On May 9, the New York State Department of Financial Services (NYDFS) issued proposed guidance to New York State-regulated banking organizations and regulated non-depository financial institutions to notify them of NYDFS’s expectation that they update their framework for the assessment of the character and fitness of their directors, senior officers, and managers.

NYDFS said it expects such a new assessment upon onboarding and on an ongoing basis.

“As part of my broader review of the Department’s regulations, guidance, and processes, I identified character and fitness standards as a policy priority,” said NYDFS Superintendent Adrienne Harris. “In light of recent events, this updated guidance takes on even greater relevance, as we work to ensure New Yorkers can have confidence in the management of our state’s financial institutions.” 

Senior officers

The 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 and 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 the covered institution.

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, 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 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.

The rationale

NYDFS says it has found that although covered businesses 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part of the appointment and onboarding process, (1) the investigative resources and standards for such reviews may be outdated and in need of modernization, and (2) such businesses should also have a robust process for on-going review, to confirm that there have been no intervening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, such a person could have a new or materially different conflict of interest arise following their initial vetting or there could be a change to his or her judicial records, each of which could weigh against that person’s fitness to continue in their current position.

Institutions covered

These expectations are ongoing at all covered firms, but they also extend to various corporate or organizational transactions, such as a merger or acquisition, 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 not merely rely on any previous vetting or due diligence performed.

Each covered entity 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, like an enforcement action, and if that individual then joins another covered institution, they should be subject to an enhanced review by the hiring firm, to ensure that the person did not play a significant role or otherwise contribute in a meaningful way to the conduct leading up to such regulatory action or proceeding.

Risk-based approach

Covered institutions should take a risk-based and proportionate approach to implementing the proposed guidance, NYDFS says, with the nature, depth and frequency of ongoing assessments tailored, as appropriate, to the complexity and risk profile of the institution.

A covered institution should review materials generated in connection with its 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 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.

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.

NYDFS encourages comments on the proposed guidance and the agency’s “Suggested Questions to Facilitate Initial and Ongoing Assessment of Designated Persons’ Character and Fitness” included at the end of the guidance. Comments must be submitted by June 30, 2023.