New York State Department Of Financial Services Releases Guidance On Vetting Key Personnel For State-Chartered Banking Organizations And Non-Depository Institutions - Financial Services - United States (2024)

The New York State Department of Financial Services (the"Department") has released final guidance (the "Guidance") toCovered Institutions, as defined below, notifying them of theDepartment's expectation that they develop, implement, andmaintain a framework for the review and assessment of the characterand fitness of their directors, senior officers, and managers. TheGuidance was published on January 22, 2024 and is effective as ofthat date.

I. The Guidance

Designated Persons

The Guidance is applicable to New York State-regulated bankingorganizations¹; branches, agencies, and representativeoffices of foreign banking organizations licensed by theDepartment; non-depository financial institutions licensed orchartered under the New York Banking Law, and institutions licensedunder Part 200 of the Regulations of the Superintendent ofFinancial Services² (together, "CoveredInstitutions") and applies to each member of the board ofdirectors, board of trustees and/or board of managers, asapplicable, and each senior officer of a Covered Institution("Designated Persons").

The term "senior officer" refers to every officer whoparticipates or has authority to participate (other than in thecapacity of a director) in major policy-making functions of aCovered Institution. An individual who satisfies these criteriawill be considered a senior officer, regardless of whether theyhave an official title or whether the individual is serving withoutsalary or other compensation.

Developing, Implementing, and Maintaining Policies andProcedures

Covered Institutions are expected to develop, implement, andmaintain policies and procedures requiring vetting of the characterand fitness of each Designated Person both at onboarding and on aregular periodic basis thereafter. The resources and standards forinvestigations of Designated Persons should be reviewed on anongoing basis to ensure that they remain applicable and up to date.These policies and procedures should include a robust framework forongoing vetting to confirm that there have been no interveningcirc*mstances that would make the continuation of an individual asa Designated Person of the Covered Institution inappropriate orimproper.

Note that these expectations extend to various corporate ororganizational transactions (including reorganizations orrestructurings)—such as a merger or acquisition, a change ofcontrol, or a purchase and assumption agreement—whereby anindividual who served as a Designated Person at one CoveredInstitution may join the acquiring, purchasing, or survivingCovered Institution as a Designated Person. In particular, thecontinuing or surviving Covered Institution is expected to beresponsible for a full and complete vetting of all its DesignatedPersons, both at the time an individual becomes a Designated Personand on a regular basis thereafter.

Sensitive Issues and Warning Signs

As part of the process of developing a framework for theassessment of a Designated Person's character and fitness, eachCovered Institution is expected to define sensitive issues, warningsigns, and other indicators that, if identified during the vettingprocess, warrant additional scrutiny before the individual ispermitted to commence service as a Designated Person or permittedto remain in their position.

Risk-Based and Proportionate Approach

Covered Institutions are expected to take a risk-based andproportionate approach to implementing the Guidance, such that thenature and depth of assessments, and the frequency of ongoingassessments, are tailored and appropriate in light of thecomplexity and risk profile of the institution. Appended to theGuidance is a list of suggested questions that a CoveredInstitution may adapt for use in the onboarding and ongoingassessments of its Designated Persons' character and fitness.Any request for information from a Designated Persons should bemade in compliance with all applicable laws.

Ongoing Review

A Covered Institution is expected to review materials generatedin connection with onboarding and/or ongoing character and fitnessassessments of Designated Persons and is expected to report suchfindings to its board of directors or the equivalent function, aswell as the chief compliance officer or equivalent function.Additionally, each Covered Institution is expected to require itsDesignated Persons to amend and update relevant information thatwas obtained during the most recent character and fitness vettingperiod in response to a change in circ*mstances or if a DesignatedPerson later determines that previously submitted information wasmaterially incorrect or that the relevant facts have materiallychanged. If, as a result of a materially adverse finding during anongoing assessment of a Designated Person, a Covered Institutiondetermines to remove a Designated Person from that person'scurrent position, to transfer such Designated Person to anotherposition or group, or to make modifications to the currentfunctions of such Designated Person, the Covered Institution isexpected to notify the Department of such determinationpromptly.

II. Conclusion

The Guidance advises Covered Institutions of theDepartment's expectation that each institution have in place aframework for vetting Designated Persons, consistent with the riskprofile of the institution's operations. Covered Institutionsthat currently maintain a vetting framework for Designated Personsshould confirm that their existing framework is consistent with theexpectations outlined in the Guidance. Department examiners willreview a Covered Institution's policies and proceduresregarding vetting Designated Persons. In particular, as part of theregular safety and soundness examination process, examiners willreview to confirm that a Covered Institution maintains a vettingpolicy consistent with the expectations outlined in the Guidanceand that the Covered Institution is operating in compliance withthose policies and procedures.

Footnotes

1. Banking organization means "all banks, trustcompanies, private bankers, savings banks, safe deposit companies,savings and loan associations, credit unions and investmentcompanies." New York Banking Law § 2.11.

2. Part 200 regulates virtual currency businesses. 23NYCRR Part 200.

The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circ*mstances.

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