A couple of weeks ago, the Office of the Superintendent of Financial Institutions Canada ("OSFI") released its Advisory: Changes to the Membership of the Board or Senior Management ("the Advisory"). It comes into effect immediately.
OSFI outlines the process for federally regulated financial institutions ("FRFIs") to provide OSFI with advance notice of potential additions to the FRFI's board of directors or senior management ("Candidates"). "Senior management" is considered a FRFI's Chief Executive Officer, those reporting directly to the Chief Executive Officer and, potentially, executives with oversight functions (such as the Chief Financial Officer, Chief Risk Officer, Chief Compliance Officer, Chief Internal Auditor and Chief Actuary). The intention is to provide OSFI with an opportunity to convey to the FRFI's Board, prior to a Candidate's appointment, any concerns it may have with the Candidate. OSFI will be focussing on a Candidate's record and suitability in respect of risk awareness and sensitivity to the FRFI's safety and soundness.
It is not clear how the Advisory will apply to Canadian branches of foreign companies. A FRFI includes a Canadian company, Canadian branches of foreign companies, etc.; however, OSFI should not have the authority to affect changes to senior management or directors of foreign companies, unless such persons are directly responsible for the operations of the company's Canadian branch.
The Advisory does not provide guidance on what is acceptable advance notice – a required number of days prior to a Candidate's appointment is not provided. FRFIs are encouraged to contact their respective Relationship Managers to discuss expectations.
OSFI acknowledges that exceptional circumstances (such as unexpected departures) may prevent a FRFI from providing it with advance notice. In such cases, FRFIs are expected to inform their Relationship Manager of the exceptional circumstance.
The Advisory states that FRFIs should provide OSFI with all of the following when providing early notice of a Candidate:
- The Candidate's curriculum vitae or equivalent, which should demonstrate the Candidate's qualifications and experience appropriate for the position
- The FRFI's rationale for selecting the Candidate
- The effective date of the Candidate's anticipated appointment or selection
In addition, the Advisory states that FRFIs should provide all of the following, once available:
- A copy of the draft internal announcement of the Candidate's appointment
- A copy of the draft public announcement of the Candidate's appointment
- The results of a Responsible Persons assessment that may be required under OSFI's Guideline E-17: Background Checks on Directors and Senior Management of FREs
In addition to the materials listed above, a FRFI must still complete and file with OSFI all required returns related to the Candidate's appointment.
The Advisory also outlines the process for setting up introductory meetings between OSFI and a large, complex FRFI's appointees. The Advisory does not provide a definition of a "large, complex FRFI"; however, domestic systemically-important banks are provided as an example and OSFI reserves discretion to include other FRFIs as supervisory judgment may warrant.
Such a meeting is to occur as early as possible following the relevant appointment and is to be conducted with the Deputy Superintendent of Financial Institutions (Supervision Sector), the Managing Director (Corporate Governance Division) and the FRFI's Relationship Manager or appropriate alternates.
The general purpose of these meetings is to facilitate an exchange on OSFI's expectations and points of interaction with the appointee's FRFI. In particular, the Advisory states that the meeting is to allow OSFI to
- become acquainted with the new director or senior manager,
- generally apprise the appointee of his/her duties under applicable FRFI statutes and OSFI's expectations under its Corporate Governance Guideline (e.g., a board of directors' duty to inform OSFI of substantive issues affecting the FRFI),
- discuss various points of interaction between OSFI and the FRFI, and
- summarize OSFI's supervisory activity in respect of the FRFI.
OSFI continues to recognize the importance of a FRFI's ability to make independent decisions regarding the appointment of senior management or nomination of directors.
The Advisory raises some interesting questions regarding its applicability to the operations of a foreign insurance company with a Canadian branch or a foreign-owned Canadian subsidiary. For instance, it is not clear if OSFI's expectation is limited to receiving advance notice of Chief Agent Candidates, or if it extends to those who will have direct responsibility for the operations of the Canadian branch or subsidiary.
Also, the Advisory alludes to OSFI's power under sections 678.1 to 678.2 of the Insurance Companies Act (Canada) to order the disqualification or removal of a FRFI's directors or senior officers. As OSFI's power under these sections does not extend to the removal of a foreign insurance company's directors or senior officers, it is unclear what actions, if any, OSFI may take in respect to its non-approval of a foreign company's Candidate beyond the Chief Agent.
Moreover, the Advisory does not define a "large, complex FRFI." In this regard, it is unclear if OSFI will consider a Canadian branch as a "large, complex FRFI" and, as such, require a meeting with a branch's (foreign company's) newly appointed director or senior manager.
What is clear is that FRFIs (including Canadian branches) should contact their respective OSFI Relationship Managers to discuss expectations for early notice of any contemplated additions to their board of directors or senior management team.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.