OSFI moves to modernize the vested asset regime

On March 29, 2021, the Office of the Superintendent of Financial Institutions (“OSFI”) released a letter indicating that it will be revising the vested asset regime for foreign insurance companies operating as branches in Canada (the “Letter”). The Insurance Companies Act (Canada) requires foreign insurance companies (“Companies”) to maintain in Canada an adequate margin of assets in respect of their insurance business in Canada. The Canadian branch of the Company (the “Branch”) must vest these assets in trust pursuant to the OSFI Standard Form Trust Agreement (Form 541) in a Canadian financial institution selected by the Branch (a “Trustee”).

Background

OSFI’s Standard Form Trust Agreement (Form 541) is the tri-party agreement between the Superintendent of Financial Institutions, the Company and the Trustee regarding the Trustee’s appointment and the assets that are eligible to be vested on the Branch’s behalf. The Terms and Conditions of the Standard Form Trust Agreement (Form 542) sets out, among other things, the types of assets that may be vested without OSFI’s pre-approval in Schedule A. The approved investments on Schedule A currently include:

• Cash
• Canadian Government or Corporate Bonds, Debentures and other Evidences of Indebtedness
• Canadian Common and Preferred Shares; and
• Guaranteed Investment Certificates

All requests to vest non-preapproved assets to, or release assets from, Branch trust accounts must be accompanied by a completed OSFI Form 298. All OSFI Form 298 submissions must be approved by the OSFI Securities Administration and Approvals Reporting Unit before the non-preapproved assets may be invested or released from trust.

Amendments

The Letter proposes three amendments to the current vested asset regime.

First, the types of assets that may be vested without OSFI’s approval will be modified to include investment grade debt and securities from the United States (U.S.). To be considered an investment grade issue, the debt must be rated at ‘BBB’ or higher by Standard and Poor’s or ‘Baa3’ or higher by Moody’s. The permissible assets in Schedule A of Form 542 presently do not include federally guaranteed debt issued by the U.S. government or U.S. securities. The revised list of assets also specifies that cash held in the vested trust account may be denominated in U.S. or Canadian dollars. The assets must meet the following criteria:

1. The assets may include cash or assets in which the Branch may invest its funds pursuant to the Branch’s investment and lending policies, standards and procedures;
2. The assets must be free of all liens, charges and encumbrances and may not be used for securities lending purposes;
3. The assets vested in trust, other than cash and obligations of the Government of Canada, must be liquid tradable securities deposited with the Canadian Depository for Securities Ltd.; and
4. The assets must be payable in Canadian or United States dollars.

Second, OSFI Form 298 will be revised to capture additional information, including confirmation that the transactions are in accordance with the financial institution’s risk tolerance and its investment policy. The Branch would also be required to include the par value, maturity or interest rate applicable to the assets in the security description for the assets.

Third, OSFI intends to standardize the monthly filing process for Trustees. Trustees are required to file statements of assets held along with their respective market values on or before the fifteenth of each month with the Superintendent. OSFI intends to standardize this process by requiring all filings to be submitted via OSFI’s Regulatory Reporting System. OSFI anticipates that this feature will be available later in 2021.

Conclusion

The proposed amendments will modernize OSFI’s approach to the oversight of foreign insurance companies operating in Canada. The amendments to Schedule A provide greater flexibility to investing in the North American equities market and will reduce the administrative burden associated with seeking approval to vest certain U.S. assets. The amendments to Form 298 will likely reduce follow-up communications between OSFI and the Branches as OSFI will have access to the necessary information in the initial submission, which will likely expedite the review process. 

OSFI is accepting comments on the above proposed amendments by email at SAAR@osfi-bsif.gc.ca until April 23, 2021. The final amendments and implementation schedule are expected to be published in spring 2021.