May 9, 2023
To: All Entities Chartered or Licensed Under the New York Banking Law
Re: Proposed Guidance on Assessment of the Character and Fitness of Directors, Senior Officers, and Managers
The New York State Department of Financial Services (“Department”) is issuing this proposal (“Proposed Guidance”) to New York State-regulated banking organizations and regulated non-depository financial institutions to notify them of the Department’s expectation that they update their framework for the review and assessment of the character and fitness of their directors, senior officers, and managers, both upon onboarding and on an ongoing basis. Protecting the safety and soundness of regulated entities is core to the Department’s mission and mandate, and a compromised director, officer, or manager can threaten an organization’s safety and soundness at any time during that individual’s service. As a result, the Department expects regulated institutions to demonstrate robust assessment of the character and fitness of key personnel at the time they are onboarded and on a regular basis thereafter, as an important control and risk management tool.
This Proposed Guidance will be applicable to New York State-regulated banking organizations and non-depository financial institutions licensed or chartered under the New York Banking Law (“Covered Institutions”) and will apply to each member of a Covered Institution’s board of directors, board of trustees and/or board of managers, as applicable, and each senior officer of a Covered Institution (“Designated Persons”).
The term “senior officer” refers to every officer who participates or has authority to participate (other than in the capacity of a director) in major policy-making functions of a Covered Institution. An individual who satisfies this criteria will be considered a senior officer regardless of whether they have an official title or whether the individual is serving without salary or other compensation. Any chief executive officer, chief financial officer, chief operations officer, chief compliance officer, chief legal officer, chief risk officer, president, senior executive vice president, executive vice president, secretary of the board of directors, or treasurer of a Covered Institution is assumed to be a senior officer, unless, by resolution of the board of directors or by the bylaws of the Covered Institution, any such individual is excluded from participation in major policy-making functions and that individual in fact does not participate therein.
The Department has found that although Covered Institutions generally investigate a Designated Person’s background as part of the appointment and onboarding process, (1) the investigative resources and standards for such reviews may be outdated and in need of modernization, and (2) Covered Institutions should also have a robust process for on-going review, to confirm that there have been no intervening circumstances that would make continuation as a Designated Person inappropriate or improper. For example, an existing onboarding assessment may only extend to criminal convictions but may not cover possible conflicts of interest or other forms of misconduct that does not result in criminal conviction. Further, a Designated Person could have a new or materially different conflict of interest arise following their initial vetting or there could be a change their judicial records, each of which could weigh against a Designated Person’s fitness to continue in their current position. This Proposed Guidance informs Covered Institutions that they are expected to have policies and procedures requiring vetting of Designated Persons’ character and fitness both at onboarding and on a regular ongoing basis.1
These expectations extend to various corporate or organizational transactions (including reorganizations or restructurings)—such as a merger or acquisition, a change of control, or a purchase and assumption agreement—whereby an individual who served as a Designated Person at one Covered Institution may join the acquiring, purchasing, or surviving Covered Institution as a Designated Person. In these situations, the acquiring, purchasing, or surviving Covered Institution should subject such individual to its own typical onboarding review upon consummation of the transaction and the subsequent ongoing assessments applied to any other Designated Person. In particular, the continuing or surviving Covered Institution should not merely rely on previous vetting or due diligence performed in connection with a Designated Person’s service at a different Covered Institution and should be responsible for a full and complete vetting of its Designated Persons, both at the time that an individual becomes a Designated Person and on a regular basis thereafter.
As part of the process of developing an appropriate framework for the assessment of a Designated Person’s character and fitness, each Covered Institution should define sensitive issues, warning signs, and other indicators that, if identified during the vetting process, warrant additional scrutiny before the individual is onboarded and permitted to commence services as a Designated Person or permitted to remain in their position. For example, if an individual served as a Designated Person at a Covered Institution that has been subject to a regulatory action or proceeding—including, for instance, an enforcement action or a receivership or conservatorship proceeding—and if that individual then joins another Covered Institution, they should be subject to an enhanced review by the hiring Covered Institution, to ensure that the person did not play a significant role or otherwise contribute in a meaningful way to the conduct that led to such regulatory action or proceeding.
