[Federal Register Volume 77, Number 111 (Friday, June 8, 2012)]
[Rules and Regulations]
[Pages 33949-33950]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-13937]
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Rules and Regulations
Federal Register
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Federal Register / Vol. 77, No. 111 / Friday, June 8, 2012 / Rules
and Regulations
[[Page 33949]]
FEDERAL RESERVE SYSTEM
12 CFR Part 225
[Docket No. OP-1441]
Statement of Policy Regarding the Conformance Period for Entities
Engaged in Prohibited Proprietary Trading or Private Equity Fund or
Hedge Fund Activities
AGENCY: Board of Governors of the Federal Reserve System (``Board'').
ACTION: Notification of policy statement.
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SUMMARY: The Board is issuing this guidance to provide clarity on the
manner in which the conformance period would apply to various
activities and investments covered by the requirements of section 619
of the Dodd-Frank Act. This guidance is identical to what the Board
announced on its public Web site on April 19, 2012.
DATES: Effective June 8, 2012.
FOR FURTHER INFORMATION CONTACT: Board: Christopher M. Paridon,
Counsel, (202) 452-3274, or Anna M. Harrington, Attorney, Legal
Division, (202) 452-6406; Jeremy R. Newell, Division of Bank
Supervision and Regulation, (202) 452-3239, Board of Governors of the
Federal Reserve System, 20th and C Streets NW., Washington, DC 20551.
SUPPLEMENTARY INFORMATION:
Introduction
On February 9, 2011, the Board issued its final rule to implement
the provisions of section 619 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (``Dodd-Frank Act'') \1\ that grant banking
entities and nonbank financial companies supervised by the Board a
period of time to conform their activities and investments with the
prohibitions and restrictions imposed by that section on proprietary
trading activities and on hedge fund and private equity funds
activities. Subsequently, the Board received a number of requests for
clarification of the manner in which this conformance period would
apply to various activities and investments covered by the requirements
of section 619 of the Dodd-Frank Act. The Board is issuing this
interpretation to address this question.
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\1\ See Conformance Period for Entities Engaged in Prohibited
Proprietary Trading or Private Equity Fund or Hedge Fund Activities,
76 FR 8265 (Feb. 14, 2011).
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As more fully explained in this statement, the Board confirms that
banking entities by statute have two years from July 21, 2012, to
conform all of their activities and investments to section 619, unless
that period is extended by the Board. During the conformance period,
banking entities should engage in good-faith planning efforts,
appropriate for their activities and investments, to enable them to
conform their activities and investments to the requirements of section
619 and final implementing rules by no later than the end of the
conformance period. This may include complying with reporting or
recordkeeping requirements if such elements are included in the final
rules implementing section 619 and the agencies determine such actions
are required during the conformance period.
Background
Section 619 of the Dodd-Frank Act added a new section 13 to the
Bank Holding Company Act (``BHC Act'') that imposes certain
prohibitions and requirements on a banking entity \2\ and a nonbank
financial company supervised by the Board \3\ that engages in
proprietary trading and has certain interests in, or relationships
with, a hedge fund or private equity fund (each a ``covered fund'').\4\
As required by section 13(b)(2) of the BHC Act, the Board, the Office
of the Comptroller of the Currency (``OCC''), Federal Deposit Insurance
Corporation (``FDIC''), and Securities and Exchange Commission
(``SEC'') in October 2011 invited the public to comment on proposed
rules implementing that section's prohibitions and requirements.\5\
Those proposed rules may be found at 76 FR 68846 et seq. (Nov. 7,
2011). The period for filing public comments on this proposal was
extended for an additional 30 days, until February 13, 2012. On January
11, 2012, the CFTC requested comment on a substantially similar
proposed rule to implement section13 of the BHC Act and invited public
comment through April 16, 2012.\6\
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\2\ The term ``banking entity'' includes any insured depository
institution (other than certain limited purpose trust institutions),
any company that controls an insured depository institution, any
company that is treated as a bank holding company for purposes of
section 8 of the International Banking Act of 1978 (12 U.S.C. 3106),
and any affiliate or subsidiary of any of the foregoing. See 12
U.S.C. 1851(h)(1); see also Prohibitions and Restrictions on
Proprietary Trading and Certain Interests in, and Relationships
With, Hedge Funds and Private Equity Funds, 76 FR 68846, 68944 (Nov.
