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Vol. 138, No. 18 — May 1, 2004 Bank Holding Company Proposal RegulationsStatutory Authority Bank Act Sponsoring Department Department of Finance REGULATORY IMPACT Description The Canadian financial services sector has been undergoing rapid change for the better part of a decade. In 1996, the federal government created the Task Force on the Future of the Canadian Financial Services Sector to review and advise on the nature of change taking place in the sector. In 1998, the Task Force issued a report which included numerous conclusions and recommendations. These findings were carefully reviewed by committees of both the House of Commons and the Senate. These committees largely endorsed the findings of the Task Force. Based on the work of the Task Force and the parliamentary committees, the federal government issued a policy paper in June 1999 entitled Reforming Canada's Financial Services Sector: A Framework for the Future. This document served as the policy foundation for Bill C-8, An Act to Establish the Financial Consumer Agency of Canada and to Amend Certain Acts in Relation to Financial Institutions (FCA Act). Bill C-8 received Royal Assent on June 14, 2001. The FCA Act provides for significant amendments to the laws governing federal financial institutions. As an integrated package, the amendments brought about by the FCA Act promote efficiency and growth in the financial services sector, foster domestic competition, empower and protect consumers of financial services, and improve the regulatory environment for financial institutions. A key characteristic of the FCA Act is the use of regulations to provide for a more flexible regulatory framework for the financial sector. This allows the Government to make modest policy adjustments to the framework in response to significant changes taking place in the global environment in which financial institutions operate. Many regulations are being proposed or modified in order to achieve this policy objective of creating a more flexible regulatory regime. The remaining amendments bring existing regulations in line with changes made to the financial institutions statutes under the FCA Act. This is the thirteenth package of regulations that has been brought forward to complete the policy intent of the FCA Act. The first twelve packages of regulations were published in the Canada Gazette, Part II on October 24, 2001, November 21, 2001, March 13, 2002, April 10, 2002, July 31, 2002, June 19, 2002, July 31, 2002, October 9, 2002, June 18, 2003, February 26, 2003, July 2, 2003, and August 27, 2003, respectively. This document discusses the regulatory impact of the following proposed new regulations: Bank Holding Company Proposal Regulations Currently, a bank may set up a regulated non-operating holding company via a share-for-share exchange. The Bank Act also contains a regulatory authority to develop a second and more flexible mechanism for a bank to set up a bank holding company and to undertake a series of related restructurings. The Regulations are key to providing this necessary flexibility. The Regulations set out the requirements for the contents of a bank's restructuring proposal, the process for shareholders' approval and the process for Minister's approval. The Regulations allow a bank to bundle a number of transactions into a proposal and request a single Ministerial approval. The proposal may include transactions that establish a holding company, set up subsidiaries of the holding company, transfer assets between subsidiaries, and bring in outside investment into non-bank subsidiaries. However, major transactions, such as a change in ultimate ownership of a bank or bank holding company, would not be part of any proposal and would need to be brought to the Minister under the normal Bank Act rules. If the Minister gives effect to the proposal, no additional Ministerial approvals under the Bank Act would be required. Superintendent approvals and any approvals under other federal financial institutions statutes would still be necessary, but would be reviewed concurrently and administratively streamlined. To fully understand the Regulations, they should be examined concurrently with the broader administrative and procedural requirements that would have to be followed for a restructuring proposal. Administrative and Procedural Requirements for Restructuring Proposal Superintendent authorization A bank intending to convert to a bank holding company must have a resolution passed by the board directing management to prepare a proposal for conversion. The bank must then obtain the Superintendent's authorization to distribute the proposal to the bank's shareholders. The Office of the Superintendent of Financial Institutions' (OSFI's) initial authorization to permit distribution of the proposal to shareholders does not prejudge any recommendation that the Superintendent may make to the Minister regarding the merits of the proposal or any Superintendent approvals associated with the proposal. The primary focus of the interaction between OSFI and the bank will be to ensure that OSFI can assess the impact of the proposal on the financial position and risk profile of the bank and all other federally regulated financial institutions in the holding company group. The bank will be expected to provide OSFI with sufficient information to allow OSFI to perform this assessment. This would include: a) the information required under subsection 11(2) of the Regulations; b) information on asset mix, capital, income and liquidity position; and c) any other information that would allow OSFI to ascertain:
