What banks must do during Volcker conformance period

Author: Danielle Myles | Published: 27 Apr 2012
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Financial institutions breathed a sigh of relief when the Volcker Rule’s two-year conformance period was confirmed last week.

But counsel have warned against overlooking the subtly-worded conformance period compliance requirements. They also disagree over what is required by the interim reporting and recordkeeping requirements.

Last week the Federal Reserve approved a joint-authority statement (Statement) confirming that, as stated in the Dodd-Frank statute, the Volcker Rule’s compliance deadline is July 21 2014. This is despite a sentence in last year’s proposed Volcker Rule indicating that regulators expected covered entities to conform as soon as practicable.

“The Fed has set us back to where we thought we were when we started, which is good,” said one bankers’ counsel.

Institute of International Bankers (IIB) general counsel Richard Coffman said a considerable degree of comfort has been taken from the Statement: “It’s accomplished its purpose and it’s a very helpful purpose – it provides a lot of clarity and certainty that banks won’t be held to compliance with the requirements on July 21 of this year.”

But according to Allen & Overy, the view taken by many commentators and media reports that entities have over two years to conform is overly simplistic and overlooks the seriousness of the interim obligations.

The Statement’s requirement to act in good faith during the two-year conformance period should not be taken lightly and will require adjustments to a covered entities’ proprietary trading.

“When the Fed talks about good faith efforts they really mean it,” said Allen & Overy partner Douglas Landy. Efforts must be appropriate for the institution’s activities and investments. “Good faith means a lot more for an investment bank than a mid-size bank in the Midwest,” Landy added.

The Statement gives no guidance on financial institutions increasing or beginning prohibited trades or investments during the conformance period. But if an entity wants one of the three one-year conformance extensions, they should make substantial efforts to bring their operations into line before July 2014.

“While they don’t actually say it, they hint in the statement that they are going to judge whether a bank gets an exception or not by whether they’ve made a good faith effort to conform,” said Landy.

This is particularly true if an activity prohibited by Volcker is commenced, according to Satish Kini, Debevoise & Plimpton partner and former Federal Reserve counsel

“I would anticipate that if someone engaged in a new activity now or entered a new investment at this stage it may be quite difficult to get a one-year extension in 2014, absent some extenuating circumstances,” he said.

Reporting and recordkeeping

There’s also disagreement over what banks must do to satisfy the Statement’s reporting and recordkeeping requirements.

The Statement requires good-faith planning efforts to enable entities to conform by the end of the conformance period, adding: ‘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.’

“In essence, by requiring a conformance plan they are requiring recordkeeping and reporting requirements,” said Landy, because these factors are necessarily a part of a conformance plan.

The Allen & Overy report describes the provision as ‘somewhat “tongue-in-cheek’,” because to file a compliance plan institutions must look over their records and report these to the regulators.

But the IIB’s Coffman has a different interpretation.

“The fact there is this separate sentence near the end of the policy statement that focuses specifically on reporting and recordkeeping requirements -- I think that tells you something,” he said.

“The reference to reporting and recordkeeping requirements I think is fairly carefully phrased so that the good faith efforts include these if required by the final rules during the conformance period,” Coffman added.

The level of detail required under the proposed rule’s reporting and recordkeeping provisions has been particularly troubling to the industry, and institutions have taken some comfort in the phrasing of this part of the Statement, Coffman said.

Responding to a request for comment, the Federal Reserve spokesperson said they had no information to provide at this time on interim reporting and recordkeeping requirements.