[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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