(ii) that the bank holding company will be able to provide adequate financial support to its regulated financial institution subsidiaries, and (iii) the soundness and feasibility of the business strategy. The bank should also raise at this time any policy issues or other salient matters relating to the proposal. Amendments Every proposal must indicate that any material amendment to the proposal will require shareholders' approval. If an amendment is brought forward that has a material effect on the proposal, then the materially amended proposal must follow the same process as a new proposal. Timing The Minister will require that the first transaction or other action in the proposal begin within six months of the Minister's approval. Shareholders' voting on fundamental changes Where an entity is undertaking a fundamental change (e.g. continuance) governed by the Bank Act, the shareholders of the entity are entitled under the Bank Act to vote on that fundamental change. If a proposal contains such a fundamental change, then the Minister will require that the shareholders of the affected entity approve the fundamental change. However, if the bank making the proposal wholly owns the affected entity, no separate vote will be required under the Bank Act. Alternatives The enclosed regulations are required in order to bring the policy intent underlying the FCA Act into effect. They are required to round out the implementation of the new policy framework, as outlined in the description. As such, no alternatives to the regulations were considered. Benefits and costs The enclosed regulations are integral to the overall policy objectives of the FCA Act. As such, their cost-benefit justification cannot be separated from the overall costs and benefits of the legislative package itself. The FCA Act provides an improved regulatory structure that balances the competing interests of stakeholders. While individual legislative measures may impose some burden on a particular stakeholder group, there are overall net benefits for all stakeholders. For example, — Consumers benefit from strengthened consumer protection measures, a more transparent complaints handling process, and the advantages brought about by increased competition. — Financial institutions face modestly increased regulation through enhanced regulatory rules and a strengthened consumer protection regime. However, they benefit from greater organizational flexibility and broader powers. The creation of the Financial Consumer Agency of Canada (FCAC) has an annual budget of about $7 million, the cost of which is passed on to financial institutions in the form of allocated assessment. — The Office of the Superintendent of Financial Institutions (OSFI) faces moderately increased regulatory challenges as a result of provisions intended to encourage new entrants, but the cost is offset by improved prudential regulatory powers and increased competition. The exact cost implications for OSFI of the legislative package are not easily calculable. The transfer of responsibility for administering the consumer provisions of the financial institutions legislation to the FCAC reduces OSFI's costs. The relaxed new entrant requirements have increased OSFI's workload and costs, some of which are borne by the new entrants. However, the streamlined approval process has reduced the cost of regulation and cost burden directly borne by financial institutions. In all, it is expected that the improved regulatory structure, once fully implemented, will not have increased OSFI's cost of regulation substantially. Each of the regulations included in this and other packages is intended to implement a specific aspect of the overall policy structure introduced by the FCA Act. The regulations may either be beneficial, cost/benefit neutral, or impose a burden on one or more relevant stakeholder groups. Since the weighing of costs and benefits has been done at the legislative level, the regulations must be examined in light of their contribution to the balance of the overall policy framework that was approved in the FCA Act. While most regulations merely round out the policy intention of a provision in the legislation, in a few cases the scope of the burden borne by a stakeholder group is at least partially determined by the regulations. In respect of the Bank Holding Company Proposal Regulations, the purpose of the Regulations is to create a more streamlined process for financial institutions to create a bank holding company, which should result in lower costs of the reorganization. Consultation The FCA Act and its related regulations are part of a policy development process dating back to 1996. At every stage of the process, stakeholders have been consulted. More recently, working drafts of the enclosed regulation were shared with stakeholders from the banking and insurance industry. Compliance and enforcement The Office of the Superintendent of Financial Institutions will be responsible for ensuring compliance with prudential aspects of the Regulations. The Financial Consumer Agency of Canada will be responsible for ensuring compliance with consumer-related