On July 6, 2016, the Federal Reserve Board (FRB) granted an extension until July 21, 2017 for banks to divest their holdings of non-conforming covered funds that were in place prior to December 31, 2013 (legacy covered funds) to the requirements of section 619 of the Dodd-Frank Act (the Volcker Rule (12 U.S.C. § 1851)). The Volcker Rule authorizes the FRB to extend the conformance period only one year at a time for a maximum of three years.

In December 2013, the FRB released the final Volcker Rule and extended the conformance period until July 21, 2015 (see Legal Update, Volcker Rule Finalized). In December 2014, the FRB again granted an extension to July 21, 2016 and announced its intention to grant banking entities an additional one-year extension until July 21, 2017 (see Legal Update, Fed Grants Additional Volcker Extension for Legacy Covered Funds). The extensions were intended to allow banking entities additional time to conform investments in and relationships with covered funds.

According to the FRB in its order, the further extension was necessary to facilitate an orderly divestment of covered funds and allow banking entities the chance to consult with managers of and investors in covered funds to modify sales practices, governance, or ownership structures to ensure compliance (see Practice Note, CLOs Under the Volcker Rule: Structuring Conforming CLOs).

The impact of the extension is significant. Under the Volcker Rule, banks must divest all collateralized loan obligation (CLO) liabilities by the effective date, potentially suffering billions in losses (see Legal Update, Volcker Rule Could Cost Banks up to $4.3 Billion). With the extension, banks are not forced into fire sales of non-conforming CLOs and have more time to amend CLO documents to conform with the Volcker Rule (see Legal Update, Draft CLO Indenture Amendment Helps "Volckerize" CLOs).