WASHINGTON (MNI) – The following is the second and final part of
excerpts from the details provided by the Federal Reserve Board
Wednesday explaining its approval of a final rule to implement the
Volker Rule:
After consideration of the comments, the Board has modified one
existing factor and added two additional factors to this list. The first
additional factor is whether divestiture or conformance of the activity
or investment would involve or result in a material conflict of interest
between the banking entity (or nonbank financial company supervised by
the Board) and unaffiliated clients, customers, or counterparties to
which the banking entity owes a duty. Because the Volcker Rule is
intended to help prevent material conflicts of interest between a
banking entity or nonbank financial company supervised by the Board and
its clients, customers or counterparties, the Board believe this is an
appropriate factor to consider in reviewing extension requests.
The Board expects that this factor may be relevant when the banking
entity serves as general partner or sponsor to a fund in which
unaffiliated persons are investors, but generally would not be relevant
when the banking entity (in addition to having an investment) serves
only as investment advisor to the fund, because serving as an investment
advisor would generally be a permissible activity for a banking entity
even if it divests its ownership interests in the fund itself. In
addition, the Board has modified the list of factors to specify that the
Board may consider the firm’s prior efforts to divest or conform the
activity or investments, including, with respect to an illiquid fund,
the extent to which the banking entity has made reasonable best efforts
to terminate or obtain a waiver of its contractual obligation to take or
retain an equity, partnership, or other ownership interest in, or
provide additional capital to, the illiquid fund.
The Board expects all banking entities and nonbank financial
companies supervised by the Board to make reasonable and good-faith
efforts to divest or otherwise conform their prohibited activities and
investments within the prescribed time periods. This includes taking all
reasonable steps to divest the firm’s interests in private equity and
hedge funds covered by the restrictions in the Volcker Rule, such as
making requests of a general partner or other applicable person(s) to
withdraw from or transfer its interest in the fund whenever authorized
or permitted by the relevant fund documents. The factors listed in the
rule are not exclusive, and the Board retains the ability to consider
other factors or considerations that it deems appropriate.
As noted in the proposed rule, the Board expects to carefully
review requests for an extended transition period to ensure that the
banking entity’s interest in the fund and the fund’s assets and
investment strategy satisfy the requirements contained in the rule in
order to be eligible for an extended transition period. As noted above
in Part III.C.1.a of this Supplementary Information, the final rule
provides that in evaluating the merits and appropriateness of a request
for an extended transition period for an investment in an illiquid fund,
the Board will consider the extent to which the fund’s current assets
are no longer illiquid (e.g. due to lapse of applicable restrictions on
an investment because a previously illiquid venture capital or portfolio
company investment has become liquid, such as through the initial public
offering of the company’s stock). The Board has modified the list of
factors the Board may consider in the final rule to make this clear.
The final rule retains the proposed rule’s provision that allows
the Board to impose conditions on any extension granted if the Board
determines such conditions are necessary or appropriate to protect the
safety and soundness of banking entities or the financial stability of
the United States, address material conflicts of interest or other
unsound practices, or otherwise further the purposes of section 13 of
the BHC Act and the final rules. In cases where the banking entity is
primarily supervised by another Federal banking agency, the SEC, or the
CFTC, the Board will consult with such agency prior to approving any
extension request by the banking entity, as well as before imposing
conditions in connection with the approval of any extension request by
the banking entity.
(2 of 2)
** Market News International Washington Bureau: 202-371-2121 **
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