By Scott Patterson And Ryan Tracy 

WASHINGTON--Regulators on Thursday handed Wall Street banks a temporary reprieve they have been clamoring for from a rule that forces them to pull out of certain risky investments.

The Federal Reserve said it would give banks two additional years to sell their stakes in private-equity, venture-capital and hedge funds covered by the Volcker rule, a win for banks who had requested more time to unwind positions. The Volcker rule is a key plank of the 2010 Dodd-Frank financial law designed to restrain banks from engaging in risky activities that could threaten clients' federally insured deposits.

The Fed move extends the deadline to 2017, from 2015, by which time banks would have had to draw down investments in the funds. The move will "reduce the potential disruptive effects that significant divestitures of covered funds could have on markets," the Fed said in an order announcing the change.

The move marks another victory for Wall Street in its efforts to delay or curb Dodd-Frank regulations. Congress's recent budget deal contained a provision that would sharply curtail a requirement for banks to push certain swaps-trading activities out of the federally insured bank holding company.

Named after former Federal Reserve Chairman Paul Volcker, the rule is among banks' most reviled Dodd-Frank requirements, since it clamps down on one of their most profitable businesses. Since it was adopted a year ago, banks have pressed regulators for a multiyear delay of the requirement for them to pull out of private-equity and other funds.

Consumer advocates said the move raises questions about how regulators will enforce the rule. "It's disappointing," said Marcus Stanley, policy director for Americans for Financial Reform, a nonprofit consumer watchdog. "Whether the Volcker rule is going to be successfully implemented is still up in the air."

Firms such as Goldman Sachs Group Inc., Morgan Stanley and J.P. Morgan Chase & Co. will benefit from Thursday's news. Goldman alone has about $7 billion invested in private equity, according to a November regulatory filing.

J.P. Morgan and Morgan Stanley declined to comment. Goldman Sachs didn't immediately respond to a request for comment.

The reprieve isn't as generous as Wall Street had been hoping for, since banks had been lobbying the Fed to grant a reprieve of up to seven years, The Wall Street Journal reported in August. The Fed still has the option to give banks an additional five years for certain "illiquid" fund investments, but it didn't say on Thursday whether it would do so.

Congress approved the Volcker restrictions as part of a broader effort to force banks away from risky bets that potentially can trigger large, destabilizing losses. The rule also restricts banks from engaging in bets designed purely to profit the bank, while allowing traditional banking activities such as buying and selling assets on behalf of clients.

The restrictions on fund investments have been one of the more contentious elements of the Volcker rule. Regulators drafting the rule clashed over how to define what types of investments would be covered, amid concerns the rule could be evaded or possibly pull in other, less-risky investments.

Banks have pressed for more time since many of them hold thinly traded assets, such as complex derivatives or real estate that can be difficult to unwind. Private-equity firms often invest cash in assets they expect to pay off several years down the line.

The banks have argued that if they are forced to pull out of investments too quickly, the moves could trigger forced selling by the funds at unfavorable prices, potentially roiling markets and hurting investors.

Thursday's decision applies to "legacy" investments that were in place before December 2013.

Write to Ryan Tracy at ryan.tracy@wsj.com and Scott Patterson at scott.patterson@wsj.com

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