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 exceptions.
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) other transactions.
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 or experiences.