On May 30, 2018, the Federal Reserve Board approved a 373 page notice of proposed rulemaking (the “proposal”) to amend the regulations implementing the Volcker Rule (the Rule), a centerpiece of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The proposal aims to simplify and tailor the compliance requirements of the Rule, which was finalized back in December 2013 to prevent banks from engaging in proprietary trading and from owning hedge funds or private equity funds. The proposed changes were jointly developed and approved by the Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the Commodity Futures Trading Commission (CFTC), and the Securities and Exchange Commission (SEC).
In the weeks following the 2016 Presidential election, members of the incoming Administration clearly expressed their views that certain aspects of Dodd-Frank, including the Volcker Rule, are overly complex. Specifically, then-Treasury Secretary-nominee Steven Mnuchin argued that the “number one problem with the Volcker Rule is that it’s too complicated and people don’t know how to interpret it.”1
On June 12, 2017, the Treasury Department took a significant step on financial regulatory issues by releasing its first report pursuant to President Trump’s executive order setting forth “Core Principles” for regulating the US financial system. Among other things, the report argues that the Volcker Rule requires “substantial amendment” and that its implementation has “hindered market-making functions necessary to ensure a healthy level of market liquidity.”2 Accordingly, the report proposes several changes—some of which could be implemented by the regulatory agencies and some of which would require Congressional action to amend the underlying statute—designed to “reduce the scope and complexity” of the rule.3
On August 2, 2017, the Office of the Comptroller of the Currency (OCC) issued a notice and request for comment4 on whether certain aspects of the regulation implementing the Volcker Rule should be revised to “better accomplish the purposes of the statute” while decreasing the compliance burden on banking entities and fostering economic growth.
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