illiquid funds.

On December 12, 2016, the Federal Reserve Board (FRB) issued guidance—in the form of a statement of policy2 and Supervision and Regulation (SR) Letter 16-183 —regarding how banking entities may seek an extension to conform their investments in illiquid funds to the requirements of the Volcker Rule.

Section 619 of Dodd-Frank permits the FRB to provide a banking entity up to five years from the end of the conformance period (i.e., five years from July 21, 2017) to conform investments in certain illiquid funds.4

Process for seeking extension

Banking entities seeking an extension should submit information, before January 21, 2017, to the Applications Unit of the appropriate Federal Reserve Bank, including:

  1. Details about the fund(s) for which an extension is requested,
  2. A certification by the General Counsel or Chief Compliance Officer of the sponsoring or investing entity that each fund meets the definition of illiquid fund,
  3. A description of the specific efforts made to divest or conform the illiquid funds, and
  4. The length of the requested extension and the plan to divest or conform each illiquid fund within the requested extension period.

The responsible Federal Reserve Bank should expect to act on an extension request within 30 days of receiving all required information. Each Federal Reserve Bank will be authorized to approve extension requests, but will not be authorized to deny such requests (in cases where the request does not meet the requirements for delegated action, the Federal Reserve Bank will refer the matter to the FRB).

In the case where the sponsoring or investing banking entity is supervised primarily by the Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), Securities and Exchange Commission (SEC), or Commodity Futures Trading Commission (CFTC), the top-tier banking entity should also provide a copy of the extension request to the relevant agency for the subsidiary banking entity.5

Approach to granting extension requests

The FRB expects that illiquid funds will “generally qualify for extensions, though extensions may not be granted in certain cases,” including where the banking entity “has not demonstrated meaningful progress to conform or divest its illiquid funds, or has a deficient compliance program under the Volcker Rule, or where the FRB “has concerns about evasion.”

Extensions would be granted for the shortest of:

  1. Five years from the date of expiration of the general conformance period (i.e., five years from July 21, 2017),
  2. The date by which each remaining fund is expected to mature by its terms or be conformed to the Volcker Rule, or
  3. A shorter period determined by the FRB.

On a case-by-case basis, the FRB may require a banking entity to provide a progress report on fund sales, maturities, or other conformance efforts “as appropriate at any time during the period that the banking entity continues to hold illiquid funds in reliance on an extension.”

Third-party consent

The FRB also clarified that a banking entity would not be required to exercise a so-called “regulatory-out” provision or otherwise seek third-party consent to terminate an investment in an illiquid fund in order to qualify for the extended transition period.

Next steps

Although the Volcker Rule was finalized in December 2013, the FRB, FDIC, OCC, SEC, and CFTC continue to address key interpretative issues with respect to implementing and enforcing the regulation.

As further developments occur, Deloitte Advisory will issue additional updates as appropriate.


Bob Maxant
Partner | Deloitte Advisory
Deloitte & Touche LLP

Raj Trehan
Managing Director | Deloitte Advisory
Deloitte & Touche LLP

Michael Bailey
Principal | Deloitte Advisory
Deloitte & Touche LLP

Chris Spoth
Executive Director, Center for Regulatory Strategy Americas
Managing Director | Deloitte Advisory
Deloitte & Touche LLP

Alex LePore
Senior Consultant | Deloitte Advisory
Deloitte & Touche LLP

1 Board of Governors of the Federal Reserve System, Volcker Rule, available at https://www.federalreserve.gov/bankinforeg/volcker-rule/faq.htm.
2 Statement of Policy Regarding Illiquid Fund Investments Under Section 13 of the Bank Holding Company Act, available at https://www.federalreserve.gov/newsevents/press/bcreg/bcreg20161212b1.pdf.
3 SR 16-18 (Procedures for a Banking Entity to Request an Extended Transition Period for Illiquid Funds), available at https://www.federalreserve.gov/bankinforeg/srletters/sr1618.pdf.
4 Under Section 619 of Dodd-Frank, illiquid fund is defined as a hedge fund or private equity fund that (1) as May 1, 2010, was principally invested in, or was invested and contractually committed to principally invest in, illiquid assets, such as portfolio companies, real estate investments, and venture capital investments, and (2) makes all investments pursuant to, and consistent with, an investment strategy to principally invest in illiquid assets.
5 Attachment One to SR 16-18 sets forth a list of contacts at these agencies.

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