Federal Reserve Clarifies Volcker Rule Conformance Requirements

The Federal Reserve issued much-anticipated guidance yesterday confirming that compliance with the Volcker Rule restrictions on proprietary trading and funds activities will be required by the end of the conformance period. As a result, banking organizations should be able to use the full two-year statutory conformance period to conform activities and investments, including new activities commenced after July 2012. The Federal Reserve’s February 2011 conformance rule and the interagency proposed rule issued last October both raised concerns that some requirements would apply starting in July 2012, despite the absence of a final rule and the number of very significant open questions.

Key points of note included the following:

• New proprietary trading and funds activities will not be restricted beginning on July 21, 2012, but firms must engage in “good-faith planning efforts” to conform their activities and investments by no later than the end of the conformance period.
• Good-faith planning efforts should (i) be “appropriate for [the firm’s] activities and investments”, (ii) include evaluating the extent to which the firm is engaged in activities and investments covered by the Volcker Rule, and (iii) include “developing and implementing a conformance plan that is as specific as possible” for bringing its activities and investments into conformance by July 21, 2014, unless that period is extended by the Board.
• Banks will not be required to have a compliance program in place by July 21, 2012, and reporting and recordkeeping requirements will not commence on July 21, 2012. Reporting and recordkeeping obligations could be introduced later in the conformance period, after the issuance of a final implementing rule, if the final rule contains those elements and the agencies determine that such actions are required during the conformance period.

The guidance provides significant relief and increased certainty to industry participants given that the October 2011 interagency proposed rule could have been read to require (i) compliance program, reporting and recordkeeping obligations to begin as of July 21, 2012; (ii) new activities or investments commenced during the conformance period to be Volcker Rule compliant (i.e., not given the benefit of the conformance period); and (iii) pre-July 2012 activities and investments to be brought into compliance “as soon as practicable”. 

Federal Reserve Press release

Federal Reserve Statement of Policy