I. Introduction

On May 9, New York State Department of Financial Services (DFS or the Department) Superintendent Adrienne A. Harris issued proposed guidance to clarify the DFS’s updated expectations regarding the review and assessment of the character and fitness of directors and senior officers (Proposed Guidance).¹ The Proposed Guidance came on the heels of the DFS’s March 12 seizure of Signature Bank, which, according to the DFS, exhibited “emerging weaknesses in corporate governance” prior to its collapse.²

The Proposed Guidance would apply to all “New York State-regulated banking organizations and regulated non-depository financial institutions” chartered or licensed under the New York Banking Law (Covered Institutions). Although these terms are not explicitly defined in the Proposed Guidance, the Department has used similar ones to refer to all “New York chartered banks, credit unions, and New York-licensed branches and agencies of foreign banking organizations,” as well as “New York-regulated mortgage banks, mortgage servicers, mortgage brokers, money transmitters, check cashers, licensed lenders, sales finance companies, premium finance agencies, limited purpose trust companies and virtual currency companies.”³

Among other things, the Proposed Guidance sets forth an expansive definition of “senior officers” for whom enhanced character and fitness vetting must be conducted at onboarding and on an ongoing basis. It also would require Covered Institutions to expand the vetting process to consider, among other things, the role a senior officer played in the failure of an institution or in significant regulatory issues previously in their careers.

Covered Institutions should review the Proposed Guidance and their existing practices and evaluate the extent of the impact this proposal might have on their corporate governance and oversight policies, procedures and processes. They also should consider submitting a comment to the DFS to identify and address any potential concerns or issues. The DFS is soliciting comments on the Proposed Guidance until June 30, 2023.

II. Key Points

The Proposed Guidance sets forth several criteria for Covered Institutions to enhance their existing policies, procedures and processes related to assessing the character and fitness of their “board of directors, board of trustees and/or board of managers . . . and each senior officer of a Covered Institution” (Designated Person or, collectively, Designated Persons). According to the DFS, the Proposed Guidance is intended to supplement, but not “supplant or supersede,” any existing vetting and due diligence obligations of a Covered Institution.

Among other things, the Proposed Guidance advises Covered Institutions to (1) update and modernize policies and procedures to ensure Designated Persons undergo a robust vetting process, both at onboarding and on an ongoing basis; (2) employ a risk-based approach to ensure the vetting framework is tailored to address specific business needs, operations and risks; (3) promptly notify DFS if a determination is made that a previously vetted Designated Person is no longer fit to perform the current function, or if a Designated Person has been transferred to another position or group; and (4) vet each Designated Person at the time they become a Designated Person, regardless of whether the person currently is or previously was a Designated Person at a different Covered Institution.

A. “Senior Officer” Definition

The Proposed Guidance sets forth an expansive definition of “senior officer” that includes every officer who participates or has authority to participate (other than in the capacity of a director) in major policy-making functions, regardless of whether they hold an official title or whether the individual is serving without salary or other compensation.

The term “major policy-making functions” is not further defined; however, the Office of the Comptroller of the Currency (OCC) has used similar language to define “executive officers” and “senior executive officers” whom the OCC would investigate as part of a financial institution’s charter application. There, the OCC has explicitly stated that such terms include “employees of entities retained by a [regulated entity] to perform such functions in lieu of directly hiring the individuals, and for a federal branch operated by a foreign bank, the individual functioning as the chief managing official of the federal branch.”⁴

Similarly, the expansive definition of “senior officer” in the Proposed Guidance would appear to allow the DFS to expand its jurisdictional reach across geographical and organizational boundaries. For example, the DFS could theoretically reach into the parent company of a Covered Institution if officers of the parent company are considered to be participating in major policy-making functions at the Covered Institution.

The functional approach to defining “senior officer,” which goes beyond looking at official titles and the receipt of a salary or compensation, could impose significant compliance and operational burdens on Covered Institutions. For example, Covered Institutions would likely be expected to develop and implement a set of robust and well-documented processes for identifying and monitoring the list of senior officers subject to the enhanced character and fitness assessment framework.⁵

B. Supervision

The Proposed Guidance, if finalized, would not be legally binding on regulated entities because it would not have undertaken the formal rulemaking process under New York State’s Administrative Code. However, the DFS has made it clear that it would expect Covered Institutions to follow the guidance, once finalized, and would be actively monitoring their compliance during the regular examination process.

