As ABA has long and persistently advocated, the Federal Reserve provided details on how banks can request an extension to conform legacy illiquid fund investments with the Volcker Rule’s prohibition on ownership interests in legacy covered funds. While banks have until July 21, 2017, to divest interests in prohibited funds – provided they were in place by the end of 2013 – the Dodd-Frank Act authorizes the Fed to provide an additional five years for conformance of illiquid funds.
To request the extension, the Fed said banks must provide a list of funds for which an extension is sought, a description of each fund and of the bank’s efforts to divest or conform the funds, a certification from the general counsel or chief compliance officer that the funds meet the definition of illiquid funds, the length of the desired conformance period and a description of the bank’s plans to divest or conform the funds by the end of that period.
Requests are due to the appropriate Federal Reserve Bank no later than Jan. 22, 2017. The Fed may grant extensions of up to five years from July 21, 2017, or for shorter periods should the funds mature or be conformed sooner. The Fed said it expects to act on applications within 30 days and that “the illiquid funds of banking entities will generally qualify for extensions, though extensions may not be granted in certain cases,” such as insufficient conformance planning or deficient Volcker Rule compliance programs.
The Fed noted that legacy illiquid funds – which are largely private equity, real estate and venture capital funds supporting long-term development and growth – can be very difficult to liquidate before maturity, especially since the expected value of the funds may not be reached until maturity and liquidation may involve termination of contractual obligations and reputational risk to the bank, among other challenges.