Vol. 144, No. 6 — March 17, 2010

Registration

SOR/2010-47 March 1, 2010

BANK ACT

Guidelines Amending the Guidelines Respecting Control in Fact for the Purpose of Subsection 377(1) of the Bank Act

The Minister of Finance, pursuant to subsection 3(4) (see footnote a) of the Bank Act (see footnote b), hereby makes the annexed Guidelines Amending the Guidelines Respecting Control in Fact for the Purpose of Subsection 377(1) of the Bank Act.

GUIDELINES AMENDING THE GUIDELINES RESPECTING CONTROL IN FACT FOR THE PURPOSE OF SUBSECTION 377(1) OF THE BANK ACT

AMENDMENT

1. Paragraphs 5(1)(a) to (m) of the Guidelines Respecting Control in Fact for the Purpose of Subsection 377(1) of the Bank Act (see footnote 1) are replaced by the following:

(a) the number, type and distribution of securities of the bank or any subsidiary of the bank, and the rights, privileges or features attached to the securities;

(b) the value of the equity and the number and type of securities of the bank or any subsidiary of the bank, that the applicant has or proposes to acquire, and the rights, privileges or features attached to those securities;

(c) the involvement of the applicant, any significant shareholder of the bank or any significant shareholder of any subsidiary of the bank, in the business of the bank or subsidiary, and their knowledge or expertise in financial services or in areas relevant to the operations of the bank;

(d) the relationships, agreements, understandings or arrangements

(i) amongst the significant shareholders of the bank or amongst the significant shareholders of any subsidiary of the bank,

(ii) between the applicant and shareholders of the bank or between the applicant and shareholders of any subsidiary of the bank, and

(iii) between the applicant and any person in relation to securities of the bank;

(e) the composition and structure of the board of directors, any committees of the board of directors or any senior management committees of the bank or any subsidiary of the bank, and the voting arrangements of the board and those committees;

(f) whether shareholders, directors or senior officers of the bank or any subsidiary of the bank, are also shareholders, directors or senior officers of the applicant;

(g) the existence of family relationships between the applicant’s directors and senior officers and the directors and senior officers of the bank or any subsidiary of the bank;

(h) the ability of persons, including the applicant, to nominate, appoint or veto the appointment of directors, members of committees of the board of directors or senior officers of the bank or any subsidiary of the bank;

(i) the ability of persons, including the applicant, in respect of the board of directors, any committee of the board of directors or any senior management committee of the bank or any subsidiary of the bank, to

(i) require that prior to the placement of a proposal before that board or committee, as the case may be, the applicant consent to the placement of the proposal, or

(ii) veto a proposal put before that board or committee;

(j) the ability of persons, including the applicant, to determine or veto day-to-day operations, business plans, significant capital expenditures, dividend policy or the issuance of securities of the bank or any subsidiary of the bank;

(k) the material terms and conditions of any agreement or arrangement between the applicant and the bank or between the applicant and any subsidiary of the bank;

(l) the existence of any dependency of the bank or any subsidiary of the bank, on the applicant created by an agreement or other arrangement between them;

(m) any linkages between the applicant and an entity on which the bank has a dependency by reason of an agreement or other arrangement between the bank and the entity;

COMING INTO FORCE

2. These Guidelines come into force on the day on which they are registered.

REGULATORY IMPACT
ANALYSIS STATEMENT

(This statement is not part of the guidelines.)

Issue and objectives

The Bank Act and the Insurance Companies Act prohibit any person from exercising control over a large bank (with equity of $8 billion or more), or over large demutualized insurers (those with aggregate surplus and minority interests of $5 billion or more at the time of demutualization, or the holding companies that have held the converted companies since demutualization). In a transaction where an applicant seeks the approval of the Minister to acquire a significant interest (more than 10%) of such financial institutions, the Minister needs to assess whether the transaction would result in control.

The legislation provides that the Minister may make guidelines respecting what constitutes control. Accordingly, the control guidelines set out the policy objectives to be considered and the factors to be taken into account by the Minister in determining control. The control guidelines are directed at maintaining the flexibility to address the unique facts of each transaction, while at the same time providing guidance as to the criteria that would be considered in assessing control.

When assessing a transaction, the Minister would examine the specific facts in light of the factors and assess how they relate to the policy objectives. If an applicant has influence according to any one or more of the factors, this would not necessarily constitute control, as no one factor or combination of factors is necessarily determinative of control.

The factors to be taken into account include whether there is any “significant dependency” of the institution on the applicant or whether any “significant subsidiary” of the institution has a “significant dependency” on the applicant.

Description and rationale

The amendments would remove the word “significant” from the terms “significant subsidiary” and “significant dependency” of the Guidelines.

The Standing Joint Committee for the Scrutiny of Regulation noted that, unlike the term “significant shareholder” that is defined in the Guidelines, the terms “significant subsidiary” and “significant dependency” were not defined, and suggested defining them in the Guidelines.

The Department of Finance has considered defining the word “significant.” However, it was determined that, as every transaction presents a unique set of facts, defining “significant subsidiary” and “significant dependency” would be restrictive and would reduce the Minister’s flexibility to address the wide array of possible transactions that might arise. There is no other alternative but regulatory amendment.

The amendments are not intended to reflect a more stringent determination of control. Rather, removing the word “significant” from these terms would remove uncertainty as to the meaning of “significant,” while providing flexibility to address the wide array of possible transactions that might arise and guidance as to the criteria that would be considered in assessing control.

Consultation

Given the technical nature of the amendment, no consultations with industry stakeholders were necessary.

Contact

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

Footnote a
S.C. 2001, c. 9, ss. 37(3)

Footnote b
S.C. 1991, c. 46

Footnote 1
SOR/2002-163

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