ARCHIVED — Vol. 146, No. 27 — July 7, 2012

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Prospectus (Federal Credit Unions) Regulations

Statutory authority

Bank Act

Sponsoring department

Department of Finance

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the regulations.)

Issue and objectives

Credit unions represent an important second tier of banking in Canada, with almost one third of Canadians belonging to either a credit union or a caisse populaire. Significant consolidation has recently occurred in the credit union sector with the 10 largest credit unions now representing 41% of credit union system assets. Currently, credit unions are regulated exclusively by the provinces.

To promote the continued growth and competitiveness of the sector and enhance financial stability, the Government of Canada introduced a legislative framework as part of the Jobs and Economic Growth Act (which received Royal Assent in July 2010) involving amendments to the Bank Act and other federal acts to enable credit unions to incorporate and continue federally. The legislative model is based on the framework applicable to banks. The model weaves in unique cooperative elements for federal credit unions and establishes transitional elements to facilitate the migration of credit unions to federal jurisdiction. Legislative amendments embed internationally recognized cooperative principles for credit unions, including the following: each member has one vote, services are primarily for members, and membership is open, but bonds of association (e.g. based on a common workplace) are permitted.

To implement the federal credit union legislative framework, a set of five regulations are required. These regulations include consequential amendments to the Bank Act regulations to adapt the existing framework to allow for cooperative ownership, as well as a series of substantive regulations pertaining to demutualization, deposit insurance disclosure, the payments framework and disclosure to members on the issuance of investment shares. Without the proposed regulations, a credit union would not be able to take advantage of the federal credit union framework.

Description and rationale

This proposed regulatory package includes five regulations.

Prospectus (Federal Credit Unions) Regulations

The requirements for disclosure when issuing securities are set out by provinces. The Regulations would incorporate, by reference, provincial prospectus requirements and provide that an exemption from those requirements constitutes an exemption from federal prospectus requirements. However, the Regulations would stipulate that a federal credit union must provide a minimum level of disclosure to the buyer of a security. For example, the proposed Regulations would require the disclosure of the nature of the business of the credit union, a description of the security being issued, the risks associated with that security, including details of any securities ranking ahead of the security, as well as the capital structure of the credit union.

Regulations Amending the Canadian Payments Association Election of Directors Regulations

The proposed Regulations would amend the existing Canadian Payments Association Election of Directors Regulations with respect to the process for the election of directors for the Canadian Payments Association (CPA) Board. The proposed Regulations specify that, once part of the federal framework, a federal credit union would be required to vote and participate in the governance of the CPA as part of the Cooperatives class, rather than in the Bank class. This would maintain the current level of participation in the governance of the CPA by the credit union movement. The proposed Regulations reflect amendments to paragraphs 9(3)(a) and (b) of the Canadian Payments Act.

Disclosure on Continuance Regulations (Federal Credit Unions)

The proposed Regulations specify the information that must be publicly disclosed to members and customers of the credit union and the process that must be followed to qualify the credit union to continue federally and be eligible for federal deposit insurance. For example, information pertaining to the transition between provincial deposit insurance and federal deposit insurance, as well as the process for how a credit union provides notice to its members and clients of its intention to continue federally.

Federal Credit Union Conversion Regulations

The proposed Regulations specify the process and disclosure required for a federal credit union to change its legal form from a company owned by members to one owned by shareholders. The proposed Regulations contain a series of requirements that must be followed to ensure a fair demutualization process, such as ensuring members are treated equally, mandating a fairness opinion and an independent evaluation of the conversion proposal, as well as restricting management from benefiting unduly from the conversion transaction.

Regulations Amending Certain Regulations Made Under the Bank Act

The proposed Regulations specify consequential amendments to existing Bank Act regulations to make them apply to federal credit unions. For example, amendments are proposed to the Related Party Transactions (Banks) Regulations and the Regulatory Capital (Banks)Regulations to ensure federal credit unions are captured by the requirements set out in the Bank Act regulations.

The proposed regulations implement requirements necessary to operationalize the legislative provisions set out in the Bank Act pertaining to a federal credit union. Together, the legislation and proposed regulations create a complete framework to allow a new type of financial institution under a federal charter. Allowing credit unions to grow and be competitive on a national scale broadens choice for consumers by helping credit unions attract new members and improving services to existing members across provincial borders.

The regulatory framework for federal credit unions is being implemented primarily under the Bank Act to reduce regulatory overlap and confer powers consistent with other federally regulated financial institutions. This approach takes into account changes necessary to preserve the cooperative principles of the credit union movement.

The federal credit union framework is voluntary and was created in response to requests made by credit unions. The proposed regulations do not compel provincially regulated credit unions to be federally regulated.