Regulations. Contact Gerry Salembier, Director, Financial Institutions Division, Financial Sector Policy Branch, Department of Finance, L'Esplanade Laurier, East Tower, 15th Floor, 140 O'Connor Street, Ottawa, Ontario K1A 0G5, (613) 992-1631 (telephone), (613) 943-1334 (facsimile). PROPOSED REGULATORY TEXT Notice is hereby given that the Governor in Council, pursuant to section 678 (see footnote a) of the Bank Act (see footnote b), proposes to make the annexed Bank Holding Company Proposal Regulations. Interested persons may make representations with respect to 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 Mr. Gerry Salembier, Financial Sector Policy Branch, Department of Finance, 140 O'Connor Street, Ottawa, Ontario K1A 0G5. Persons making representations should identify any of those representations the disclosure of which should be refused under the Access to Information Act, in particular under sections 19 and 20 of that Act, and should indicate the reasons why and the period during which the representations should not be disclosed. They should also identify any representations for which there is consent to disclosure for the purposes of that Act. Ottawa, April 21, 2004
EILEEN BOYD
BANK HOLDING COMPANY PROPOSAL INTERPRETATION 1. The following definitions apply in these Regulations. "Act" means the Bank Act. (Loi) "bank" means a bank that is widely held, within the meaning of section 2.3 of the Act, and that makes an application under subsection 678(1) of the Act. (banque) "proposal" means a proposal described in subsection 678(1) of the Act. (proposition) CONTENTS OF A PROPOSAL 2. A proposal shall contain (a) a description of the transactions and any actions that would require approval within the meaning of subsection 973(1) of the Act, by which the bank proposes to establish a bank holding company; (b) a description of the transactions and any actions that would require approval within the meaning of subsection 973(1) of the Act, by which shares of the bank holding company are proposed to be exchanged for shares of the bank; (c) a description of any other transactions and any actions that would require approval within the meaning of subsection 973(1) of the Act, that the bank or the bank holding company proposes to undertake in relation to the proposal; (d) the proposed timing of the transactions and actions referred to in paragraphs (a) to (c); and (e) a description of the manner and circumstances in which the bank would seek the approval of shareholders with respect to any amendments to the proposal. DISTRIBUTION OF PROPOSAL 3. The bank shall send the proposal and the independent advisor's report described in paragraph 11(1)(d) to all of its shareholders, together with information about the proposed transactions and actions referred to in section 2 in sufficient detail to permit a shareholder of the bank to form a reasoned judgment about the proposal. SPECIAL MEETING AND APPROVAL BY BANK'S SHAREHOLDERS 4. The bank shall hold a special meeting of the shareholders of the bank in order to obtain their approval of the proposal. 5. Each share of a bank entitles the shareholder to one vote at the special meeting, whether or not the share otherwise carries the right to vote. 6. Subject to section 9, the holders of shares of a class are entitled to vote separately as a class, if the proposal would (a) increase or decrease any maximum number of authorized shares of that class, or increase any maximum number of authorized shares of a class having rights or privileges equal or superior to the shares of that class; (b) effect an exchange, reclassification or cancellation of all or part of the shares of that class; (c) add, change or remove the rights, privileges, restrictions or conditions attached to the shares of that class and, without limiting the generality of the foregoing,
(ii) add, remove or change prejudicially redemption rights, (iii) reduce or remove a dividend preference or a liquidation preference, or (iv) add, remove or change prejudicially conversion privileges, options, voting, transfer or pre-emptive rights, or rights to acquire securities of the bank, or sinking fund provisions; (d) increase the rights or privileges of any class of shares having rights or privileges equal or superior to the shares of that class; (e) create a new class of shares equal or superior to the shares of that class; (f) make any class of shares having rights or privileges inferior to the shares of that class equal or superior to the shares of that class; or (g) effect an exchange or create a right of exchange of all or part of the shares of another class into the shares of that class. 7. Subject to section 9, the holders of a series of shares of a class are entitled to vote separately as a series if the proposal includes anything described in section 6 that would affect the series in a manner different from other shares of the same class. 8. In addition to the right to vote separately that is described in sections 6 and 7, the holders of shares of a class or series are entitled to vote separately as a class or series, as the case may be, if the proposal involves the bank selling all or substantially all of its assets, and the shares of the particular class or series are affected by the sale in a manner different from the shares of another class or series. 