Covered Institutions should take a risk-based and proportionate approach to implementing this Proposed Guidance, with the nature and depth of assessments and the frequency of ongoing assessments tailored, as appropriate, to the complexity and risk profile of the institution. Appended to this Proposed Guidance is a 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. Covered Institutions may tailor these suggested questions to their specific business needs, operations, and risks. Covered Institutions are reminded that any information requested should be made in compliance with all applicable laws.
A Covered Institution should review materials generated in connection with their onboarding and ongoing character and fitness assessments and should report related findings to its board of directors or the equivalent function, as well as the chief compliance officer or equivalent function. Additionally, each Covered Institution should require Designated Persons to amend relevant materials between designated vetting periods in response to intervening circumstances or if a Designated Person later determines that previously submitted information was materially incorrect or has materially changed. If, as a result of a materially adverse finding during an on-going assessment of a Designated Person, a Covered Institution determines to remove a Designated Person from that person’s current position, or transfer such Designated Person to another position or group, or to make modifications to the current functions of such Designated Person, the Covered Institution is required to promptly notify the Department of such determination.
Department examiners will review a Covered Institution’s policies and procedures regarding the onboarding and ongoing assessment of Designated Persons, and whether such onboarding and ongoing assessments are taking place, as part of each institution’s examination.
The Department encourages Covered Institutions to comment on this Proposed Guidance and the suggested questions attached. When commenting, please be as specific as possible about suggestions or concerns.
Please submit all comments by June 30, 2023, to [email protected] and use “Proposed Guidance on Character and Fitness” in the subject line. Submitted comments may be subject to public inspection and should not include any sensitive or confidential information.
If you have any questions about the above, please contact Kathleen Scott at [email protected].
For Comment: Suggested Questions to Facilitate Initial and Ongoing Assessment of Designated Persons’ Character and Fitness
- Acknowledge that you have reviewed and understand the following policies of the Covered Institution and provide in a separate attachment evidence of any documented exceptions to compliance with these policies:
- Gifts and Loan Policy
- Insider Trading Policy
- Electronics Communications Policy
- Social Media Policy
- Data Protection Policy
- Records Management Policy
- Conflict of Interest Policy
- Health and Safety Policies
- Corporate Opportunity Policy
- Harassment and Discrimination Policies
- Outside Business Policy
- Political Contributions Policy
- Personal Trading Policy
- Outside Lobbying Activity Policy
- [Other policies to be added as appropriate]
- For on-going assessment, please indicate that, to the best of your knowledge, you have been in compliance with all above-listed policies [during [year(s)], and have made all disclosures required, including seeking exceptions from these policies as appropriate, and being granted such exceptions.
- During [year(s)], have you been charged with, indicted for, convicted of, and/or pleaded nolo contendere to, any criminal matter (including, but not limited to, driving under the influence, reckless driving, and/or disorderly conduct)?
- Have you or any financial institution with which you are or were associated been sanctioned and/or censured in any way by a banking or securities regulator during [year(s)], including any regulatory sanction, consent order, enforcement order, supervisory agreement, civil monetary penalty, or other administrative penalties?
- Have you been the subject of any professional disciplinary actions, denied a license, and/or had a license suspended or revoked during [year(s)] (e.g., a governmental or professional licensing organization), excepting banking and securities regulators referenced in Question 4?
- Please describe in a separate attachment any civil litigation, investigation, or sanction—including but not limited to any regulatory sanction, consent order/agreement, enforcement order/agreement, or other administrative findings or penalties—in which you have, to your knowledge, been named or have otherwise become involved in your professional capacity, or which have been initiated against a prior employer in connection with your responsibilities in that position, in the preceding ten (10) years.
- Have you ever been dismissed or ask to resign from past employment, including a less than honorable discharge from military service?
- Have you been involved in any of the following filings where the filing was denied, disapproved, withdrawn, or otherwise returned without favorable action by a federal or state regulatory authority or a self-regulatory organization?