Consultation

Throughout the development of the proposed regulations, the Department of Finance (the Department) consulted key stakeholders in the credit union system, including provincial governments, individual credit unions, provincial credit union centrals, national centrals, financial sector associations and federal agencies, including the Office of the Superintendent of Financial Institutions (OSFI), the Financial Consumer Agency of Canada and the Canada Deposit Insurance Corporation.

Written comments were received and the Department followed up with stakeholders to address questions of interpretation and points of clarification, for example, clarifying the role OSFI would play in matters of continuance and how a credit union would demonstrate it had met the requirements set out in the proposed regulations. Changes in drafting or policy were not required as a result of stakeholder questions.

Implementation, enforcement and service standards

The regulatory framework for federal credit unions is being implemented primarily under the Bank Act and, as such, the proposed regulations would be administered and enforced by OSFI, the Canada Deposit Insurance Corporation and the Financial Consumer Agency of Canada. This would provide consistency of treatment of entities under the Bank Act.

Contact

Jane Pearse
Director
Financial Institutions Division
Department of Finance
L’Esplanade Laurier, 15th Floor
140 O’Connor Street
Ottawa, Ontario
K1A 0G5
Telephone: 613-992-1631
Fax: 613-943-1334
Email: finlegis@fin.gc.ca

PROPOSED REGULATORY TEXT

Notice is hereby given that the Governor in Council, pursuant to subsection 273.1(2) (see footnote a) of the Bank Act (see footnote b), proposes to make the annexed Prospectus (Federal Credit Unions) Regulations.

Interested persons may make representations concerning the proposed Regulations within 30 days after the date of publication of this notice. All such representations must cite the Canada Gazette, Part Ⅰ, and the date of publication of this notice, and be addressed to Jane Pearse, Director, Financial Institutions Division, Department of Finance, L’Esplanade Laurier, East Tower, 15th floor, 140 O’Connor Street, Ottawa, Ontario K1A 0G5 (tel.: 613-992-1631; fax: 613-943-1334; email: finlegis@fin.gc.ca).

Ottawa, June 19, 2012

JURICA ČAPKUN
Assistant Clerk of the Privy Council

PROSPECTUS (FEDERAL CREDIT UNIONS) REGULATIONS

DISTRIBUTION OF SECURITIES – GENERAL

PROSPECTUS

Contents

1. (1) The information to be disclosed before a distribution of securities of a federal credit union must be set out in a prospectus and must include the contents that are required for a prospectus under the legislation set out in column 2 of the schedule for the relevant jurisdiction set out in column 1.

Procedures

(2) The disclosure must be made in accordance with the procedures for disclosure by prospectus that are required under the legislation set out in column 2 of the schedule for the relevant jurisdiction set out in column 1.

Form

(3) The information to be disclosed must be in the form that is required for a prospectus under the legislation set out in column 2 of the schedule for the relevant jurisdiction set out in column 1.

Other requirements

2. In addition to the requirements set out in section 1, a prospectus filed under any legislation set out in column 2 of the schedule must comply with any other requirements that are set out in that legislation.

EXEMPTION

Exemption from provincial requirements

3. A person that has been exempted under the legislation set out in column 2 of the schedule for the relevant jurisdiction set out in column 1, or by the relevant provincial regulator, from any prospectus requirements under that legislation is also exempt from those requirements for the purposes of sections 1 and 2.

DISTRIBUTION OF SECURITIES – INDIVIDUAL MEMBERS

APPLICATION

Exemption from requirement to provide prospectus

4. A federal credit union that is exempt under section 3 from the requirement to provide a prospectus must comply with the requirements set out in sections 5 to 9 in respect of a distribution of its securities to any of its members who are individuals, other than an issuance of shares as a dividend or patronage allocation under subsection 79(1) of the Bank Act.

DISCLOSURE

Manner

5. Any disclosure that is required to be made by a federal credit union under these Regulations must be made in language that is clear and simple and in a manner that is not misleading.

Written disclosure before distribution

6. (1) Before a federal credit union enters into an agreement with one of its members respecting the distribution of its securities, it must provide that member with a disclosure document containing

  • (a) on the first page, prominently displayed,
    • (i) the statement “No official of the Government of Canada has considered the merits of the matters addressed in this disclosure”,

    • (ii) a statement indicating that the securities are not eligible for deposit insurance coverage by the Canada Deposit Insurance Corporation,

    • (iii) a statement indicating that the agreement is not binding on the member if the federal credit union receives written notice of the member’s intention not to be bound by the agreement not later than the second business day after the day on which the federal credit union provided the information required by this section, and

    • (iv) a statement indicating that the security is not transferrable, except to another member;
  • (b) the name, date of incorporation, and head office address of the federal credit union;

  • (c) the name, municipality of residence and principal occupation of each of the federal credit union’s directors and senior officers, and the title of each senior officer;

  • (d) the name and location of each transfer agent;

  • (e) a brief description of the attributes of the securities being distributed;

  • (f) a description of the risks associated with the securities being distributed;

