[This story previously appeared in Securities Regulation Daily.]
By Mark S. Nelson, J.D.
The Securities Industry and Financial Markets Association (SIFMA) asked the Federal Reserve to give banks new guidance and a one-year delay to help them meet the 2015 conformance deadline for bringing covered funds into compliance with the Volcker rule. Banks are likely to flood the Fed with extension requests in Q4 2014, SIFMA told the Fed’s general counsel in a letter published yesterday.
Fed guidance. The lack of Fed guidance for illiquid funds is one of the main worries for SIFMA’s members. SIFMA said not many funds will fall within the conformance rule, despite the Dodd-Frank Act’s plan to include them, because of the delay between the adoption of the final conformance rule (issued in February 2011 and later clarified in June 2012) and the final Volcker regulations (December 2013). Specifically, SIFMA asked the Fed to find a way to let illiquid funds partake of the stable run-off period until 2022 by aligning the Dodd-Frank Act’s intent with its regulatory implementation to close the two-year gap.
“Our members are at a loss as to how to proceed in the absence of further guidance from the Federal Reserve staff,” said SIFMA. According to SIFMA, 14 of its members with illiquid funds, who represent nearly 3,000 funds, planned to ask the Fed to extend the time to meet the conformance rule. The numbers include illiquid hedge fund interests for which a buyer may exist, but the fund cannot be sold in secondary markets.
Likewise, SIMFA estimates that over 1,500 funds will need a delay to satisfy asset management rules. This will include the time needed to “sell down” or conform employees’ stakes in covered funds. Logistics also will play a role in extension requests because of the time funds may need to get investor and regulatory approvals to rename covered funds or fund families, especially if the bank has ceded control of the fund or its adviser to another entity.
Other recommendations. SIFMA also wants banks to be able to finish their contractual duties owed to a fund for its lifetime, even if the fund is in its late stages and will be wound up. Yet another recommendation is to grant a one-year categorical extension to the conformance period to all currently registered investment companies and foreign public funds to let sponsors dilute seed capital. This latter request could be augmented by separate relief creating a presumptive seeding period for some non-legacy funds.
SIFMA listed many other ways the Fed can provide guidance or more time to meet Volcker rule mandates. SIFMA also said it will soon ask the Fed for a one-year delay related to the conformance period for banking entities’ interests in all foreign funds. An extension would help to ease the Volcker rule’s burden on overseas markets.
The preliminary data cited by SIFMA in its letter to the Fed came from a survey of its members. SIFMA said that despite the lack of data on assets under management or market valuations, the results of the 19-member sample cited in its letter show the likelihood that many banks will ask the Fed for extensions later this year. In fact, SIFMA said its data may “substantially underestimate” the volume of requests.