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FEDERAL RESERVE SYSTEM
Order Approving Extension of Conformance Period
Section 619 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act ("Dodd-Frank Act") added a new section 13 to the Bank Holding
Company Act of 1956 (codified at 12 U.S.C. § 1851) that generally prohibits
banking entities from engaging in proprietary trading and from investing in,
sponsoring, or having certain relationships with a hedge fund or private equity
fund. These prohibitions are subject to a number of statutory exemptions,
restrictions, and definitions.
Section 619 provides that a banking entity must conform its activities and
investments to the prohibitions and restrictions of that section and any final
implementing regulation no later than two years after the statutory effective date of
section 13, which is July 21, 2012, unless extended by the Board.1 Under the
statute, the Board may, by rule or order, extend the two-year conformance period
for up to three one-year periods, if in the judgment of the Board, an extension is
consistent with the purposes of section 619 and would not be detrimental to the
public interest.
The Board, the Office of the Comptroller of the Currency, the Federal
Deposit Insurance Corporation, the Commodity Futures Trading Commission, and
the Securities and Exchange Commission ("Agencies") have responsibilities for
implementing section 619 through regulation. These Agencies issued final rules
implementing section 619 on December 10, 2013, which become effective on
April 1, 2014. These final rules contain critical definitions and descriptions of
permissible and impermissible activities and require implementation of a
comprehensive compliance program to ensure that impermissible activities do not
take place. In particular, the final rules require a banking entity engaged in
covered activities or investments to establish a variety of limits, written policies,
internal review processes, and controls related to its marketmaking, underwriting,
and hedging activities and to restructure and limit certain of its investments in and
relationships with covered funds, including securitizations of nonloan assets.
1
See 12 U.S.C. § 1851(c).
In order for a banking entity to conform its activities to the prohibitions and
restrictions in section 619 and the final rules, a banking entity must first evaluate
the extent to which it and all of its affiliates are engaged in covered activities as
defined in the final implementing rules and then develop and implement a
conformance plan to come into compliance by the end of the conformance period.
Banking entities must also terminate prohibited activities and divest impermissible
investments in order to be in compliance by the end of the conformance period,
which in some cases will require the divestiture or restructuring of illiquid covered
funds and in other cases will involve complying with investment limits that are tied
to the risk-retention requirements imposed by section 941 of the Dodd-Frank Act.
These requirements are the subject of an ongoing rulemaking that will be
completed during the conformance period for section 619. Banking entities also
must implement ongoing compliance and regulatory reporting/recordkeeping
programs for permitted activities to ensure that no impermissible activities or
investments occur.
To ensure effective compliance with section 619 and the final rules, banking
entities need sufficient time to conform their activities in a safe and sound manner.
Providing banking entities with sufficient time is consistent with protecting the
safety and soundness of the entities because it allows for the termination of
activities and the divestiture of prohibited investments in an orderly manner.
Section 619 itself provided banking entities with a two-year conformance
period (with the possibility for extension). The legislative history of section 619
indicates this extended conformance period was intended to give markets and firms
an opportunity to adjust to the prohibitions and requirements and any
implementing rules.2 Final implementing rules were only recently adopted by the
Agencies and contain important details identifying the activities and investments
that are covered by the prohibitions in section 619 and the final rules, as well as
details about the manner in which activities permitted by the statute and final rules
must be conducted.
For these reasons, the Board believes that granting a one-year extension of
the conformance period is consistent with the purposes of section 619 of the Dodd2
156 Cong. Reg. S5898 (daily ed. July 15, 2010)(statement of Sen. Merkley).
Frank Act and would facilitate the effective implementation of the statute.
Moreover, a one-year extension of the conformance period is not detrimental to the
public interest and will ensure that there are not unnecessary disruptions to the
financial markets as banking entities restructure their activities.
Each banking entity must conform all of its proprietary trading activities and
investments to the prohibitions and requirements of section 619 and the final
implementing rules by no later than the end of the conformance period. During the
conformance period, each banking entity is expected to engage in good-faith
efforts, appropriate for its activities and investments, that will result in the
conformance of all of its activities and investments to the requirements of
section 619 and the implementing rules by no later than the end of the
conformance period.3 Good faith efforts include evaluating the extent to which the
banking entity is engaged in activities and investments that are covered by
section 619 and the final rules, as well as developing and implementing a
conformance plan that is appropriately specific about how the banking entity will
fully conform all of its covered activities and investments by the end of the
conformance period. In addition, banking entities that have stand-alone
proprietary trading operations are expected to promptly terminate or divest those
operations. Moreover, banking entities should not expand activities and make
investments during the conformance period with an expectation that additional
time to conform those activities or investments will be granted.
Based on the foregoing, the Board hereby extends the conformance period
under section 619 of the Dodd-Frank Act for all banking entities (subject to the
reporting requirements noted above) for one year, until July 21, 2015. 4 This
extension does not apply to the data reporting and recordkeeping requirements
The Board issued a Statement of Policy Regarding the Conformance Period for Entities
Engaged in Prohibited Proprietary Trading or Private Equity Fund or Hedge Fund Activities in
which the Board clarified the activities that are permissible during the conformance period.
77 Fed. Reg. 33,949 (June 8, 2012).
4
Pursuant to the Board's regulation regarding the conformance period, a company that was not
a banking entity or a subsidiary or an affiliate of a banking entity on July 21, 2010, must bring its
activities into conformance before the later of the general conformance date, which by this order
is July 21, 2015, or two years after the date on which the company becomes a banking entity or a
subsidiary or an affiliate of a banking entity. 76 Fed. Reg. 8265 (February 14, 2011).
applicable under Appendix A of the final rule to certain banking entities with
significant trading activities.
By order of the Board of Governors of the Federal Reserve System, effective
December 31, 2013.
Robert deV. Frierson (signed)
Robert deV. Frierson
Secretary of the Board
@FedFRASER