Comprehensive control over the business operations through appointment of a trustee

Periodically, our legal consultants briefly discuss a relevant ruling  from the supervisory field of the Dutch Authority for the Financial Markets (AFM), De Nederlandsche Bank (DNB) or the Dutch Personal Data Authority (AP). Always based on three identical questions. In ‘plain language’, easy to understand even for the non-lawyers among us. This month, Marco Mulleneers and Gerard Jong reflect on a ruling by the Trade and Industry Appeals Tribunal (CBb) of 6 February 2024 on an instruction imposed by DNB on three trust offices in combination with the appointment of a trustee.

What was going on here?

In 2018, DNB investigated three trust offices and found that they failed to comply with requirements of laws and regulations regarding client due diligence and transaction monitoring. It follows from the CBb ruling that DNB had repeatedly pointed out the need for (structural) improvements in the past. An improvement process, started by the trust offices in 2017, failed to prevent breaches being identified again in 2018. Therefore, DNB imposed two formal enforcement measures aimed at ending the breaches. Firstly, an instruction with a line of conduct that the trust offices should

1. bring all client files in line with the requirements of the Act on Supervision of Trust Offices 2018 (Wtt 2018);
2. review transactions carried out in a specified period; and 
3. provide an audit report and management statement on full compliance with the instruction to DNB.

Second, DNB appointed a trustee in respect of the management of the three trust offices. The trustee had to make efforts to ensure that the trust offices adequately, timely and fully comply with the line of conduct as laid down in the instruction. The trustee also had to ensure that the revision of all client files and (re)assessment of transactions took place with sufficient depth. Later, DNB amended the trustee’s decision twice, extended the beneficiary period of instruction and the trustee’s appointment, and, through two decisions, charged the trustee’s costs to the trust offices.

To clarify, this is a trustee that DNB can appoint under the Wtt 2018 for all or certain bodies or representatives of a trust office. For other financial companies, the AFM and DNB have this power under the Act on Financial Supervision and the Pensions Act. Strict requirements apply to a trustee’s appointment. These differ per supervisory law. In the case of a trust office, firstly, there must be breaches. Secondly, (i) the trust office must not have complied with an instruction or not fully complied with it within the time limit or (ii) this violation must seriously endanger an adequate functioning of the trust office. Appointment of a trustee is thus only an issue when there are serious breaches and DNB or the AFM thus want to get (more) grip on the supervised institution. This seems less extensive than a court-appointed bankruptcy trustee who takes over the management and operations of a bankrupt company, looks for possible buyers and (otherwise) winds up the business. 

The trust offices objected to the instruction, the appointment of the trustee and the other decisions mentioned above. DNB declared the objections unfounded, and the trust offices appealed. On appeal, the Rotterdam District Court ruled in brief – as follows:

(a) DNB was entitled to impose an instruction for serious breaches of the Wtt 2018. The regulator did not have to assume that the trust offices would adequately and structurally terminate all breaches on their own initiative and within the foreseeable future. In contrast, providing DNB with an audit report – the third line of conduct – is not permitted, as it is not aimed at ending the breaches during the term of the instruction.

(b) There were sufficient grounds to appoint a trustee, as there were serious breaches of the Wtt 2018 that seriously jeopardise the adequate functioning of trust offices. 

(c) DNB was also allowed to simultaneously give an instruction and appoint a trustee. The legal text, legislative history and case law do not preclude this.

d) However, a trustee whose task is limited to monitoring compliance with the instruction is contrary to the legal system. The trustee’s assignment to trust offices was “formulated too vaguely and too lightly” by DNB and therefore contrary to Section 54 Wtt 2018. According to the District Court, the legislator assumes a more guiding and decision-making role for the trustee.

Both the trust offices and DNB appealed this ruling to the CBb. 

What was CBb’s verdict?

As this appeal concerns the instruction, the trustee appointment and five related decisions, the judgment covers many facets. We will discuss the main points.

Breaches have been committed

On appeal, the trust offices argued that DNB had conducted negligent investigations and that no conclusion could be drawn from this that norm breaches had been committed. The CBb concluded that DNB failed to provide sufficient evidence of breaches only regarding a group of inactive clients. The other breaches that led to the two enforcement measures were committed by the trust offices, according to the CBb. 

Instruction was permissible

Next, the trust offices argue that, if any breaches exist, they are not so serious that DNB was allowed to give an indication. In that context, they refer to the plan of action submitted to DNB in May 2019 in response to the intention to issue a instruction and a compliance report from 2018 showing that ongoing compliance work and progress had been made on their own initiative. However, the CBb intervenes here and concludes that DNB was authorised to issue an instruction. In doing so, the CBb considers that this instruction aims to ensure that the trust offices remedy the breaches and that this is “an appropriate means” to that end. The instruction is also “necessary” according to the CBb. First, because the breaches of the core provisions of the Wtt 2018 and its predecessors have been longstanding. Second, because it could not be expected that the trust offices would adequately and structurally end all breaches on their own initiative and within the foreseeable future. The May 2019 action plan and the 2018 compliance report do not make this different, according to the CBb. The CBb also found no specific circumstances that could lead to the opinion that the instruction was unreasonably onerous.

Trustee was allowed to be appointed

The trust offices put forward several arguments to argue that DNB should not have appointed a trustee. Among other things, they argue that;

1. the statutory requirements for a trustee appointment were not met;
2. a trustee should only be appointed after an appointment has first been made; and
3. the combination of an appointment and trustee is not permitted. 

