Guidance Notice on Vetting Members of Administrative and Supervisory Bodies in accordance with the Banking Act and the Insurance Supervision Act

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Provisions on vetting members of administrative and supervisory bodies were inserted in the Banking Act ( Kreditwesengesetz – KWG ) and the Insurance Supervision Act ( Versicherungsaufsichtsgesetz – VAG ) for the first time by virtue of the Act to Strengthen Financial Market and Insurance Supervision (Gesetz zur Stärkung der Finanzmarkt- und der Versicherungsaufsicht) of 29 July 2009, Federal Law Gazette I p.
2305. Further relevant provisions were inserted in the
KWG by virtue of the Act governing the Restructuring and Proper Liquidation of Credit Institutions, the Establishment of a Restructuring Fund for Credit Institutions and Extension of the Limitations Period in respect of Governing Body Liability under Stock Corporation Law ( Gesetz zur Restrukturierung und geordneten Abwicklung von Kreditinstituten, zur Errichtung eines Restrukturierungsfonds für Kreditinstitute und zur Verlängerung der Verjährungsfrist der aktienrechtlichen Organhaftung ) of 9 December 2010, Federal Law Gazette I p.
1900. These provisions lay down notification requirements, substantive requirements and the measures available to be taken with respect to the relevant office bearers.

Business sign: BA 53-FR 1903-2012/0003

03.12.2012

The provisions of the Banking Act apply to institutions and financial holding companies, while the provisions of the Insurance Supervision Act apply to primary insurance and reinsurance undertakings, pension funds, insurance holding companies, special-purpose insurance companies and mixed financial holding companies. "Undertaking" will be used below as an umbrella term for all of these types of entities.

The extent of the requirements imposed on the members of administrative and supervisory bodies when performing their functions depends specifically on the size and systemic relevance of the undertaking, as well as the nature, scale, complexity and risks inherent in the undertaking’s business (hereinafter referred to as the "test criteria").

I. Substantive requirements

In view of the significance of the financial sector, including for the real economy, members of administrative and supervisory bodies must be able to understand the transactions entered into by their undertakings, assess the inherent risks and, if necessary, enforce changes in management. [1] For this reason they are required to possess the requisite degree of expertise and reliability referred to in section 36 (3) sentence 1 KWG and section 7a (4) sentence 1 VAG . [2] Concerning these substantive requirements for office bearers the personal and autonomous exercise of office is essential.

1. Expertise

The expertise of members of administrative and supervisory bodies must be reasonably proportionate to the "test criteria".

In the case of listed corporations within the meaning of section 264d of the Commercial Code ( Handelsgesetzbuch – HGB ), section 100 of the Stock Corporation Act ( Aktiengesetz – AktG ) requires at least one independent member of the supervisory board to possess expertise in the areas of auditing or accounting. For other undertakings, the composition of the administrative or supervisory body must be such as to ensure that it is able to perform its control function.

Members of administrative or supervisory bodies may have already acquired the requisite expertise through (previous) experience in the same sector, for example as a member of management or of the administrative or supervisory body of a similar undertaking.

(Previous) experience

in other sectors; in public administration; or as a result of holding a political office;

may establish the required expertise if such experience substantially relates to commercial and legal issues, is acquired over an extended period, and was or is not entirely of a subordinate nature.

As a rule, general commercial expertise is assumed in the case of merchants within the meaning of sections 1 et seq.
HGB and farmers and foresters and other traders within the meaning of section 141 of the Fiscal Code ( Abgabenordnung – AO ) who have an obligation to keep accounts. These individuals may be considered to possess the necessary degree of expertise depending on the size and business model of the undertaking.

Please note the following special cases:

a) Members of administrative and supervisory bodies subject to co-determination

In the case of co-determined administrative and supervisory bodies, employees of the relevant corporate group who are directly involved in the commercial and legal processes of the supervised undertaking’s day-to-day business are generally presumed to possess the requisite expertise. This also applies to exempted members of the works council or staff committee who are members of the administrative or supervisory body, and to union representatives, provided they are familiar with the commercial and legal processes of the business based on their (previous) experience.

