Materiality Criteria for Related Party Transactions

Document Properties

  • Type of Publication: Letter
  • Posted: August 11, 2008
  • Reference: Guideline for Banks / T&L / Co-op / Canadian Life / P&C / Fraternals
  • Our File: P2200-38
  • To:
    • Banks,
    • Federally Regulated Trust and Loan Companies,
    • Federally Regulated Cooperative Credit Associations,
    • Federally Regulated Life Insurance Companies and Fraternal Benefit Societies,
    • Federally Regulated Property and Casualty Insurance Companies,

Draft Guideline E-6 – Materiality Criteria for Related Party Transactions establishes criteria for determining whether a transaction with a related party is nominal or immaterial for the purposes of the legislation governing federally regulated financial institutions (FRFIs).

The revisions to the Guideline are intended to achieve three objectives:

  • provide additional clarity where necessary.

  • reflect legislative changes to the self-dealing regime that have occurred since the original guidelines were issued. For example, the removal of categories that apply to legislatively permitted transactions. Under the current regime, materiality criteria are only needed to allow for some prohibited transactions to be conducted when they are immaterial to the FRFI. Therefore, some categories listed in the original E-6 guidelines are no longer necessary.

  • consolidate and harmonize the three separate FRFI sector guidelines into one in support of OSFI’s commitment to providing a level playing field for all sectors.

Reference should be made to the Guideline Impact Analysis Statement for a more detailed discussion of these objectives.

In addition to the implementation of this Guideline, OSFI intends to propose a regulation that will prescribe as permitted transactions the following two transaction categoriesFootnote 1:

  1. Where the related party transaction consists of:

    1. the acquisition of Actively Traded SecuritiesFootnote 2 of a related party and the transaction:
      1. forms a part of the financial services or products offered by the FRFI or its subsidiary, or
      2. is for the purpose of managing or mitigating the FRFI’s or the FRFI’s subsidiary’s risks; or
    2. the acquisition of Actively Traded Securities of a third party from a related party or the disposition of Actively Traded Securities to a related party, and the transaction:
      1. iis effected in the ordinary course of business of the FRFI or its subsidiaries, on the secondary market, through an intermediary,
      2. forms a part of the financial services or products offered by the FRFI or its subsidiary, or
      3. is for the purpose of managing or mitigating the FRFI’s or the FRFI’s subsidiary’s risks.
  2. Taking a security interest in Actively Traded securities of a related party provided that, in the event of default, the FRFI’s recourse is not limited to the Securities.

The regulation would provide more formal clarity and transparency regarding transactions that would be exempt from the self-dealing regime. The more formal legal drafting used in the regulations to describe the permitted transactions will likely differ from the Guideline, but the substance will not change and there will be no practical impact on institutions subject to the Guideline. OSFI will consult with the industry on the proposed draft regulation.

OSFI expects the materiality criteria in the revised Guideline to be implemented within one year of the effective date of the proposed regulation. Companies that chose to establish their own materiality criteria instead of adopting the criteria in the Guideline are expected to seek the Superintendent's written approval of their criteria prior to the effective date of the Guideline. In reviewing these requests, OSFI will require supporting information as described in the OSFI document entitled Transaction instruction of applications subject to deemed approval process found on OSFI’s Web site at http://www.osfi-bsif.gc.ca/eng/documents/guidance/docs/trans20.pdf.

We would appreciate receiving comments on this draft Guideline or the proposed Regulations by October 15, 2008. Please forward any comments you have to Laural Ross, Director, Special Projects, Legislation and Approvals, at 613-990-6972, by facsimile at 613-998-6716 or by email at laural.ross@osfi-bsif.gc.ca.

  • Robert Hanna
  • Assistant Superintendent
  • Regulation Sector

Footnotes

Footnote 1

The regulation making authority is Bank Act section 500, Insurance Companies Act of Canada section 533, Trust and Loan Companies Act section 488 and Cooperative Credit Associations Act section 424.

Return to footnote 1 referrer

Footnote 2

"Actively Traded Securities" refers to a Security that trades on a recognized stock exchange, commodities exchange or over-the-counter market for which the market value is readily ascertainable. However, a Security acquired through a private placement or public offering where there is not a significant public float does not meet the conditions of actively traded.

Return to footnote 2 referrer