C. Questions for Assessing Character and Fitness

The DFS appends to the Proposed Guidance an extensive list of suggested questions that a Covered Institution may “adapt for use” in the onboarding and ongoing assessment of its Designated Persons’ character and fitness. Several of the suggested questions implicate existing federal and state laws related to the sharing of confidential supervisory information and employee salary information. Where the Proposed Guidance would be inconsistent with existing laws, the DFS reminds Covered Institutions that any information requested from Designated Persons should be made in compliance with all applicable laws.

III. Looking Forward

The Proposed Guidance fits within a larger framework of U.S. regulators’ increasing emphasis on senior management accountability. The shift toward greater accountability is also reflected in the Department of Justice’s new corporate compliance certification announced in March 2022, which requires chief compliance officers and chief executive officers to certify to the effectiveness of their company’s compliance program in all corporate criminal resolutions.⁶

The Proposed Guidance also shares similarities with international frameworks for senior management accountability. For example, the Proposed Guidance aligns closely with the UK Financial Conduct Authority’s Senior Managers and Certification Regime in emphasizing personnel fitness, integrity and the need for ongoing assessments. It also aligns with the European Central Bank’s Guide to Fit and Proper Assessments, which aims to strengthen corporate governance of banks by ensuring management’s experience, reputation, freedom from conflicts of interest, and independence of mind.⁷

Under this backdrop, and in light of the recent seizure of Signature Bank, Superintendent Harris has identified the character and fitness standards set forth in the Proposed Guidance as a “policy priority.” Covered Institutions should therefore review the Proposed Guidance and their existing practices and evaluate the extent of the impact this proposal might have on their corporate governance and oversight policies, procedures and processes. They also should consider submitting a comment to the DFS to identify and address any potential concerns or issues. The period to submit comments ends on June 30, 2023.

Footnotes -

1. N.Y. Dep’t Fin. Servs., Letter re: Proposed Guidance on Assessment of the Character and Fitness of Directors, Senior Officers, and Managers (May 9, 2023), https://www.dfs.ny.gov/industry_guidance/industry_letters/il20230509_guidance_assessment_fitness.

2. N.Y. Dep’t Fin. Servs., “Internal Review of the Supervision and Closure of Signature Bank,” at 27 (Apr. 28, 2023), https://www.dfs.ny.gov/system/files/documents/2023/04/nydfs_internal_review_rpt_signature_bank_20230428.pdf.

3. See N.Y. Dep’t Fin. Servs., Letter re: Diversity, Equity and Inclusion and Corporate Governance (July 29, 2021), https://www.dfs.ny.gov/industry_guidance/industry_letters/il20210729_diversity_equity_incl_corpgov.

4. OCC, “Comptroller’s Licensing Manual: Background Investigations” (Dec. 2021), https://www.occ.gov/publications-and-resources/publications/comptrollers-licensing-manual/files/background-investigations-licensing-manual.pdf.

5. For example, an institution might be uncertain if its head of Internal Audit qualifies as a senior officer due to her possible involvement in policy-making. This unclear categorization hinders effective regulation and complicates the understanding of the Proposed Guidance’s scope and compliance expectations.

6. Assistant Attorney General Kenneth A. Polite Jr. Delivers Remarks at ACAMS 2022 Hollywood Conference (March 22, 2022), https://www.justice.gov/opa/speech/assistant-attorney-general-kenneth-polite-jr-delivers-remarks-acams-2022-hollywood (stating that for all criminal division corporate resolutions, the Department would consider requiring Chief Executive Officers and Chief Compliance Officers to certify at the end of the term of the agreement that their companies’ compliance programs are “reasonably designed and implemented to detect and prevent violations of the law . . . and [are] functioning effectively.”).

7. European Central Bank, Fit and Proper Assessments Webpage (last accessed June 8, 2023), https://www.bankingsupervision.europa.eu/banking/tasks/fit_and_proper_assessments/html/index.en.html.