Review of the Trustee Licensing Regulatory Framework: The Results of the Consultation – Questions 5 to 8

Issue Number 5
Corporate Names

Issue

According to the Directive on Trustee Licensing, the name of a corporate trustee can only be composed of the names of one or more trustees or accountants that are practising or have actively practised either as trustees or accountants. The name may also consist of the name of a monitor appointed in Companies' Creditors Arrangement Act proceedings commenced after September 30, 1997, and before September 18, 2009.

Stakeholders favour opening up corporate name provisions. However, they recommend that there should be strict rules to prevent the public from being confused.

Background

The Office of the Superintendent of Bankruptcy (OSB) has received requests to adopt standards that reflect more modern business name conventions.

The Canada Business Corporations Act (CBCA) states that a corporation created under that statute is not allowed to carry on business under a name that is "deceptively misdescriptive."

As pointed out by the Canadian Association of Insolvency and Restructuring Professionals (CAIRP), the naming standards of professional bodies in Canada are intended to promote good taste and the reputation of the profession to maintain the confidence of the public in the profession.

The 2007 Competition Bureau report Self-Regulated Professions suggests that restrictions on firm names may not be necessary to protect consumers.

Analysis

There are two general principles underlying our interest in liberalizing the rules of corporate names:

1. maintaining a fair balance between market demand and protection of the public; and
2. promoting free competition while enabling a firm to develop goodwill in its corporate name.

Regarding maintaining a fair balance between market demand and protection of the public, a comment made by the Superintendent of Bankruptcy in 2005 is still relevant:

Regulation that is too restrictive in the area of corporate names would protect the acquired rights of a limited group of firms, but would limit competition because it would prevent new firms from benefiting from the same advantages. However, regulation that is too liberal may dilute the economic value of some corporate names and potentially confuse the marketplace.

We believe that the criteria set below for corporate names adequately achieve the balance sought between the two principles. As well, given those criteria for unacceptable names, there is no need to insist that the name of a corporate trustee must be composed of one or more names of trustees or accountants.

The OSB also believes it is necessary to address concerns related to claims or assertions within the name that cannot be substantiated by the firm or names that would cause confusion.

Decision

Establish criteria for non-acceptable names

The OSB will amend the Licensing Directive to liberalize the requirements of acceptable names for a corporate trustee. Any corporate name or operating name would be acceptable unless it:

1. is false or misleading;
2. contravenes professional good taste;
3. brings the profession into disrepute; or
4. is not in the public interest in the opinion of the Superintendent of Bankruptcy.

The requirement of the Advertising Directive that a trustee shall always identify himself/herself as a Trustee in Bankruptcy will remain in place.

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Issue Number 6
Closed Company (or Private Company) and Share Ownership

Issue

According to the Directive on Trustee Licensing, a corporate trustee shall be a private or closed company as defined in the applicable legislation.

While stakeholders generally agree that the notion of private company is no longer necessary, they have mixed views on whether or not corporate trustees could be listed on the stock exchange.

Background

Section 14.08 of the Bankruptcy and Insolvency Act and paragraph 22 of Directive No. 13R2, Trustee Licensing, provides that a majority of the directors and a majority of the officers of the corporate trustee shall be licensed trustees. Paragraph 23 of Directive No. 13R2 provides that a corporate trustee shall be a private or closed company. Also, according to paragraphs 24–25, a trustee cannot practise under two different corporations in the same province, except to facilitate successorship. There are no other requirements that govern ownership and control of the corporate trustee.

The notion of a closed company is no longer used in numerous jurisdictions. Instead, the inverse concepts of "distributing company" and "reporting issuer" are used. This situation creates difficulties for enforcing the Directive. Moreover, the Directive does not contain any other restrictions with regard to shareholders.

The 2007 Competition Bureau report Self-Regulated Professions suggests that restrictions on firms' business structure may not be warranted.

In both the United States and the United Kingdom there are insolvency and restructuring firms that are directly or indirectly listed on stock exchanges, which means their securities may be acquired by the public. As well, there is at least one Canadian corporate trustee whose parent company is listed on a stock exchange.

Analysis

The Office of the Superintendent of Bankruptcy (OSB) believes that the requirement of "closed" or "private" company is no longer necessary given the state of current federal and provincial corporate law.

The issue of whether shares of the parent of a corporate trustee could be publicly traded is complex and there are significant differences in the recommendations of major stakeholders.

In setting the limit on the number of shares any shareholder might be permitted to own, one must balance the need for independence versus the need to attract large, stable investors, such as mutual and pension funds.

