The Office of the Superintendent of Financial Institutions
(Canada) ("OSFI") recently requested industry and public
comment by October 15, 2008 on changes affecting the materiality
criteria for nominal and immaterial related party transaction
Guideline E-6 – Materiality Criteria for Related Party
Transactions (the "Guideline") currently sets thresholds
for permitted related party transactions. These thresholds are
categorized by numerous types of transactions (which are
industry-specific) and are based on transaction-specific and
aggregate dollar thresholds (and calculated by dollar value,
percentage of regulatory capital and specified time periods).
OSFI proposes two major changes to this framework by way of
regulation and amendments to the Guideline.
The proposed regulation (the "Regulation") would
create two new categories of permitted transactions involving
Actively Traded Securities1("ATS"):
Acquisition and Disposition. (a) the
acquisition of ATS of a related party, where the
transaction forms a part of the financial services or products
offered by the financial institution, or is to manage or mitigate
the financial institution's risk, or (b) the
acquisition of ATS of a third party from a related party
or the disposition of ATS to a related party,
where the transaction is effected in the financial
institution's ordinary course of business on the secondary
market, through an intermediary, forms a part of the financial
services or products offered by a financial institution, or is to
manage or mitigate the financial institution's risks.
Security Interest. Taking security in ATS of a related
party provided that, in the event of a default, the financial
institution's recourse is not limited to the securities.
The proposed Guideline would consolidate, harmonize and simplify
the categories of transactions and, generally speaking, level the
playing field as between industries in terms of thresholds.
The five broad categories involving related parties proposed
are: (i) purchase or provision of services involving related
parties; (ii) leasing; (iii) purchase or sale of assets (other than
Securities); (iv) acquisition or disposition of Securities of, from
or to a related party; loans, endorsements/guarantees; assignments;
(v) other forms of extending credit to a natural person; and (vi)
The harmonization of transaction-specific and aggregate
thresholds results in new thresholds for some industries where none
existed before (e.g. banks, trust companies and cooperative credit
associations would have new thresholds for non-business loans to
individuals), different calculations for aggregate thresholds for
certain categories of transactions (e.g. banks, trust companies and
cooperative credit associations would have a higher aggregate
threshold for certain credit transactions), and changes in
aggregating period (e.g. calendar versus financial year for certain
life insurance company transactions).
Financial institutions (and in particular the Conduct Review
Committee of the Board of Directors) must review the proposed
Guideline to determine the impact on their internal policies. A
member of the BLG Financial Services Regulatory Group would be
pleased to assist your analysis of the application of the proposed
Guideline or Regulation to your institution.
In addition, this is the first opportunity in more than 10 years
(15 years in the case of insurance companies) for financial
institutions to affect the shaping of the categories, definitions,
and thresholds that form the baseline for the "nominal and
immaterial" exemption to the related party transaction
prohibition. BLG's Financial Services Regulatory Group is also
able to make comments on your behalf to OSFI to amend the proposed
Guideline or Regulation to reflect your institution's interest
1. means "Security that trades on a recognized stock
exchange, commodities exchange or over-the-counter market for which
the market value is readily ascertainable." A Security
acquired through a private placement or public offering where there
is not a significant public float does not meet the conditions of
The Canadian Office of the Superintendent of Financial Institutions ("OSFI") recently ruled that a bank cannot promote comprehensive credit insurance ("CCI") within its Canadian branches under the Insurance Business (Banks and Bank Holdings Companies) Regulations (the "Regulations").
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