Irrespective of the foregoing, section 7a (4) sentence 2 VAG provides that when testing for the requisite expertise, the Federal Financial Supervisory Authority ( Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin ) shall take into account the specific circumstances of occupational pension schemes with regard to any appointment to the supervisory board of employer and employee representatives of the sponsoring undertaking.

b) "Born" members

The chief administrative officials of regional or local public authorities (for example, mayors ( Bürgermeister ) or district administrators ( Landrat )) are usually presumed to possess the requisite expertise, provided they carried out activities on a not insignificant scale for an extended period before or since they took office, and such activities substantially related to commercial and legal issues that were not entirely subordinate in nature. The same applies to treasurers ( Kämmerer ) of regional or local public authorities and employees in similar positions.

c) Further training

Involvement in an administrative or supervisory body is not as a general rule precluded just because the requirements for presuming the requisite expertise have not been met. The necessary knowledge may also usually be acquired through further training. Having regard to the individual case and the test criteria, further training must encompass the basic commercial and legal processes of the day-to-day business of similar undertakings, risk management and the function and responsibility of the members of ad-ministrative or supervisory bodies, including in contrast with the role of management. It should go into the basic principles of financial accounting and the law of supervision.

The question of whether further training can convey the necessary knowledge can only be determined on a case-by-case basis. For this reason, BaFin is unable to certify further training courses to the effect that participation in a certain course will always be deemed sufficient.

Further training may be done before or immediately after notification of the appointment of the administrative or supervisory board member concerned.

If further training has been completed before notification of the appointment and it is relevant for assessing whether the requisite expertise is possessed, proof of attendance must be submitted together with the notice of appointment.

If the expertises acquired through further training, but only after notification of the appointment and after commencement of the relevant member's activities on the administrative or supervisory body, the further training should usually take placewithin six months [3] of the appointment in order to ensure a reasonable correlation between the period spent obtaining the necessary qualifications and the term of office. [4]

In such cases, proof of attendance must be submitted without undue delay after completion of the further training.

The proof of attendance must allow identification of the course provider, the course content and the duration of the course.

d) Continuing education

Members of administrative and supervisory bodies must ensure that they are always making decisions on the basis of up-to-date information. For this reason they are required to continually familiarise themselves with changes in the undertaking’s environment, for example with new rules and regulations or developments in financial products both within the undertaking and on the market. To this end they should take appropriate measures to participate in continuing education to the necessary extent.

2. Reliability, including conflicts of interest

Separate and distinct from the requirement of expertise, members of administrative and supervisory bodies must be reliable. Persons will not be deemed reliable if, based on general experience, their personal circumstances would justify the assumption that personal matters could interfere with the prudent and proper exercise of their supervisory role.

Accordingly, the prudent and proper exercise of the supervisory role also requires the administrative or supervisory board member concerned to have adequate time to dedicate to their work (adequate availability).

Conflicts of interest on the part of members of administrative or supervisory bodies, particularly in connection with their own commercial pursuits, may also constitute circumstances that interfere with the prudent and proper exercise of the supervisory role.

A conflict of interest may arise, for example, if the member, a close relative of the member or an enterprise managed by a member maintains business dealings with the supervised undertaking, which could result in the supervised undertaking becoming commercially dependent to a certain degree if, for example, it brokers loans, other banking transactions or insurance products.

A conflict of interest may also arise if the member – or the enterprise for which the member works or in which the member holds a stake – has borrowed from the supervised undertaking and is in danger of defaulting.

Fault is not required in order to be considered lacking in reliability.

3. Statutory limit on number of positions held

The supervisory function requires the relevant office bearers to dedicate an adequate amount of time to the role.

a) Basic principle

Under section 36 (3) sentence 6
KWG and section 7a (4) sentence 4
VAG
, members of administrative or supervisory bodies may not hold office on more than five supervisory bodies of enterprises supervised by BaFin .

