WASHINGTON (Reuters) - The Federal Reserve Board laid out on Monday how U.S. banks can apply to take five more years to comply with the Volcker Rule, a reform emerging from the 2007-09 financial crisis that has received some of the harshest criticism from Wall Street.

The rule, intended to keep banks from speculating with their customers' money, limits the amount of illiquid investments firms can hold. Big Wall Street banks have said they need more time to exit fund investments that are difficult to sell but no longer allowed by the 2010 Dodd-Frank Wall Street reform law.

The Fed said it was the final grace period it could grant following three one-year extensions.

It said a bank would qualify for an extension as long as it demonstrated meaningful progress in divesting illiquid funds, had a sufficient compliance program and the Fed was not concerned it was trying to evade the law.

Firms will also need to certify that the funds meet the definition of illiquid and lay out a plan for divesting or making the investments conform to the rule.

Before the crisis, big banks had proprietary trading desks that made bets on market direction, as well as in-house hedge funds, investments in external hedge funds and co-investments alongside clients in internal private-equity funds. Underlying assets could range from investments in private companies to real estate and long-dated derivatives.

In regulatory filings, banks have said they may face difficulty in getting rid of those investments by upcoming deadlines.

(Reporting by Lisa Lambert; Editing by Peter Cooney)