Volcker Rule Update: Federal Reserve Issues Guidance onConformance Period for Entities Engaged in Proprietary
Trading or Private Fund Activities
April 23, 2012
Last week, the Federal Reserve issued a statement of policy on the period of time banking
entities have to bring their activities and investments into compliance with Section 13 of theBank Holding Company Act (the “Volcker Rule”). The Volcker Rule, which was enacted as partof the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, imposes certain
prohibitions and restrictions on banking entities engaging in proprietary trading andsponsoring and/or investing in private equity and hedge funds. While the Volcker Rule
becomes effective on July 21, 2012, the key date is July 21, 2014, which is the statutory deadlineby which banking entities must conform their activities and investments to the Volcker Rule.
The Federal Reserve’s recent guidance confirms that banking entities will have this entire twoyear “conformance period” to come into compliance with the Volcker Rule.
While the two-year conformance period is provided by statute, confusion surrounded certain
statements the federal banking and financial regulators made as part of the proposed rules on
the Volcker Rule.1 The preamble to the proposed rules stated that the agencies would expect
banking entities to “fully conform” all of their activities and investments to the proposed rules“as soon as practicable within” the conformance period. In addition, the preamble stated thatbanking entities are not authorized to engage in “new” or “additional” prohibited activities orinvestments during the conformance period. These statements, however, went further than thestatutory language of the Volcker Rule, which stated that banking entities must bring theiractivities and investments into compliance “not later than 2 years after the date on which therequirements become effective.”21

The proposed rules were issued by the Federal Reserve, the other federal banking agencies and theSecurities and Exchange Commission in October 2011. A substantially similar proposal was issued by
the Commodity Futures Trading Commission in January 2012. The proposed rules remain pending,and in testimony before the House Financial Services Committee, on February 29, 2012, and the Senate
Banking Committee, on March 1, 2012, Federal Reserve Chairman Bernanke acknowledged that theproposed rules are not likely to be finalized prior to the Volcker Rule’s effective date of July 21, 2012.
For background regarding these proposed rules, please see our client memorandum, titled“Regulations Proposed to Implement the Volcker Rule,” dated October 13, 2011, available at
http://www.simpsonthacher.com/content/Publications/pub1275.pdf. Rules regarding theavailability of, and process for obtaining, extensions to the two-year conformance period wereadopted by the Federal Reserve in February 2011. See 76 Fed. Reg. 8265 (Feb. 14, 2011).

212 U.S.C. § 1851(c)(2).

Memorandum – April 23, 2012

The statement of policy is important because it reassures banking entities that they will notneed to take definitive steps to restructure or terminate operations covered by the Volcker Rule
until later in the conformance period after the Volcker Rule implementing regulations havebeen finalized and adopted. However, the Federal Reserve will expect these banking entities toengage in “good-faith efforts,” appropriate for their activities and investments, that “will result“in the conformance of “all” of their activities and investments to the Volcker Rule by no later
than July 21, 2014 (or potentially later if an extension is granted by the Federal Reserve). Goodfaith conformance efforts of a banking entity will include: (i) an evaluation of the extent towhich it is engaging in activities and investments that are covered by the Volcker Rule and (ii)the development and implementation of a conformance plan that is “as specific as possible” about
how the banking entity will “fully conform” all of its covered activities and investments to theVolcker Rule and any final implementing rules. Good-faith conformance efforts may also
include complying with reporting and recordkeeping requirements “if” such elements areincluded in the final rules implementing the Volcker Rule and the agencies determine that suchactions are required during the conformance period.
***

We continue to monitor key developments under the Volcker Rule. For more information
regarding the Federal Reserve’s recent statement of policy, please contact any of the members of
our Financial Institutions or Private Funds groups.
This memorandum is for general information purposes and should not be regarded as legal advice. Pleasecontact your relationship partner if we can be of assistance regarding these important developments. The
names and office locations of all of our partners, as well as our recent memoranda, can be obtained fromour website, www.simpsonthacher.com.
The contents of this publication are for informational purposes only. Neither this publication nor the lawyers who authored it arerendering legal or other professional advice or opinions on specific facts or matters, nor does the distribution of this publication to
any person constitute the establishment of an attorney-client relationship. Simpson Thacher & Bartlett LLP assumes no liability inconnection with the use of this publication.

Page 2Memorandum – April 23, 2012

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