When appointing an individual to the administrative or supervisory body of an undertaking that is subject to the provisions of the KWG , the positions held by that individual on the supervisory bodies of undertakings that are subject to the provisions of the VAG are also relevant and count towards the total number of positions held, and vice versa .

b) Exemption

Where a person is appointed to the supervisory body of an undertaking that is sub-ject to the provisions of the KWG , all positions already held by that person and the new position shall effectively count as only one position rather than the actual number of positions for the purpose of the statutory limit if the undertakings belong to the same institution-related guarantee or protection scheme (exemption under section 36 (3) sentence 6 half-sentence 2 KWG ).

Similarly, positions on the supervisory bodies of enterprises within the same insurance or corporate group shall effectively count as one position rather than the actual number of positions for the purpose of the statutory limit (exemption under section 7a (4) sentence 4 half-sentence 2 VAG ).

c) No reciprocal application

The exemption under section 36 (3) sentence 6 half-sentence 2 KWG (see above) does not apply to appointments to the administrative or supervisory body of an undertaking subject to the provisions of the VAG , just as the exemption under section 7a (4) sentence 4 half-sentence 2 VAG does not apply to appointments to the administrative or supervisory body of an undertaking subject to the provisions of the KWG . Only the specifically applicable statutory exemption may be relied upon for each appointment. Even where a group or group structure consists of both undertakings subject to the provisions of the VAG and undertakings subject to the provisions of the KWG , the limit on the number of supervisory positions held is always assessed separately either according to the VAG or the KWG .

d) Pre-existing positions

In general, there is no requirement to relinquish positions in excess of the statutory limit where they are already held when the statutory limit enters into effect, and such positions may also be extended through reappointment. However, no further positions may be accepted.

4. Acting and substitute members

All of the requirements relating to expertise, reliability and the limit on the number of positions held apply mutatis mutandis to acting members (to the extent they are permitted by law) from the time they are elected. By the term "acting members", BaFin means persons appointed for the event that an actual administrative or supervisory body member is incapacitated for a brief period, and who assume the role of the relevant member for that period.

By contrast, substitute members, and by these
BaFin means persons who replace actual members of the administrative or supervisory body if the latter stand down from the body permanently, are not required to meet all of the requirements of holding office until they actually replace the original member. Accordingly, for substitute members the period for doing any further training necessary does not commence until they are actually appointed.

II. Procedural issues and documents required

1. Notification of appointments

a) First-time appointments

Unlike the case for managers, where notification is required of the intention to appoint, section 24 (1) no.
15
KWG and sections 13d no.
12 (in conjunction with section 113 (1)), 13e (1) sentence 1 no.
4, 121a (1) sentence 1 and 121g (2) sentence 1 VAG provide that notification is only required when members of the administrative or supervisory body are actually appointed. Notification is also required of appointments to non-mandatory administrative and supervisory bodies.

The notification of appointment should state:

in the case of undertakings subject to the provisions of the KWG : the name of the undertaking as the reference; in the case of undertakings subject to the provisions of the VAG : the undertaking’s four-digit BaFin registration number as the reference.

b) New appointments in connection with restructures

Notification is required where new appointments are made in the course of corporate restructures.
[5]

c) Reappointments

No notification is required if a member's position is extended by reelection. Thus members of administrative and supervisory bodies appointed prior to 1 August 2009 are not subject to the notification requirement until they permanently cease being a member of the administrative or supervisory body of the relevant undertaking.

2. Acting and substitute members

The remarks made under II.1. apply mutatis mutandis to acting members.

By contrast, substitute members are only subject to notification when the original member for whom the substitute member is appointed permanently stands down from the relevant body and the substitute member takes their place. The neces-sary documents therefore need not be submitted to BaFin until such time.

3. Documents to be submitted

a) Curriculum Vitae

Similar to the supervisory practice for managers, notifications of the appointment of members of administrative and supervisory bodies must be accompanied by a pertinent Curriculum Vitae (CV). CVs must be personally signed and dated. They should meet the requirements laid down for the CVs of managers [6] and, in particular, contain all of the information necessary to be able to assess reliability and expertise. CVs should focus primarily on the positions held during the member's professional career. CVs shall state the specific months ( e. g. "Feb 2011 - Apr 2013") in which the various positions were held.

In addition, all business dealings with the supervised undertaking of the type re-ferred to in I. 2., including brokerage activities, shall be disclosed.

