Memorandum
Volcker Rule Update: Extension Granted for Legacy Funds
December 19, 2014

On Thursday, the Federal Reserve Board made a much-welcomed announcement: the deadline for divestingor conforming investments and relationships with so-called “legacy covered funds” has been extended by one
year to July 21, 2016. In addition, the Federal Reserve Board indicated that it intends to grant another oneyear extension next year, which would bring the deadline for these funds to July 21, 2017, for a two-year
additional extension.

Background
The Volcker Rule is a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010that generally prohibits a banking entity, when acting as principal, from sponsoring or investing in “coveredfunds” (which generally include funds that would be investment companies but for the exemptions provided
by Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act of 1940) or engaging in proprietarytrading. The Volcker Rule became effective on July 21, 2012, but with a two-year conformance period ending
July 21, 2014 for banking entities to divest or restructure their covered investments and relationships. On
December 10, 2013, the Federal Reserve Board and several other federal banking and financial agencies
issued final regulations implementing the substantive provisions of the Volcker Rule. Concurrent with therelease of those regulations, the Federal Reserve Board issued a blanket, industry-wide one-year extension,
which meant that banking entities had until July 21, 2015 to comply.
The Federal Reserve Board, which has sole authority to grant extensions, has now extended the compliancedeadline another year to July 21, 2016. However, the extension is limited to investments and sponsorships
in certain “legacy covered funds,” not to funds generally. Also, proprietary trading activities are not coveredby this extension.

Extension Applies to “Legacy Covered Funds” Only
The extension applies to “investments in and relationships with covered funds and foreign funds that may besubject to [the Volcker Rule] and that were in place prior to December 31, 2013.” Although the term “inplace” is not defined in the extension order, it should be understood to mean that the relevant investment
Simpson Thacher & Bartlett LLP

2Memorandum – December 19, 2014

and sponsoring-related activity must have been made or in existence prior to the cut-off date of December 31,
2013, as opposed to the fund merely being formed prior to such date. The Federal Reserve Board also notedthat non-banking sponsors of covered funds in which foreign banks invest may use this time to restructure
or conform these foreign bank investments.
The term “foreign fund” is not defined, and it is unclear whether it means both foreign covered funds andforeign non-covered funds. Foreign non-covered funds are funds that receive investments from foreignbanking entities (and other non-U.S. investors) and avoid application of the Volcker Rule by not fallingwithin the definition of “covered fund.” They have presented foreign banking entities and private fundsponsors with substantial restructuring challenges because of how the “banking entity” and “covered fund”
definitions interact. In short, foreign non-covered funds may be swept up by the Volcker Rule, through thebanking entity definition, if a foreign banking entity has a position of 25% or more of the fund’s total
ownership interests or otherwise controls the fund through substantial governance rights. By contrast, acovered fund is excluded from the banking entity definition. Absent clarification to the contrary from theFederal Reserve Board, we believe it is reasonable to conclude that foreign non-covered funds that fall underthe banking entity definition have the benefit of the extension if the control relationship (25% or greater
ownership, etc.) was in place prior to December 31, 2013.

Prospects for a Final Extension to July 21, 2017
The Federal Reserve Board has indicated that it “intends next year” to grant a final one-year extension “topermit banking entities until July 21, 2017, to conform ownership interests in and relationships with legacy
covered funds.” The reason for this precatory language is that the Dodd-Frank Act authorizes the Federal
Reserve Board only to grant general extensions to the conformance period “for not more than one year at atime.”

Illiquid Fund Extension Not Addressed
The extension order does not address the five-year extension that may be granted, by application of abanking entity, with respect to certain illiquid funds, other than to say that the Federal Reserve Board willconsider whether to take action regarding such funds at a later time.

“Good-Faith” Conformance Efforts
In granting the latest one-year extension, the Federal Reserve Board has once again reminded banking
entities that they are “expected” to take “good-faith efforts” to completely divest or conform theirinvestments and activities by “no later than the end of the applicable conformance period.” For covered
legacy funds addressed in the extension order, this deadline is July 21, 2016, and it is highly likely that thedeadline will be eventually extended to July 21, 2017. Banking entities are expected to “make plans well inadvance of the end of the extended conformance period” as to how they will divest or conform their legacy
covered fund investments and activities to the Volcker Rule.
Simpson Thacher & Bartlett LLP

3Memorandum – December 19, 2014

For further information about the recent extension order or the Volcker Rule generally, please contact any
member of the Firm’s Financial Institutions and Private Funds practices, including those listed below.
FINANCIAL INSTITUTIONSPRIVATE FUNDS

Lee Meyerson+1-212-636-3675
lmeyerson@stblaw.com

Thomas H. Bell+1-212-455-2533
tbell@stblaw.com

Mark Chorazak+1-212-455-7613
mchorazak@stblaw.com

Michael W. Wolitzer+1-212-455-7440
mwolitzer@stblaw.com
Glenn R. Sarno+1-212-455-2706
gsarno@stblaw.com

The contents of this publication are for informational purposes only. Neither this publication nor the lawyers who authoredit are rendering legal or other professional advice or opinions on specific facts or matters, nor does the distribution of thispublication to any person constitute the establishment of an attorney-client relationship. Simpson Thacher & Bartlett LLP
assumes no liability in connection with the use of this publication. Please contact your relationship partner if we can be ofassistance regarding these important developments. The names and office locations of all of our partners, as well as ourrecent memoranda, can be obtained from our website, www.simpsonthacher.com.
Simpson Thacher & Bartlett LLP

4Memorandum – December 10, 2014

UNITED STATESEUROPE

SOUTH AMERICANew York425 Lexington Avenue
New York, NY 10017+1-212-455-2000

LondonCityPointOne Ropemaker StreetLondon EC2Y 9HUEngland+44-(0)20-7275-6500

São Paulo
Av. Presidente Juscelino
Kubitschek, 1455
São Paulo, SP 04543-011
Brazil+55-11-3546-1000

Houston2 Houston Center909 Fannin Street
Houston, TX 77010+1-713-821-5650

ASIA

Los Angeles
1999 Avenue of the Stars
Los Angeles, CA 90067+1-310-407-7500

Beijing3919 China World Tower
1 Jian Guo Men Wai Avenue
Beijing 100004
China+86-10-5965-2999

Palo Alto
2475 Hanover Street
Palo Alto, CA 94304+1-650-251-5000

Hong Kong
ICBC Tower
3 Garden Road, Central
Hong Kong+852-2514-7600

Washington, D.C.
1155 F Street, N.W.
Washington, D.C. 20004+1-202-636-5500

Seoul
West Tower, Mirae Asset Center 1
26 Eulji-ro 5-gil, Jung-gu
Seoul 100-210
Korea+82-2-6030-3800
Tokyo
Ark Hills Sengokuyama Mori
Tower
9-10, Roppongi 1-Chome
Minato-Ku, Tokyo 106-0032
Japan+81-3-5562-6200

Simpson Thacher & Bartlett LLP