Department of Finance
Mr. Jonathan G. Katz
Re: Proposed Rule - Foreign Bank Exemption From the Insider Lending
Dear Mr. Katz:
On behalf of the Department of Finance, I would like to commend the efforts undertaken by the Securities and Exchange Commission (SEC) to address the national treatment concerns that have arisen from Section 402 of the Sarbanes-Oxley Act. The release of this Proposed Rule, which would provide an exemption for foreign banks similar to that included in Section 402 for their U.S. counterparts, is a welcome development.
My purpose in writing this letter, however, is to express our concern that Canadian banks registered and reporting with the SEC would be unable to qualify for the exemption as it is currently drafted, due to differences between the U.S. and Canadian regulatory regimes for insider lending. Given the robustness of Canada's regulatory approach, I believe this outcome would be both unintended and inconsistent with the SEC's stated goal of extending national treatment to foreign banks subject to similar regulation.
Canadian banks are subject to consolidated and comprehensive regulation and supervision, as provided for in Canada's Bank Act and undertaken by the Office of the Superintendent of Financial Institutions. Banks accepting retail deposits, which include the six Canadian banks registered with the SEC, must also be members of the Canada Deposit Insurance Corporation. Part XI of the Bank Act, concerning self-dealing, strictly limits the ability of banks to extend loans to related parties, including senior officers and directors. In general, such loans must be made on "market terms and conditions." They are also subject to prudential thresholds based on total amounts outstanding to the given insider and to all related parties, as a percentage of regulatory capital. In addition, a senior officer may acquire a loan only if the aggregate principal amount of all his/her outstanding loans (excluding certain secured loans, such as the mortgage on a principal residence) would not exceed the greater of twice his/her annual salary and CA$100,000.
Within this strict insider-lending framework, Section 496(4) of the Bank Act permits a bank to grant loans to senior officers on terms and conditions more favourable than those offered to the public, provided these terms and conditions have been approved by the bank's conduct review committee. This committee of the board must be fully composed of directors independent of management, with a majority unaffiliated. The benefit accruing to a senior officer through such a loan is also considered to be a taxable benefit under Canadian law.
As indicated, Section 496(4) of the Bank Act provides the option to banks of providing preferential loans to senior officers, under certain specific conditions. This provision, however, would appear to disqualify Canadian banks from the SEC's proposed exemption. Section 13k-1(b)(2) of the Proposed Rule requires the "laws or regulations of the foreign bank's home jurisdiction" to restrict the granting of loans to executive officers or directors made on preferential terms unavailable widely to employees pursuant to a benefit or compensation program. Canadian banks would therefore appear to be unable to access the exemption without legislative changes, despite being subject to a robust framework for insider lending.
I understand that Section 13k-1(b)(2) of the Proposed Rule reflects the insider lending principles with which U.S. banks must comply under the Federal Reserve Board's Regulation O. I also appreciate that the Proposed Rule was drafted with a view to ensuring that foreign banks have appropriate insider lending safeguards, while accommodating the diversity of regulation in home jurisdictions. I would suggest that the current formulation of Section 13k-1(b)(2), which is based upon the existence of specific regulation in the home jurisdiction, does not provide sufficient flexibility to allow foreign banks to qualify for the proposed insider lending exemption.
In a separate intervention on this issue, the Canadian Bankers Association (CBA) has outlined an approach that would permit Canadian banks to comply with the insider lending standards identified as important by the SEC, without necessitating legislative changes. This revision to the Proposed Rule would allow foreign banks to qualify for exemption based on compliance "in fact" with the standards set out in Section 13k-1(b)(2), without reference to the laws or regulations in the home jurisdiction. We view this approach to be both sound and equitable. It increases the flexibility afforded to foreign banks to qualify for the exemption while maintaining the insider lending standards the SEC views as important for fostering investor confidence. We therefore encourage the SEC to look favourably upon the CBA's proposal.
I appreciate the opportunity to comment on the Proposed Rule and once again thank the SEC for its work to date on the insider lending issue. We look forward to continuing this constructive dialogue in the ongoing implementation of the Sarbanes-Oxley Act.
c.c. Mr. Wayne A. Abernathy, U.S. Department of the Treasury