For many years, financial institutions that are members of CDIC and entities selling and/or holding deposit products for clients have held constant to the truism that deposits held in a trust account are entitled to separate and distinct CDIC coverage in addition to the coverage available to each beneficial owner of the trust account. CDIC has recently published a Paper, that has not received much publicity, in which it proposes a number of significant changes with regard to trust accounts. The proposed changes, if adopted, will impose significant new requirements on CDIC members and depositors, including trustees. The proposed changes will also apply to joint accounts.
Currently, for a deposit owner to benefit from the separate coverage afforded to trust accounts, the interests of the legal owner must be disclosed on the records of the member institution. CDIC’s proposals, that effectively expand and clarify this basic requirement, will have a significant impact on CDIC member institutions and their systems and raise significant legal and fiduciary issues for entities that acquire deposit instruments for third parties that will be covered by CDIC only if the proposed disclosure requirements are met.
If an entity failed to take steps to fulfill these requirements, the entity should consider the implications of such failure. Given the potential quantum of loss in the event of the failure of a CDIC member, an adverse decision in the courts may result in an overwhelming award of damages.
The proposals would require CDIC members to:
- accept information disclosing beneficial and/or legal interests in joint accounts and trust accounts and ensure that their systems make such information readily accessible;
- systematically identify accounts as trust accounts and distinguish single beneficiary trust accounts from multi-beneficiary accounts;
- request and record beneficiary information (name, address, birth date or SIN) when a trust arrangement is disclosed; and
- annually remind trustees of multiple beneficiary trusts of annual disclosure requirements.
For CDIC members, sophisticated trust structures will pose an additional burden in meeting these requirements.
The implementation of the proposals would necessitate trustees’ consideration of a number of issues, including
- privacy issues relating to disclosure of information regarding beneficiaries; and
- if, and how, to respond to demands for information from CDIC members.
As the effect of the proposed changes is not certain, we recommend that all CDIC members, and trustees (and other entities) that acquire deposits for the benefit of others, including pension funds and mutual funds, carefully review the CDIC Paper (which can be found on the CDIC website) and determine their impact on their operations, activities and risk profile. CDIC is accepting comments with regard to the Paper until August 15, 2009.