Consideration has been given to the role of trustees, including the fact that they are "officers of the court" and, as such, must serve the public interest. In contrast, public corporations must first serve the interest of their shareholders rather than the public. There may be instances where the corporate trustee has to choose between the public interest and the shareholders' interest. In addition, publicly traded corporations are subject to relevant provincial legislation and conditions of the stock exchange, which may conflict with restrictions of a regulatory nature. Accordingly, shares of corporate trustees should not be publicly traded.

Decision

Repealing the closed company requirement

The Licensing Directive will be amended to repeal the requirement of "closed" or "private" company. However, shares of corporate trustees will not be permitted to be publicly traded. The OSB will also further review recommendations made by the Canadian Association of Insolvency and Restructuring Professionals (CAIRP) in its submission to address control and conflict of interest concerns.

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Issue Number 7
Licensing Fees

Issue

The Office of the Superintendent of Bankruptcy (OSB) is considering whether annual licensing fees for trustees should be tiered or subject to a scale of fees where the trustee's performance has resulted in higher supervision costs for the OSB.

Most stakeholders support the concept that non-compliant trustees should be responsible for the extra costs of supervision. They suggest that the extra costs could be recovered by the OSB by increasing licensing fees or by charging non-compliant trustees directly for supervision costs.

Background

Since 2002, every individual trustee, including those working for a corporate trustee, plus every corporate trustee has been required to pay an annual fee of $850.

Some trustees require a disproportionately high level of attention and additional supervisory resources by the OSB due to issues of non-compliance.

The OSB considered how similar professions in Canada and other jurisdictions deal with this issue.

Provincial institutes of chartered accountants each require their members to pay the same annual fee.

The Québec Bar has a scale of fees based on two factors other than the performance of the lawyer:

1. whether the lawyer is newly licensed (lower fees); and
2. whether the lawyer is retired (lower fees).

In the United Kingdom, the responsible government agency, "The Insolvency Service," operates on a cost-recovery basis. However, there is no link between licensing fees and the performance of individual trustees.

In Australia, the responsible government agency that regulates personal insolvencies, Insolvency and Trustee Service Australia (ITSA), operates on a cost-recovery basis. ITSA monitors insolvency professionals based on six core areas: registrations and renewals, inspections, education, complaints, inspector-general reviews and disciplinary actions. From these, ITSA assigns a risk rating from 1 to 4 for each practitioner. Once again, however, there is no link between the trustee rating and licensing fees.

Options

At this time, the OSB is considering any or all of the following options, alone or in combination:

1. Base licence fee on the OSB's determination of appropriate risk category
   • The Canadian Association of Insolvency and Restructuring Professionals (CAIRP) commented that adoption of this option would require the OSB to develop a substantive model principled on identifiable and measurable metrics. For example, CAIRP has suggested that the OSB could establish four risk categories for all trustees after allowing for an appropriate materiality threshold based on various factors. Fees assessed at each of the four levels should increase geometrically from the base fee paid by compliant trustees. The amounts should be significant enough to encourage compliance and not be seen by trustees as simply a cost of doing business.
2. Adopt direct cost-recovery system
   • Under this option, the OSB would bill higher risk trustees for the actual costs incurred by the OSB to carry out additional supervision or audits. CAIRP has suggested that the cost should be based on a per diem rate and capped. Another suggestion from the Insolvency Institute of Canada is based on the premise that all trustee offices pay for inspections and monitoring – the more frequently an office is inspected, the more it will pay. Finally, another comment suggested that if a trustee who has been investigated is found at fault, the trustee should pay the investigation costs plus any fine prior to having his/her licence reinstated.
3. Adopt AMPs approach
   • Administrative monetary penalties (AMPs) are sanctions in the form of a monetary penalty imposed by government through an administrative process rather than through criminal prosecution or civil action. Under the AMPs, non-compliant trustees may be charged a penalty for administrative deficiencies.

Decision

The OSB will pursue further development of each option for possible implementation in the future. Part of the process of developing each option would include further consultation with stakeholders.

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Issue Number 8
Succession Agreements and Annual Licensing Reports

Issue

Currently, there is no requirement for trustees to have in place a valid succession agreement or to submit an annual report to the Office of the Superintendent of Bankruptcy (OSB) containing up-to-date information such as financial statements, details of professional liability insurance coverage, compliance issues and confirmation that a succession agreement is in place.

Stakeholders are generally supportive of filing an Annual Licensing Report (Annual Report), which would include information regarding things such as succession agreements and insurance among others. Concerns have been raised regarding filing financial statements of the firm and self-identification of compliance matters.

Background

The absence of a valid succession agreement poses a risk to the integrity of the system and causes unnecessary costs where a trustee becomes incapacitated and conservatory measures must be issued by the Superintendent for the protection of estates. Requiring succession agreements to be in place and including a reporting obligation with regard to details of same would help to better protect the system.