  • (g) a description of any business that the federal credit union or its subsidiaries, if any, carry on or intend to carry on;

  • (h) details of the capital structure of the federal credit union;

  • (i) details of the use to which the proceeds from the sale of the securities will be put;

  • (j) details of any securities ranking ahead of the securities being distributed;

  • (k) a description of any action, suit or other proceeding to which the federal credit union is a party;

  • (l) a description of any material interest of a director, officer or employee of the federal credit union or any of its subsidiaries in the operations of the federal credit union, generally, or in the securities being distributed, including
    • (i) details of any options to purchase securities of the federal credit union that are held by a director or officer, and the name of any director or officer who holds such options, and

    • (ii) details of any options to purchase securities of the federal credit union that are held by an employee who is not a director or an officer, without naming the employee;
  • (m) a description of every material contract entered into within the two-year period before the date of the distribution;

  • (n) a description of the risk factors associated with the federal credit union;

  • (o) an explanation of any substantial variations in the operating results of the federal credit union within the five-year period before the date of the distribution;

  • (p) the amount of any dividends or patronage allocations paid, or distributions made, by the federal credit union within the five-year period before the date of the distribution;

  • (q) the amount of any undeclared dividends on any shares with cumulative dividend rights;

  • (r) the name and address of the federal credit union’s auditor and a statement indicating that copies of the federal credit union’s most recent interim and annual financial statements are available upon the member’s request;

  • (s) details of the method of distributing the securities and of any commission payable or discount allowable on the distribution;

  • (t) any other material fact; and

  • (u) a statement indicating that the disclosure document constitutes full, true and plain disclosure of all material facts relating to the securities proposed to be distributed.

Disclosure deemed provided

(2) If the document is sent by mail, the federal credit union is deemed to have provided it five business days after the postmark date.

Oral disclosure before distribution

7. (1) Before a federal credit union enters into an agreement with one of its members respecting the distribution of its securities, it must provide the member with the information referred to in subparagraphs 6(1)(a)(ii) and (iii) and paragraphs 6(1)(e) and (i) orally, by means of a person who is knowledgeable about the terms and conditions of the security.

Exception – agreements by electronic means

(2) If an agreement referred to in subsection (1) is entered into by electronic means, the federal credit union is not required to comply with that subsection, but it must, before entering into the agreement, provide the member with the telephone number of a person who is knowledgeable about the terms and conditions of the security.

Other disclosure

8. The document referred to in section 6 must also be disclosed by a federal credit union

  • (a) on each of its websites through which products or services are offered in Canada; and

  • (b) in written format to be sent to any person who requests it.

Advertisements – required content

9. (1) In each of its advertisements for its securities, a federal credit union must disclose how the public may obtain information about the securities and must state that the securities are not eligible for deposit insurance coverage by the Canada Deposit Insurance Corporation.

Market performance

(2) A federal credit union that uses past market performance in an advertisement for a security must represent that performance fairly, must base any hypothetical examples used in the advertisement on realistic assumptions that are disclosed in the advertisement and must state in the advertisement that past market performance is not an indicator of future market performance.

COMING INTO FORCE

S.C. 2012, c. 5

10. These Regulations come into force on the day on which section 10 of the Financial System Review Act comes into force.

SCHEDULE
(Sections 1 to 3)

PROVINCIAL LEGISLATION

Item

Column 1

Jurisdiction

Column 2

Legislation

1.

Ontario

Securities Act, R.S.O. 1990, c. S.5, as amended from time to time

2.

Quebec

Securities Act, R.S.Q., c. V-1.1, as amended from time to time

3.

Nova Scotia

Securities Act, R.S.N.S. 1989, c. 418, as amended from time to time

4.

New Brunswick

Securities Act, S.N.B. 2004, c. S-5.5, as amended from time to time

5.

Manitoba

The Securities Act, C.C.S.M. c. S50, as amended from time to time

6.

British Columbia

Securities Act, R.S.B.C. 1996, c. 418, as amended from time to time

7.

Prince Edward Island

Securities Act, R.S.P.E.I. 1988, c. S-3.1, as amended from time to time

8.

Saskatchewan

The Securities Act, 1988, S.S. 1988-89, c. S-42.2, as amended from time to time

9.

Alberta

Securities Act, R.S.A. 2000, c. S-4, as amended from time to time

10.

Newfoundland and Labrador

Securities Act, R.S.N.L. 1990, c. S-13, as amended from time to time

11.

Yukon

Securities Act, S.Y. 2007, c. 16, as amended from time to time

12.

Northwest Territories

Securities Act, S.N.W.T. 2008, c. 10, as amended from time to time

13.

Nunavut

Securities Act , S.Nu. 2008, c. 12, as amended from time to time

[27-1-o]

Footnote a
S.C. 2012, c. 5, s. 10

Footnote b
S.C. 1991, c. 46