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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