Filing an annual report would ensure that the OSB has up-to-date reporting of trustees' practices and that they are able to perform their fiduciary duties properly.

Many professional bodies, such as members of provincial bar associations, are required to file annual returns with their governing bodies in which they must provide details regarding trust accounts and insurance coverage.

Analysis

There was support, in general, for a requirement that trustees have in place a valid succession agreement.

Filing an annual report would place the onus on trustees to provide up-to-date information to the OSB on key areas of their practice to assure the OSB that they are able to perform their fiduciary duties properly. Failure to file an annual report or filing incomplete or false information should be considered a serious breach that may harm public confidence in the licensing process.

The Bankruptcy and Insolvency Act (BIA) requires that the OSB maintain a record of all complaints against trustees. Complaints against trustees can come from many sources, including debtors, creditors and the general public. It is imperative that all such complaints are disclosed to the OSB. As a means of achieving this goal, trustees could be required to disclose any issues that they have or ought to have reported to their insurer and to provide an attestation that debtors have been advised in writing of their right to complain to the OSB about the trustee.

Decision

1. Mandatory filing of an annual report by all trustees

The Directive on Trustee Licensing will be amended to provide that all licensed trustees are required to file an annual report.

1.1 Succession agreements to be mandatory and details to be included in annual report (individual trustees)

Unfortunately, issues have arisen over the last several years where sole practitioners without valid succession agreements have become unable to continue the administration of their estates. This has damaged the integrity of the insolvency system and resulted in higher costs being incurred by stakeholders. As well, the OSB has, in some instances, been forced to intervene, and in some situations it has not been possible to find a trustee willing to take on the open estates of other trustees.

Succession agreements will ensure continuity in the administration of estates in the event of the death or incapacity of a trustee.

Decision

The annual report will require trustees to report any "succession agreements" they may have in place with successor trustees. This will address issues regarding succession that may arise in the event of death, incapacity or other factors that may prevent trustees from performing engagements. Failure to have a succession agreement in place may increase the risk of stakeholders having to incur higher costs of administration.

Trustees will be required to inform the OSB of any changes related to or affecting the succession agreement.

1.2 Statement attesting to the solvency of the individual and corporate trustee

The Directive on Trustee Licensing requires that trustees be solvent at all times. Clearly, the financial stability of a trustee's practice is fundamental to having confidence in the system. It was proposed that one way for the OSB to receive greater assurance of the solvency of trustees would be to require financial statements. However, financial statements would not provide sufficient information regarding the solvency of trustees. The alternative of requiring an attestation from all trustees as to their solvency received considerable support.

Decision

As an initial step, there will be a statement in the annual report attesting to the solvency of each individual and corporate trustee.

1.3 Details on professional liability insurance and employee dishonesty insurance (individual and corporate trustee)

Paragraph 27 of Directive No. 13R2, Trustee Licensing, requires that trustees "have adequate professional liability insurance and adequate employee dishonesty (also known as fidelity) insurance, a bond or other suitable financial arrangements." As well, paragraphs 14 and 26 require that trustees must continue to meet the requirements of the Directive at all times. By providing the above information on insurance to the OSB on an annual basis, the OSB will be able to readily determine that trustees are in compliance with their insurance requirement.

Decision

The annual report will include the following information on professional liability insurance and employee dishonesty insurance: name of insurance company, policy number, amount of coverage and Insurance Confirmation Authorization allowing the OSB to verify the information with the insurer.

1.4 Disclosure of material matters affecting administration of estates (individual trustee)

The OSB is obligated to maintain a record of all complaints against trustees. By making it a requirement for trustees to advise the OSB in the annual report of material matters that have or ought to have been reported to the trustee's insurer, the OSB will be better able to consider this information in the application of its compliance programs for the protection of the integrity of the insolvency system.

Decision

The annual report will include a requirement to disclose the following information:

• any matters that have or ought to have been reported to the trustee's insurer; and
• an attestation from trustees that debtors involved in a formal insolvency proceeding under the BIA or Companies' Creditors Arrangement Act (CCAA) have been informed of their right to file a complaint with the OSB against the trustee and that debtors (including individuals empowered to bind corporate debtors) have signed an acknowledgement of that right.

1.5 Hours of professional development via self-study and coursework (individual trustee)

It is imperative that all trustees maintain the highest level of insolvency expertise and keep up to date with the latest developments in the field of insolvency. Accordingly, it is reasonable for trustees to advise the OSB on an annual basis of the number of hours of professional development undertaken.

Decision

The annual report will include a requirement to disclose the number of hours of professional development undertaken through self-study and coursework.

1.6 Further development

The OSB will pursue development, including other reporting requirements, for implementation in the future. Part of the process in developing such a report would include consultation with stakeholders.