Document Properties
- Type of Publication: Guidance Note
- Date: October 2001
- Audiences: Life
This note provides guidance in the application of Bulletin E-6,
"Materiality Criteria for Related Party Transactions of Life Insurance
Companies,” which establishes criteria for determining whether a
transaction with a related party is nominal or immaterial to a life
insurance company.
In an effort to establish a uniform standard for all life insurers,
Bulletin E-6 grouped related party transactions into 13 categories based
on the nature of the transaction and the degree of associated risk. The
bulletin also set out specific materiality criteria for each category.
Recent inquiries about this bulletin have raised an interpretation issue
concerning what constitutes a category 5 transaction (purchase and sale of
actively traded securities) or a category 9 transaction (loans to,
guarantees on behalf of, and investments in non-actively traded securities
of, entities) in the table attached to the bulletin. This guidance note
provides clarification for the following related party transactions:
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the purchase of securities issued by an entity in the control chain; and
-
the purchase of “newly issued” securities of a related party.
A. The purchase of securities issued by an entity that controls the
company
The materiality criteria set out under section 522 of the Insurance
Companies Act (ICA) do not override section 74 of the ICA, which
precludes a company from holding, directly or through a subsidiary, any
shares of, or ownership interests in, an entity that controls it.
Exceptions to this restriction are set out in sections 76 (Holding as
personal representative and security interest) and 76.1 (Holding in market
indexed segregated funds) of the ICA. However, the purchase of shares or
ownership interests issued by an entity that controls the company, where
the holding of such shares or ownership interests is permitted by sections
76 or 76.1 of the ICA, is subject to the self- dealing provisions set out
in Part XI of the ICA. Therefore, a company may make use of the
materiality criteria set out in Bulletin E-6 to enter into such related
party transactions.
B. The purchase of securities of a related party
The type 5 transactions in Bulletin E-6 were categorized as nominal or
immaterial related party transactions on the assumption that:
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it is easier to establish the market value of actively
traded securities;
-
transactions effected through intermediaries such as
brokers, dealers, auction markets and stock markets, are likely to be
on market terms and conditions; and
-
purchases or sales of securities in secondary markets
help to mitigate the risk of collusion with related parties.
Only the following transactions constitute type 5 transactions:
-
the purchase on the secondary market, through an intermediary, of
actively traded securities issued
by a related party;
-
the purchase directly from a related party of actively traded
securities issued by a third party; and
-
the sale directly to a related party of actively traded securities
issued by a third party.
Where the purchase of actively traded securities issued by a related
party, including shares of, or ownership interest in, an entity that
controls the company where the holding of such shares or ownership
interests is permitted by sections 76 or 76.1 of the ICA (see A above),
does not meet the conditions set out in 1 above, the transaction should be
included in category 9. The substance of such transactions is similar to
category 9 transactions (loans to, guarantees on behalf of, and
investments in non-actively traded securities of, entities) because the
proceeds flow directly to the issuer of the securities who is a related
party.
Federally regulated life insurance companies should address any questions
to Mr. Louis Bourgeois, Legislation Specialist, at (613) 990-2957 or by
fax at (613) 998-6716.