On January 20, 2014, Canada's federal financial institutions regulator, the Office of the Superintendent of Financial Institutions (OSFI), released for comment a draft Advisory setting out new requirements for prior notification to OSFI of potential changes to directors or senior officers of Canadian federally-regulated financial institutions (FRFIs). The draft Advisory complements OSFI's Corporate Governance Guideline, released in January 2013, which provides that FRFIs should notify OSFI of any potential changes to the membership of the "FRFI Board and Senior Management and any circumstances that may adversely affect the suitability of Board Members and Senior Management". The draft Advisory also supplements OSFI's 2008 Guideline E-17 (Background Checks on Directors and Senior Management of Federally Regulated Entities (FREs)), which sets out OSFI's expectations for FRE internal policies and procedures regarding assessments of proposed directors and senior officers. The Corporate Governance Guideline does not apply to branch operations of foreign banks and foreign insurance companies and therefore the draft Advisory should similarly not apply to such branch operations. By comparison, Guideline E-17 does apply to branch operations in Canada. OSFI is expected to release a draft updated/expanded Guideline E-4A (Role of the Chief Agent and Record Keeping Requirements) in early 2014 that is anticipated to better and more clearly align the governance expectations for branches with those applicable to companies under the Corporate Governance Guideline. The draft Advisory is open for comment until February 28, 2014.
The draft Advisory reflects a significantly more intrusive approach by OSFI into the corporate governance of FRFIs and is consistent with OSFI's recently increased focus on corporate governance and the recent establishment within OSFI of a dedicated corporate governance working group. However, the provisions appear to be a step backward from the approach under Guideline E-17, which placed responsibility for assessing proposed directors and officers on the financial institutions themselves, rather than OSFI, but which pre-dated the global financial crisis and OSFI's resulting increased focus on corporate governance. While significantly more onerous than current requirements, the draft Advisory is not as intrusive as the procedures in certain other major jurisdictions, such as the United Kingdom, where the regulator more actively interviews proposed candidates before appointment to determine whether they are "fit and proper" for the proposed position and will reject candidates determined not to be fit and proper.
The draft Advisory also more closely follows an interim December 2012 draft of the Corporate Governance Guideline, which proposed that OSFI should be informed in a timely fashion of proposed appointments prior to the candidate's formal nomination. That concept was strenuously resisted at the time by industry associations and was deleted from the final version of the Corporate Governance Guideline. The applicable industry associations would likely be expected to push back on the similar proposed requirements in the draft Advisory.
Key elements of the draft Advisory
The composition of an FRFI's Senior Management, as defined in the Corporate Governance Guideline, will vary from institution to institution. Senior Management will generally be composed of the CEO and individuals who are directly accountable to the CEO. In addition to the CEO's direct reports, such as the heads of major business platforms or units, Senior Management will also generally include the executives responsible for the oversight functions, such as the Chief Financial Officer (CFO), Chief Risk Officer (CRO), Chief Compliance Officer (CCO), Chief Internal Auditor and Chief Actuary (CA).
The draft Advisory requires early notification in writing to the FRFI's OSFI Relationship Manager of a candidate's appointment or nomination for election as follows:
Senior Management Positions: At least thirty (30) days before the candidate would be officially appointed (under exceptional circumstances (e.g., emergencies), where a timely appointment is deemed necessary for the purpose of a FRFI's operational requirements, pre-notification to OSFI may occur in a shorter timeframe but as early as possible).
Director Positions: As soon as the preferred nominee for election or appointment is identified.
As part of the written notification, the FRFI should provide to OSFI:
The curriculum vitae of the candidate, which should demonstrate that the candidate has the qualifications and experience appropriate for the position to which it is proposed they be appointed;
The rationale for the candidate's selection; and
The effective date of the proposed appointment.
FRFIs should also provide the following to OSFI, once available:
A copy of the draft internal and/or public announcement of the appointment; and
The results of the assessment under the FRFI's internal policy adopted pursuant to Guideline E-17.
OSFI recognizes the importance of FRFIs' ability to make independent decisions, including decisions on the appointment of senior management or nomination of directors, in the course of conducting their day-to-day business. To the extent that OSFI may have any specific concerns regarding the appropriateness of a candidate, OSFI will inform the board of the FRFI, as appropriate, prior to the candidate's appointment or nomination for election.
For large, complex FRFIs (including domestic systemically-important banks), OSFI may request an introductory meeting with a new director or senior officer following their appointment. Introductory meetings will generally occur within four months, and no later than six months, following the appointment or election of a candidate. The introductory meeting is intended to facilitate open communication between OSFI and the FRFI board and senior management and to contribute to OSFI's overall assessment of the corporate governance practices of FRFIs, with the ultimate objective of promoting safety and soundness.
The meeting will be conducted with the Deputy Superintendent of Financial Institutions, Supervision Sector; the Managing Director, Corporate Governance Division and the FRFI's OSFI Relationship Manager or their delegate.