In accordance with the restrictions under section 36 (3) sentence 6 KWG , section 7a (4) sentence 4 VAG and section 100 (2) sentence 1 no.
1
AktG
, the existence of other positions on both mandatory and non-mandatory administrative or supervisory bodies must also be disclosed; if no other positions are held then a no-tification stating "nil" must be submitted.

b) Form: "Disclosures relating to the reliability of members of adminis-trative and supervisory bodies"

The form attached in Appendix 1, "Disclosures relating to the reliability of members of administrative and supervisory bodies" must be completed and submitted. It must be personally signed and dated.

c) "Criminal record check for submission to an authority", "European criminal record check for submission to an authority" or "equivalent documents" from another country

aa) General remarks on documents

Depending on their nationality and place of residence, members of administrative and supervisory bodies must submit the original copy of a "criminal record check for submission to an authority" (document type "O") issued by the Federal Office of Justice ( Bundesamt für Justiz ) in accordance with section 30 (5) of the Act governing the Federal Register of Criminal Records ( Bundeszentralregistergesetz – BZRG) (hereinafter the "criminal record check for authorities"), a "European criminal record check for submission to an authority" in accordance with sections 30 (5) and 30b BZRG (hereinafter " EU criminal record check") or, if such documents are not issued in the member's country of residence, criminal record checks equivalent to those named above, or certifications of reliability assessments performed by supervisory authorities in the country of residence after consultation with the relevant section of BaFin (hereinafter "equivalent documents"). In countries in which criminal record checks are issued by a public agency, other documents may not be used as a substitute.

To allow
BaFin to attribute criminal record checks and documents to the undertaking with the administrative or supervisory body to which the relevant member has been appointed, the following information, and that information only, shall be provided:
[7]

in the case of undertakings subject to the provisions of the KWG : the name of the undertaking as the reference; in the case of undertakings subject to the provisions of the VAG : the un-dertaking's four-digit BaFin registration number as the reference.

Members of administrative and supervisory authorities who have resided in different countries in the previous ten years must submit criminal record checks and documents from each country. Where the documents are not in German, the original document must be accompanied by a certified translation or a translation prepared by a government appointed or accredited interpreter or translator. [8]

Applications for a "criminal record check for authorities" and an " EU criminal record check" must be made to the local registration office ( Meldebehörde ) (section 30 (2) sentence 1 BZRG). German nationals who reside outside the Federal Republic of Germany may apply directly to the Federal Office of Justice (section 30 (3) sentence 1 BZRG). The Federal Office of Justice sends both the "criminal record check for authorities" and the " EU criminal record check" directly to BaFin . The "criminal record check for authorities" should not be confused with the "expanded criminal record check" referred to in section 30a BZRG.

bb) Specific documents required

The following specific criminal record checks and documents must be submitted:

(1) Members of administrative and supervisory bodies who are German nationals

and reside in Germany:

a "criminal record check for authorities" issued by the Federal Office of Justice;

and reside in a member state of the European Union:

an "
EU criminal record check" issued by the country of residence, if available; otherwise a "criminal record check for authorities" issued by the Fed eral Office of Justice and "equivalent documents" from the EU member state of residence;

and reside in a non-member state:

a "criminal record check for authorities" issued by the Federal Office of Justice and "equivalent documents" from the country of residence.

(2) Members of administrative and supervisory bodies who are nationals of a member state of the European Union

and reside in Germany:

an "
EU criminal record check";

and reside in a member state of the European Union:

an "
EU criminal record check" issued by the country of residence, if avail-able; otherwise "equivalent documents" from the EU member state of residence;

and reside in a non-member state:

"equivalent documents" from the country of residence.

(3) Members of administrative and supervisory bodies who are nationals of non-member states

and reside in Germany:

a "criminal record check for authorities" issued by the Federal Office of Justice;

and reside in a member state of the European Union or in a non-member state:

"equivalent documents" from the country of residence.

