Fed Gives Banks More Time to Sell Private-Equity, Hedge Fund Stakes -- Update

By Ryan Tracy And Scott Patterson 

WASHINGTON--The Federal Reserve on Thursday said it would give banks two more years to sell private equity and hedge fund stakes covered by the Volcker rule, a win for banks who had requested more time to unwind positions.

The Fed move effectively extends from July 2015 to July 2017 a deadline by which banks would have had to sell the fund investments, which are barred under the rule's restrictions on bank trading. 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.

Since the Volcker rule was adopted a year ago, banks have been pressing regulators for a multiyear delay of the requirement for them to pull out of private equity and other funds. 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.

The banks were 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 on Thursday say whether it would do so.

Congress approved the Volcker restrictions as part of a broader efforts to force banks to shift away from risky bets that can potentially trigger large, destabilizing losses.

The restrictions 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 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 [e-mail] and Scott Patterson at [e-mail]

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