WASHINGTON (CN) – The Board of Governors of the Federal Reserve System plans to implement a conformance period for regulated banks to bring their business practices in-line with Section 619, also known as the Volcker Rule, of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The Volcker Rule, named after former Fed Chairman Paul Volcker, prohibits banking entities from making speculative investments on their own behalf or from engaging in proprietary trading or from owning an interest in, or sponsoring, a hedge fund or private equity fund.
The rule is intended to limit the exposure of banks, and by extension, protections afforded to banks by federal agencies, to credit-default swaps and other types of high risk investments that helped to bring on the collapse of the financial services sector in 2007.
Separately, the rule also prohibits a banking entity that advises, manages or sponsors a hedge fund or private equity fund from entering into any transaction with the fund. This eliminates financial incentives for banking entities to place outside bets on positions held by funds they advise.
The prohibitions of the rule are set to go into effect 12 months after all the regulating agencies involved in implementation complete their rule making processes, but no later than July 21, 2012. The conformance period, during which companies will be allowed to modify their business practices to comply with the rule, or drop their status as banking entities, would extend two years beyond the effective date of the prohibitions.
The Board of Governors of the Federal Reserve System requests public comment on how the conformance period should be implemented, what the progress of prohibitions should be, within the period, and under what circumstances the conformance period should be extended.