7, 2011).
\3\ A ``nonbank financial company supervised by the Board'' is a
nonbank financial company or other company that the Financial
Stability Oversight Council (``Council'') has determined, under
section 113 of the Dodd-Frank Act, shall be subject to supervision
by the Board and prudential standards. See 12 U.S.C. 1851(h)(3); 76
FR at 68945.
\4\ See 12 U.S.C. 1851. Section 13 of the BHC Act defines the
terms ``hedge fund'' and ``private equity fund'' as any issuer that
would be an investment company, as defined under the Investment
Company Act of 1940 (15 U.S.C. 80a-1 et seq.), but for section
3(c)(1) or 3(c)(7) of that Act, or any such similar funds as the
appropriate Federal banking agencies, the SEC, and the CFTC may, by
rule, determine should be treated as a hedge fund or private equity
fund. See 12 U.S.C. 1851(h)(2); see also 76 FR at 68950.
\5\ See 12 U.S.C. 1851(b)(2).
\6\ This proposed rule may be found at 77 FR 8332 (Feb. 14,
2012).
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Section 13(c)(6) of the BHC Act required the Board, acting alone,
to adopt rules regarding the conformance periods for activities and
investments restricted by section 13.\7\ The Board issued its final
conformance rule (``Conformance Rule'') on February 9, 2011.\8\
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\7\ See 12 U.S.C. 1851(c)(6).
\8\ See 76 FR 8264. The Board proposed to relocate the Board's
Conformance Rule, which was added as Sec. Sec. 225.180-182 of the
Board's Regulation Y, as subpart E of the Board's proposed rule to
implement the substantive portions of section 13 of the BHC Act. See
76 FR at 68850, 68968. As part of that proposed rule, the Board also
sought public comment on whether any part of the Conformance Rule
should be revised. See id. at 68923.
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Board Guidance
After adoption by the Board of the Conformance Rule, a number of
commenters on the interagency proposed rules to implement section 13
requested advice regarding the period of time a banking entity would
have to conform its activities and investments to the requirements of
section 13 and the implementing rules and whether certain activities
would be prohibited prior to
[[Page 33950]]
the expiration of the conformance period.\9\ In particular, commenters
sought confirmation that the Conformance Rule would allow a banking
entity the full period permitted by statute to conform all of its
investments and activities to section 13 and the final implementing
rules. In addition, commenters sought confirmation that activities
conducted and investments made during the conformance period would not
be subjected to the requirements of the implementing rules during the
conformance period.
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\9\ See, e.g., comment letters to the agencies from the
Securities Industry and Financial Markets Association et al.,
``Comment Letter on the Notice of Proposed Rulemaking Implementing
the Volcker Rule--Proprietary Trading'' (Feb. 13, 2011); The Bank of
New York Mellon Corporation et al. (Feb. 13, 2012); and Credit
Suisse, ``Covered Funds Issues in the Volcker Rule Proposal'' (Feb.
13, 2012).
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Section 13 of the BHC Act generally provides that, unless the
period for conformance is extended by the Board, a banking entity must
conform its activities and investments to the prohibitions and
requirements of that section and any final implementing rules no later
than 2 years after the statutory effective date of section 13.\10\ The
effective date of section 13 is July 21, 2012.\11\
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\10\ See 12 U.S.C. 1851(c)(2); see also proposed 12 CFR
248.31(a), 76 FR 68969. Pursuant to section 13(c)(2) of the BHC Act,
the Board may, by rule or order, extend the two-year conformance
period provided in the Conformance Rule for not more than one year
at a time, with a maximum of three one-year extensions, if the Board
determines that such an extension is consistent with the purposes of
this section and would not be detrimental to the public interest.
