The Office of the Superintendent of Financial Institutions (“OSFI”) recently ruled that entities that fall within the broad meaning of the term “foreign bank” as defined in the Bank Act (Canada) (the “Act”) who sell debt instruments to Canadian securities dealers are not engaging in or carrying on business in Canada for the purposes of Part XII of the Act. The ruling is significant because it provides foreign banks with some assurance that they may access Canadian capital markets to sell their debt instruments.
OSFI Ruling No 2007-01 (the “Ruling”) was issued in response to a request OSFI received from several foreign banks and entities associated with foreign banks (the “Issuers”) which are active issuers of debt instruments such as certificates of deposit, commercial paper and structured term notes. The Issuers sought clarity on the question of whether their proposal to sell debt instruments to Canadian securities dealers to fund their own or their affiliates’ banking business would be subject to Part XII of the Act, which governs the entry into and operations of foreign banks in Canada.
Restrictions on a foreign bank Carrying on Business in Canada
The Act governs the entry into and operations in Canada of all entities that fall within the definition of the term foreign bank in the Act. Foreign bank is defined in the Act to include any entity that is called a bank or that is regulated as or like a bank in any jurisdiction in which it carries on business. It also includes any entity that controls a foreign bank and any entity that provides financial services and is affiliated with a foreign bank.
Under the Act, a foreign bank may not engage in or carry on business in Canada except as authorized by the Act (i.e. through a foreign bank subsidiary or an authorized foreign branch or some other approved entity, or pursuant to an approval or an exemption order obtained from the Minister of Finance). The Act does not provide guidance on the factors that OSFI may take into account in determining whether a foreign bank is engaging in or carrying on business in Canada. Whether a foreign bank would be considered to be engaging in or carrying on business in Canada will depend on the circumstances that surround the activity in question. OSFI will assess the facts and circumstances of each particular case to determine whether there is a sufficient connection between the foreign bank, or the entity associated with a foreign bank, and Canada.
In considering the request made by the Issuers, OSFI considered the following factors to be relevant to its determination that the proposed activity would not result in the Issuers being considered to be engaging in or carrying on business in Canada:
- Canadian securities dealers who sought access to investment products they could resell to investors had established relationships with the Issuers in a manner consistent with industry practice;
- the negotiation and execution of the documentation related to the debt instruments, and decision-making about the administration and development of the debt instrument programs, would be done by employees of the Issuers outside Canada;
- the scope of activities expected to be performed by employees of the Issuers inside Canada would be limited;
- the Issuers would not deal directly with the investors who would ultimately hold the debt instruments;
- the Canadian securities dealers would not act as an agent or nominee of the Issuers – they would purchase the debt instruments as principal for the purposes of resale or inventory; and
- the activities to be performed by the payment agents engaged by the Issuers would be ancillary functions that were administrative in nature.
The Ruling is consistent with the widely-held view that, generally, where all aspects of the marketing, negotiation, execution and closing of a transaction by a foreign bank take place outside Canada, the foreign bank would not be considered to be engaging in or carrying on business in Canada solely by reason of that transaction.
Opportunities and Impacts
The Ruling provides helpful guidance to foreign banks that are considering establishing debt instrument issuance programs in Canada, or that are contemplating greater access to Canadian capital markets.
The Ruling may open the Canadian market to the issuance of various structured note products by foreign banks. However, foreign bank debt products remain at a disadvantage to structured notes issued by Canadian banks which are, in the case of principal protected notes, generally exempt from Canadian securities laws and offered by way of a relatively simple information statement. Foreign bank debt products will have to be offered by way of either a prospectus or the commercial paper or accredited investor exemptions to the prospectus requirements in Canadian securities laws. Additionally, the ruling only permits fully underwritten offerings in relation to foreign bank debt products, rather than the best efforts agency arrangements prevalent in the Canadian structured note marketplace.
OSFI Rulings Generally
Rulings describe how OSFI has applied or interpreted certain provisions of the Act, and the regulations or guidelines thereunder. Rulings may provide guidance for other similar transactions where the relevant facts are the same as or similar to those of the transaction or type of transaction that OSFI considered for the purposes of issuing a particular ruling. However, subsequent transactions may raise additional or different considerations that were not addressed in a previous ruling. Accordingly, rulings are not necessarily binding on OSFI’s consideration of subsequent transactions.