The CBb rejects all these grounds. 

The CBb shares the court’s opinion that there were serious (norm) breaches of the Wtt 2018 that seriously endangered an adequate functioning of the trust office. This was sufficient ground to appoint a trustee. The trust offices structurally did not (sufficiently) fulfil the gatekeeper function. DNB was therefore entitled to assume that the adequate functioning of these trust offices was at risk. The fact that DNB had not previously imposed remedial enforcement measures on these trust offices and that the trustee only had a limited task does not alter this. Furthermore, the CBb considers that it does not follow from the law and legislative history that a trustee may only be appointed when it has become apparent that a trust office is not following an instruction. Moreover, the CBb agrees with the District Court that the Wtt 2018, legislative history and case law do not preclude combining an instruction with the appointment of a trustee. Also, according to the CBb, there is no basis for the trust offices’ claim that an instruction is “meaningless” if a trustee has been appointed. 

Trustee assignment was too limited

Against the court’s opinion, that the trustee’s assignment violates Section 54 Wtt 2018, DNB put forward several grounds. First, DNB argued that the third paragraph of this section does not set any frameworks or requirements for this assignment. This (therefore) does not preclude – in short – the mandate that the trustee oversees compliance with an instruction. Furthermore, according to DNB, the legislator has not commented on the content or severity of the mandate that the supervisor can or must give to a trustee. DNB also points to the principle of proportionality, from which it follows that the supervisor must consider the circumstances of the case and assess what assignment, given that, is appropriate.

The CBb does not go support this. If DNB had wanted to keep a closer eye on the trust offices’ compliance with the instruction, DNB could have incorporated this into the instruction. According to the CBb, a trustee is not meant as “a stick” to follow up the instruction, but to gain a more far-reaching grip on the business operations. In doing so, the CBb considered that DNB had not made it clear that and/or in what way this trustee appointment was for this purpose to gain a more far-reaching grip on the trust offices’ business operations. According to the CBb, appointing a trustee with “only” the task of monitoring caompliance with an instruction is “not a suitable and necessary means”. This leads to the conclusion that this trustee appointment violates the principle of proportionality.

What does this teach us?

As a general principle, when a financial company fails to comply with applicable laws and regulations, it may face one formal enforcement measure (and sometimes two). The fact that the company has previously taken or started its own actions to end breaches is considered by the regulator when deciding whether a formal remedial measure – such as a instruction order under periodic penalty payment or appointment of a trustee – is appropriate and in order. Own initiative does not mean that there can therefore no longer be grounds to impose that remedial measure. Especially in a situation where breaches have occurred before and this is the case again in a subsequent investigation. If, on the other hand, breaches are found for the first time and the company quickly presents a thorough, concretely developed action plan and demonstrably implements it, this may result in an enforcement measure being waived by the AFM or DNB. 

When the regulator considers appointing a trustee, it is important to take a critical look at the (intended) mandate of the trustee. From this ruling, we learn that that mandate should aim at giving the supervisor a more far-reaching grip on the conduct of the business, i.e. not just overseeing the follow-up of an instruction through that officer. Whether such an instruction can stand the test of the administrative court depends on what exactly is going on at the financial undertaking. This can of course vary from case to case, as follows from the four trusteeship decisions that can be found on the websites of the AFM and DNB: 

• DNB appointed a trustee in 2016 regarding the management of a payment service provider. This trustee had a similar remit to that of the trustee in respect of the trust offices before it.
• In 2026, the AFM appointed a trustee in relation to an investment fund that was being wound down. Here, the trustee strengthened the management of the manager and, in accordance with the mandate, had to ensure, among other things, that the settlement took place in accordance with laws and regulations and that the interests of participants were considered.  
• In 2019, DNB appointed a trustee in respect of the management of an insurer that was struggling with solvency problems. This trustee had to support the management in the recovery process and ensure that the recovery plan was properly developed and implemented. In addition, the trustee had to explore the market for takeover candidates and ensure, among other things, that the right external expertise is procured.
• In 2020, DNB appointed a trustee at another insurer with capital problems. This trustee had to be guided by the interests of policyholders and approve payments the management wanted to make. Other parts of the assignment are not visible in the public decision. However, the news report does show that DNB revoked the licence of this insurer when it was established that the equity shortfall had not been repaired within the statutory timeframe.

We do not know whether all these orders could stand the test of the administrative court, as they were not appealed. Presumably, this is not the case with the first order, as that order is similar to the one that did not stand up in this CBb ruling. Our assessment is that the other three orders are likely to ‘meet the bar’ that the CBb has set at a clear height with this ruling. 

Finally, in the past, a trustee appointed by DNB or the AFM usually functioned ‘behind the scenes’ and was called a ‘silent trustee’. For some years now, there has been a statutory disclosure requirement in respect of most formal enforcement measures, and DNB and the AFM must also publicly disclose a trustee appointment. So now, on top of that, granting a (too) limited assignment to that trustee is not in line with the expectations of the highest administrative court.  

What can Projective Group do for you?

Are you yourself confronted with signals from the regulator showing that your company’s compliance with laws and regulations is failing? Have you received a letter from DNB or AFM indicating that the regulator intends to impose a formal enforcement measure? Or are you wondering how best to respond to or communicate with the AFM or DNB during an enforcement process? We would be happy to help you settle your dispute with the regulator or, better still, prevent it. Please contact us without any obligation.