On February 9, 2011, the Board of Governors of the Federal Reserve System (“Federal Reserve”) published a final rule (“Final Rule”) implementing the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) that give banking entities a defined period of time to conform their proprietary trading and hedge fund and private equity fund (“Covered Private Fund”) activities to the so-called Volcker Rule. The Final Rule gives such entities a conformance period of two years, with the possibility of three one-year extensions, and an additional period of up to five years for investments in illiquid funds. In addition, the Final Rule provides further clarity regarding illiquid funds, the Volcker Rule’s effect on nonbank financial institutions subject to Federal Reserve supervision, and the procedures governing extension requests. In a number of respects, the Final Rule was modified from the Federal Reserve’s proposed rule,2 the differences from which we have highlighted below. The Final Rule will become effective on April 1, 2011.
Section 619 of the Dodd-Frank Act adds a new section 13 to the Bank Holding Company Act of 1956 (“BHC Act”) (to be codified at 12 U.S.C. 1851)—the so-called Volcker Rule, named after Paul Volcker, the former Chairman of the Federal Reserve who was the principal advocate of this measure. In general, the Volcker Rule prohibits banking entities from engaging in proprietary trading in securities, derivatives, or certain other financial instruments, and from investing in, sponsoring, or having certain relationships with a Covered Private Fund. New section 13 of the BHC Act provides banking entities two years to bring their activities and investments into compliance with the Volcker Rule, and allows the Federal Reserve to extend this conformance period under certain conditions.
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