The Office of the Superintendent of Financial Institutions (Canada) ("OSFI") has published a ruling that BLG obtained for one of its foreign bank clients that confirms that a Canadian entity that provides back office services to a foreign portfolio manager does not carry on a financial services business within the foreign bank regulation context (the "Ruling").1 This Ruling is of interest to foreign bank groups and their Canadian subsidiaries that wish to provide services to investment funds inside or outside Canada and that wish to have back office services provided from within Canada.
Issue and Implications
The issue was whether the provision of back office services by a Canadian subsidiary of a foreign bank ("FB") to the FB in its offshore portfolio management services to investment funds would deem the subsidiary to be a "financial services entity" pursuant to the Bank Act (Canada). If so, this would subject the FB group to further scrutiny and heavier regulation in Canada, including the requirement to obtain Minister of Finance and OSFI approvals for certain financial and commercial activities and investments.
Facts and Finding
An FB had undertaken to provide portfolio management services to domestic and foreign investment funds from outside of Canada. It proposed to establish a Canadian subsidiary to undertake certain limited activities (the "Activities") including:
- preparing and maintaining certain books and records of the investment funds (e.g., accounting records, corporate records, shareholders/unitholders registry);
- preparing the net asset valuations and financial statements of the investment funds managed by the FB;
- performing certain of the investment funds’ compliance and general administration functions (e.g., reviewing investment fund prospectuses, reviewing agreements with service providers, arranging shareholders/unitholders and directors meetings, drafting minutes of these meetings, registering shareholders/unitholders subscriptions and redemptions); and
- in connection with the above, acting as a liaison between the FB and other entities that provide services to the investment funds (e.g., bankers, brokers/dealers or custodians).
Section 507(1) of the Bank Act broadly defines a "financial services entity" as an entity that engages in activities where at least 10 per cent of its business consists of one or more of the following:
(a) providing any financial service;
(b) acting as a financial agent;
(c) providing investment counselling and portfolio management services;
(d) issuing payment, credit or charge cards and, in cooperation with others, including other financial institutions, operating a payment, credit or charge card plan;
(e) engaging in the activities referred to in the definition of "mutual fund entity" or "mutual fund distribution entity" in subsection 464(2);…..
OSFI considered whether the Activities would be considered the provision of portfolio management services, an activity listed in paragraph 507(1)(c) of the "financial services entity" definition.
OSFI determined that the Canadian subsidiary would not manage the assets of the investment funds, which it viewed as a key function of a portfolio manager, and that the subsidiary would only provide "back-office" services to the FB to assist the FB’s provision of portfolio management services to the investment funds. Accordingly, OSFI concluded that the Canadian subsidiary would not be a "financial services entity" for the purposes of Part XII of the Bank Act.
Next Steps for Consideration
This Ruling provides a helpful touchstone to investment management entities within a foreign bank group that do not have and do not wish to have a financial establishment in Canada for the purposes of the Bank Act. A foreign bank group that has a financial establishment in Canada faces more onerous regulation. These investment management groups now have parameters within which to structure their activities in Canada.
The Ruling is a welcome addition to the growing body of published rulings that OSFI has made public to financial institutions and their advisors. As is the case with all OSFI rulings, this Ruling was based on a specific fact situation that BLG presented to OSFI. Rulings are not binding to OSFI.