E. Permitted Self-Dealing

• Author: M.H. Ogilvie
• Profession: LSM, B.A., LL.B., M.A., D.Phil., D.D., F.R.S.C. Of the Bars of Ontario and Nova Scotia Chancellor's Professor and Professor of Law, Carleton University
• Pages: 167-169

Page 167

Since 1991, the Bank Act has provided that banks may engage only in certain types of transactions with related parties such as directors and officers. The purpose of these provisions is to ensure that a bank does not enter into any transactions with persons who may exercise influence over the bank’s affairs. The general approach of Part XI of the Act is to prohibit self-dealing transactions entirely except for specific exceptions. Responsibility for ensuring compliance with Part XI is posited with a bank’s conduct review committee of the board that must review all such transactions and report them annually to the Office of the Superintendent of Financial Institutions (OSFI).¹²⁴

Section 489(1) of the Act provides that a bank shall not enter into any transaction with a related party of the bank either directly or indirectly. The definition of a "related party" is extensive but includes a shareholder with a significant interest in any class of shares; a director or "senior officer"¹²⁵of a bank or a body corporate that controls a bank; a spouse or partner or child of a director or senior officer below eighteen years of age; or an entity controlled by any of these persons.¹²⁶

The Superintendent may also designate any person as a related party.¹²⁷ Pro-

Page 168

hibited transactions include guarantees; investments in any securities of a related party; or taking a security interest in the securities of the related parties.¹²⁸

Loans include deposits, financial leases, conditional sales contracts, repurchase agreements, or any other similar arrangement for obtaining funds on credit.¹²⁹

However, certain related party transactions are permitted: (i) transactions of a nominal or immaterial value as measured by criteria established by the conduct review committee and approved in writing by the Superintendent;¹³⁰(ii) loans, guarantees, and assignments if fully secured by securities of, or guaranteed by, the federal or provincial governments;¹³¹(iii) deposits by the bank for clearing purposes with a Canadian Payments Association (CPA) direct clearer or clearing group;¹³²(iv) loans from the related party;¹³³(v) acquisitions of securities guaranteed by the federal or provincial governments;¹³⁴(vi) acquisition of goods for use in the ordinary course of business;¹³⁵(vii) sales of any assets if fully paid for in money and there is an active market for those assets;¹³⁶(viii) leases from and to a related party for use in the ordinary course of business;¹³⁷(ix) any assets from or to a related party of the bank under a sale agreement approved by the minister;¹³⁸(x) written contracts for services provided and used in the ordinary course of business;¹³⁹and (xi) any transactions with the bank holding company or any other related company in the...