(4) Other cases

Where there are special circumstances relating to residence ( e. g. country of resi-dence changed in the last ten years) or nationality ( e. g. a national of multiple EU/EEA states or non-member states) which are not covered by the situations described above, the extent of documents to be submitted must be agreed with the competent section of BaFin .

d) Excerpt from the Federal Business Record Register (Gewerbezentralregister)

Members of administrative and supervisory bodies who were or are self-employed [9] and those who, in the course of their professional activities were or are:
[10]

O10 the authorised representative of a businessperson; charged with managing a business; or the manager of any other commercial enterprise;

must submit the original copy of an excerpt from the Federal Business Record Register in accordance with section 150 of the Industrial Code ( Gewerbeordnung – GewO ) to BaFin . Applications for an excerpt from the Federal Business Record Register shall be made to the competent local authority (usually the registration office or trade regulatory authority (Gewerbeaufsichtsamt)) (sections 150 (2) and 155 (2) GewO in conjunction with the laws of the relevant Land). Persons who fall within the group described above and who reside outside the Federal Republic of Germany may apply directly to the Federal Office of Justice (section 150 (3) GewO ). [11]

The following information should be provided:

in the case of undertakings subject to the provisions of the KWG : the name of the undertaking as the reference; in the case of undertakings subject to the provisions of the VAG : the undertaking’s four-digit BaFin registration number as the reference.

The following instructions for the completion of form GZR 3 under the 2nd General Administrative Provisions relating to the Federal Business Record Register ( Zweite allgemeine Verwaltungsvorschrift zur Durchführung des Titels XI - Gewerbezentralregister - der Gewerbeordnung – 2. GZRVwV - Ausfüllanleitung) shall be complied with:

the key code number "1" shall be entered in field 01 document type ( Beleg-Art ); both boxes should remain blank in field 20.

The Federal Office of Justice shall send the excerpt from the Federal Business Record Register to the applicant. The excerpt must be submitted to BaFin together with the other documents listed in Part II.3. [12]

e) Further training – proof of attendance

Proof of attendance of further training courses must contain the information set forth under I.1.c).

f) Submission of documents where board position already held

If the newly appointed member is already a manager or a member of the admin-istrative or supervisory body of an undertaking subject to BaFin's supervision, the documents required to be submitted in order to assess reliability must be resubmitted. BaFin may waive this requirement in individual cases.

g) Additional documents

BaFin may request additional documents if this is deemed necessary after evaluation of the documents referred to above.

h) No assumption of costs by
BaFin

BaFin will not assume the costs associated with the required documents.

4. Notification of changes in the composition of administrative or supervisory bodies

BaFin requests that undertakings notify it of all changes in the composition of administrative or supervisory bodies ( e. g. when a member stands down) and in so doing convey an up-to-date picture of the composition of the relevant body.

III. Obligations of members of administrative and supervisory bodies

The requirements imposed on members of administrative and supervisory bodies are required to be ascertained by reference to the "test criteria". They must meet their obligations at all times. Specifically, this requires them to monitor and form a judgment about the undertaking’s business strategy and risk situation. It follows then that apart from attending and preparing for meetings, office bearers must oversee the undertaking even between meetings, particularly in the case of significant changes in its risk situation. [13]

In order to be able to make appropriate decisions, members of administrative and supervisory bodies must, for example, prepare for meetings by reviewing relevant documents prior to the meeting. Preparation requires not only a reasonable time frame and locality, but also documents that are appropriate both in terms of their content and volume. To this extent the members of administrative and supervisory bodies need the support of the undertaking they supervise. Meeting papers should always be distributed prior to the meeting itself except in justified exceptional cases. It is not sufficient for meeting documents to be reviewed and responded to only by the office bearer's staff.

Office bearers must meet the requirements for each individual task and perform their function thoroughly and personally. This not only requires the supervisory body to dedicate a sufficient amount of time to their function, but also to actively request information from management on an ad hoc basis if required. Under section 36 (3) sentence 4 KWG and section 87 (8) VAG , members of administrative and supervisory bodies must exercise their monitoring and control function with due diligence in order to identify and eliminate serious infringements by managers of the principles of proper management.

