On April 19, 2012, the Board of Governors of the Federal Reserve System ("Board") issued a statement of policy (the "Conformance Statement") clarifying that a banking entity covered by Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the so-called "Volcker Rule") has until July 21, 2014 (unless extended by the Board) to fully conform its activities and investments to the requirements of that section (the "Conformance Period"). 1
The Volcker Rule presents the potential for drastic change to covered banking entities through largely banning their participation in proprietary trading or hedge fund and private equity investments.2 The Volcker Rule itself became effective on July 21, 2012, notwithstanding the lack of a final rule adoption from the five federal agencies charged with its implementation. 3
In the Conformance Statement, the Board clarified for covered banking entities that they would have a two-year perioduntil July 21, 2014in which to "conform all of their activities and investments." However, the Conformance Statement also places conformance obligations on covered banking entities during the Conformance Period. Below, we review what covered banking entities must do during this period in order to conform their activities to the requirements of the Volcker Rule during the Conformance Period.
The only direct guidance provided by the Board on activities during the Volcker Rule Conformance Period comes from the Conformance Statement, which it released in response to requests for clarification of the manner in which the Conformance Period "would apply to various activities and investments covered by" the Volcker Rule. 4 The Board stated that "[d]uring the conformance period, every banking entity that engages in an activity or holds an investment covered by [the Volcker Rule] is expected to engage in good-faith efforts, appropriate for its activities and investments," to enable it to conform its activities and investments to the requirements of the Volcker Rule "by no later than the end of the conformance period."5 The Board also pointed to the almost identical language of an issuing release for a regulation that governs Conformance Period activity under the Volcker Rule ("Conformance Rule"). 6 In this release, the Board provided that during the Conformance Period, companies must engage in "good faith efforts" that will result in conformance by no later than the end of the Conformance Period. 7
The meaning of "good faith efforts" during the Conformance Period is critical to many banking entities that must now wind down proprietary trading departments and divest positions in hedge funds and private equity funds. Unfortunately, the vagueness of this "good faith" mandate and the lack of direct contextual guidance have led to a large divergence of opinions on what must be done. Some banking entities have already begun divesting proprietary trading activities and liquidating funds holdings, while other banking entities have continued to enter into such trades and maintain funds positions and plan to continue to do so right up until the conformance deadline. Still other banking entities have focused on maintaining the same level of covered activities while not materially increasing their risk profile.