See 12 U.S.C. 1851(c)(2), proposed 12 CFR 248.31(a)(3), 76 FR at
68969. The Board may further extend the period of time within which
a banking entity may acquire or retain an ownership interest in, or
otherwise provide additional capital to, an illiquid fund, provided
that certain criteria are satisfied. See 12 U.S.C. 1851(c)(3),
proposed 12 CFR 248.31(b), 76 FR at 68969.
\11\ Section 13(c)(1) of the BHC Act provides that section 13
shall take effect on the earlier of (i) 12 months after the date of
issuance of final rules implementing that section, or (ii) 2 years
after the date of enactment of section 13, which is July 21, 2012.
See 12 U.S.C. 1851(c)(1). Because the agencies did not issue final
rules implementing section 13 of the BHC Act by July 21, 2011,
section 13 of the BHC Act specifies that the effective date for its
provisions will be July 21, 2012. Id.
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As noted in the issuing release for the Conformance Rule and the
legislative history of section 13, the conformance period for banking
entities is intended to give markets and firms an opportunity to adjust
to the prohibitions and requirements of that section and any
implementing rules adopted by the agencies.\12\ Consistent with this
purpose and the statute, the Conformance Rule provides each banking
entity with a period of 2 years after the effective date of section 13
(i.e., until July 21, 2014) in which to fully conform its activities
and investments to the prohibitions and requirements of section 13 and
the final implementing rules, unless that period is extended by the
Board (the ``conformance period''). The Conformance Rule also provides
a nonbank financial company supervised by the Board with 2 years after
the date the company becomes a nonbank financial company supervised by
the Board to comply with any applicable requirements of section 13 of
the BHC Act, including any applicable capital requirements or
quantitative limitations adopted thereunder, unless that period is
extended by the Board.\13\
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\12\ See 76 FR at 8265 (citing 156 Cong. Reg. S5898 (daily ed.
July 15, 2010) (statement of Sen. Merkley)).
\13\ See proposed 12 CFR 248.32, 76 FR 68970. As noted in the
October 2011 proposed rule to implement section 13 of the BHC Act,
the Board has not proposed at this time to require any additional
capital requirements, quantitative limits, or other restrictions on
nonbank financial companies pursuant to section 13, in light of the
fact that the Council has not yet finalized the criteria for
designation of, nor yet designated, any nonbank financial company.
See 76 FR at 68847.
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Under the Conformance Rule, all proprietary trading activity
conducted by each banking entity must conform to the prohibitions and
requirements of section 13 of the BHC Act and any final implementing
rules by no later than the end of the conformance period. Similarly,
all activities, investments and transactions with or involving a
covered fund, including a covered fund organized and offered or
sponsored by the banking entity, must conform to section 13 of the BHC
Act and final implementing rules by no later than the end of the
relevant conformance period.
During the conformance period, every banking entity that engages in
an activity or holds an investment covered by section 13 is expected to
engage in good-faith efforts, appropriate for its activities and
investments, which will result in the conformance of all of its
activities and investments to the requirements of section 13 of the BHC
Act by no later than the end of the conformance period. This includes
evaluating the extent to which the banking entity is engaged in
activities and investments that are covered by section 13 of the BHC
Act, as well as developing and implementing a conformance plan that is
as specific as possible about how the banking entity will fully conform
all of its covered activities and investments with section 13 of the
BHC Act and any final implementing rules by July 21, 2014, unless that
period is extended by the Board. These good-faith efforts should take
account of the statutory provisions in section 13 of the BHC Act as
they will apply to the activities and investments of the banking entity
at the end of the conformance period as well as any applicable
implementing rules adopted in final by the primary financial regulatory
agency for the banking entity. Good-faith conformance efforts may also
include complying with reporting or recordkeeping requirements if such
elements are included in the final rules implementing section 13 of the
BHC Act and the agencies determine such actions are required during the
conformance period.
Nothing in this guidance restricts in any way the authority of any
agency to use its supervisory or other authority to limit any activity
the agency determines to be unsafe or unsound or otherwise in violation
of law.
By order of the Board of Governors of the Federal Reserve
System, June 5, 2012.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 2012-13937 Filed 6-7-12; 8:45 am]
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