IV. Measures

If members of administrative or supervisory bodies breach the duties described above, BaFin has the power to issue them with a warning, and if the breach continues, to require their dismissal. Where a breach of duty is so material that it calls into question the reliability or expertise of the relevant administrative or supervisory body member, BaFin may be able to require the undertaking concerned to dismiss the member even without a prior warning. The address for service of the demand for dismissal is determined according to the relevant provisions of corporate and co-determination law.

BaFin may also require the relevant member to be banned or replaced by a special commissioner, and such action is subject to the same requirements as demands for dismissal.

These measures may also be taken with respect to members of non-mandatory administrative or supervisory bodies.

Since the Legislative Intent
[14] explicitly states that the substantive requirements also apply to members of administrative and supervisory bodies appointed prior to 1 August 2009, such members may also be subject to measures imposed by BaFin if there are irregularities in the performance of their function.

Footnotes

[1]

Bundestag printed papers (
BT
-
Drucks.
16/12783, pps. 16, 18.)

[2]
Expertise in this context equates to the responsibilities of members of administrative and supervisory bodies laid down in the Stock Corporation Act (see e.g.
section 111 (1)
AktG
) and those now also set forth in the
KWG and the
VAG
.

[3]
The grace period of (usually) six months has no impact on liability under company law, which exists from the date of appointment.

[4]
In certain cases, the existential needs of the primary business in the case of farmers and other occupations that are just as heavily reliant on the seasons may justify a longer period. If this exemption is relied upon, it must be specified in the notification together with a statement of reasons.

[5]
This requirement is based exclusively on company reorganisation and company law provisions and on the timing, according to these provisions, of formal reappointments.

[6]
See section 5 (1) no.
1 of the Regulation on Notifications and the Production of Documents under the Banking Act ( Verordnung über die Anzeigen und die Vorlage von Unterlagen nach dem Kreditwesengesetz – AnzV ) and Circular 6/97 published by the Federal Insurance Supervisory Office ( Bundesaufsichtsamt für das Versicherungswesen – BAV ) of 18 June 1997 ( VerBAV 1997, 311); the requirements do not extend to proving managerial experience, because members of administrative and supervisory bodies do not necessarily have to have managerial experience.

[7]
The data entry fields of computer-generated criminal record checks can only accommodate a limited number of characters, so errors can occur if too much information is entered.

[8]
Where documents are in English, the competent section of BaFin may agree, after consultation, to waive the requirement to provide a translation.

[9]
See section 149 (2) sentence 1 (a) and no.
3 (a)
GewO
.

[10]

See section 149 (2) sentence 1 no.
1 (b) and no.
3 (b)
GewO in conjunction with section 9 of the Administrative Offences Act ( Gesetz über Ordnungswidrigkeiten – OWiG ).

[11]
Because the statutory provisions of the BZRG differ from those in the GewO , there is no distinction made with respect to the nationality of administrative and supervisory body members akin to the distinction made under Part II.3.c) bb).

[12]
Unlike the "criminal record check for authorities“ and the " EU criminal record check", the excerpt from the Federal Business Record Register for BaFin's purposes is sent to the applicant, who is then required to submit it to BaFin (the statutory provisions of the BZRG differ from those in the GewO ).

[13]
Please refer to the relevant
BaFin circulars on the minimum requirements for risk management ( MaRisk ) in relation to the involvement of members of administrative and supervisory bodies in an undertaking’s risk management in accordance with section 25a KWG and section 64a VAG :

for undertakings subject to the provisions of the KWG : Circular 11/2010 ( BA ) of 15 December 2010, particularly AT 1 no.
1,
AT
4.2 no.
5 (discussion of strategies),
AT
4.3.2 no.
6 (reporting on the risk situation),
AT
4.4 no.
2 (collection of information by the internal auditing function) and BT
2.4 nos. 5 and 6 (reporting of serious findings by the internal auditing function).
for undertakings subject to the provisions of the VAG : Circular 3/2009 ( VA ) of 22 January 2009, particularly 7.1 no.
2 (reporting on the risk situation), 7.1 no.
4 (discussion of business strategy and risk strategy), 7.2.1 no.
3 (collection of information by the independent risk monitoring function) 7.3.4 no.
7 (management's explanation of the risk report).

[14]

BT
-
Drucks.
16/12783, p.
16.

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