- A charter or license application, a depository institution holding company application, or a federal deposit insurance application, in which you were listed as an organizer, director, senior executive officer, or a person that would own or control (either individually or as a member of a group) 10 percent or more of any class of voting securities or other voting equity interest of the institution, or similar position?
- A merger application in which you were listed as a director, senior executive officer, or similar position?
- A notice of change in director or senior executive officer, or similar form, in which you were listed as a director, senior executive officer, or similar position?
- A notice of change in control for a depository institution or other company, or a similar form, in which you were listed (either individually or as a member of a group) as an acquirer or transferee?
- Any other application, notice, or other regulatory or administrative request which was filed with a federal or state regulatory authority or a self-regulatory organization in which you were listed in some capacity?
- Has anyone in your immediate family or an individual living in your household worked for the Covered Institution or an affiliate in [year(s)] If so, please state their name and their relationship to you. “Immediate family” means the spouse of an individual, the individual's children, parents, siblings, or partner.
- Have you or an immediate family member started or continued an outside business relationship with an auditor of the Covered Institution during [year(s)]?
- Please describe in a separate attachment all indebtedness to the Covered Institution or an affiliate that you have incurred [during the past year / since your previous report] (excluding indebtedness associated with a general purpose credit card), and the balance outstanding of all such indebtedness to the Covered Institution or an affiliate at the end of [year].
- Please describe in a separate attachment any lobbying activities in which you have been engaged in your personal capacity during [year(s)] and whether you were registered as a lobbyist in any jurisdiction during [year(s)].
- Please describe in a separate attachment any litigation (unless described above) or bankruptcy proceedings of which you have been a part during [year(s)] and provide copies of all relevant documents.
- Do you owe outstanding child support in connection with any unemancipated child(ren)?
- Please describe in a separate attachment all settlements of litigation (threatened or actual) brought against you in your personal or a professional capacity during [year(s)] and provide copies of all relevant documents.
- Have you or any company with which you are or were associated, during [year(s)]:
- Filed a petition under any chapter of the Bankruptcy Code or had an involuntary bankruptcy petition filed against you or the company?
- Defaulted on a loan or financial obligation of any sort, whether as obligor, cosigner, or guarantor?
- Forfeited property in full or partial satisfaction of any financial obligation?
- Had any liens or other judgments filed against you?
- Had wages or income garnished for any reason?
- Failed or refused to pay any outstanding judgments?
- Have you filed/paid all of your required income and other taxes for [year(s)]?.
- Please list in a separate attachment all companies (whether publicly traded or not) and any organizations (including not-for-profit and/or charitable) of which you have been a member of the board of directors or an executive officer during [year(s)].
- Have you been a senior officer or a board member at a financial institution that filed for reorganization or bankruptcy; became subject to a receivership or conservatorship proceeding; became subject to a resolution or liquidation proceeding; had its license, charter, or registration surrendered or revoked; received financial assistance from a federal or state agency or instrumentality (e.g., FDIC); merged with or been acquired by an institution that received financial assistance from a federal or state agency of instrumentality in connection with the transaction; or otherwise failed or ended business operations?
- Please disclose all compensation received during [year(s)], beyond amounts paid to you as compensation by the Covered Institution.
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I certify that the answers provided in this Questionnaire (including any Attachments) are true and correct to the best of my knowledge, information and belief. I will promptly notify [name, title, contact information] if any of the information in this Questionnaire subsequently becomes inaccurate, incomplete, or changes materially.
1 The Department notes that this Proposed Guidance is intended to supplement, as appropriate, Covered Institutions’ existing vetting and due diligence of Designated Persons and reporting obligations. It does not intend to, and does not, supplant or supersede existing obligations. In particular, Covered Institutions subject to laws and regulations that require timely reporting of certain key facts with respect to Designated Persons (e.g., the obligation to report to the Department the initiation of any administrative, civil, or criminal proceeding pertaining to residential mortgage lending under 3 NYCRR § 38.10) remain subject to those obligations.