9. (1) If the by-laws of a bank provide that, in the case of an amendment to the by-laws referred to in paragraph 218(1)(a), (b) or (e) of the Act, the holders of shares of a class or series are not entitled to vote separately as a class or series on the amendment, and if the proposal deals exclusively with matters in the corresponding provision of these Regulations and does not deal with other matters referred to in section 6, the holders of shares of a class or series are not entitled to vote separately as a class or series on the proposal. (2) In this section, "corresponding provision" means paragraph 6(a), (b) or (e) of these Regulations in relation to paragraph 218(1)(a), (b) or (e), respectively, of the Act. 10. The proposal is approved by the shareholders of the bank when the shareholders, and the holders of each class or series of shares who are entitled to vote separately as a class or series, have approved the proposal by special resolution. APPLICATION TO MINISTER 11. (1) Subject to section 13, an application to the Minister to give effect to a proposal shall include (a) a copy of the proposal referred to in section 2; (b) the resolution of the bank's board of directors instructing the management of the bank to prepare the proposal; (c) the notice of the special meeting referred to in section 4 and the form of proxy and the management proxy circular sent with the notice; (d) an independent advisor's report that states that, with respect to the bank's shareholders, the consideration, or lack thereof, provided in the proposal is fair from a financial point of view; (e) pro forma financial statements and capital adequacy calculations of the bank holding company and all its subsidiaries that are Canadian financial institutions that are referred to in any of paragraphs (a) to (d) of the definition "financial institution" in section 2 of the Act; (f) a business plan of the bank holding company and all its subsidiaries that are referred to in paragraph (e); and (g) the special resolution referred to in section 10, accompanied by a certificate of the bank indicating the results of the votes held in respect of the resolution. (2) The application shall also include an explanation of the reasons why the transactions or other actions referred to in section 2 that would require an approval within the meaning of subsection 973(1) of the Act are necessary or desirable to give effect to the proposal. (3) The application shall also include a list of any provisions referred to in section 14 despite which the bank seeks approval in order to give effect to the proposal and, with respect to any of those provisions that are referred to in paragraph 14(b), an explanation of the reasons why the bank seeks to proceed despite that provision. 12. The Minister may request, in relation to an application made in accordance with section 11, any additional information that the Minister considers necessary for considering the application. 13. No application made in accordance with section 11 is valid unless (a) a notice of intention to make an application under that section has been published at least once a week for a period of four consecutive weeks before the application in the Canada Gazette and in a newspaper in general circulation at or near the place where the head office of the bank holding company is to be situated; and (b) the application is made to the Minister within three months after approval of the proposal by the bank's shareholders. 14. For the purposes of paragraph 678(1)(b) of the Act, the provisions of the Act are (a) subsections 12(3) and 25(2), section 30, subsection 34(1) as it applies to subsection 25(2), subsections 37(2), 56(1) to (3), 75(5), 228(2), 229(3) and 236(2), section 679 and subsections 686(2), 808(2) and 809(3); and (b) subsections 34(2) and (3) and 61(2) and (3), sections 70, 215, and 225, subsections 226(1) to (5), 228(1) and 232(1) to (3), section 233, subsections 234(1) to (4), section 235, subsections 236(1), (3) and (4), 398(1) and (2), 399(1) to (4), 400(1) and (2) and 401(1) and (2), section 401.1, subsections 683(2) and (3) and 705(2) and (3), section 714, section 802 as it applies to section 215, section 805, subsections 806(1) to (5), 808(1), 813(1) to (7), 908(1) and (2), 909(1) to (4), 910(1) and (2) and 911(1) and (2), section 912 and subsections 976(2) to (5). 15. After the Minister has given effect to a proposal under section 678 of the Act, the Superintendent shall cause a notice to that effect to be published in the Canada Gazette. AMENDMENT 16. Any amendment to a proposal must be submitted to the Minister for approval. COMPLETION OF TRANSACTIONS 17. Subject to section 18, all transactions and actions referred to in section 2 in relation to a proposal shall be done within two years after the day on which the first transaction or action is completed. EXTENSION 18. (1) The Minister may, on request, before the end of the period specified in section 17, extend that period on any terms and conditions that the Minister considers necessary. (2) In a request for an extension, there shall be a description of why it is impracticable to complete all transactions and actions referred to in section 2 in relation to a proposal within the period referred to in section 17. COMING INTO FORCE 19. These Regulations come into force on the day on which they are registered. [18-1-o] S.C. 2001, c. 9, s. 183 S.C. 1991, c. 46 |
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