Bill C-4 amends record-keeping rules; OSFI releases new and revised Legislative Advisories

On January 29, Bill C-4, An Act to implement the Agreement between Canada, the United States of America and the United Mexican States (Bill C-4), was introduced in the House of Commons. Part 2 of Bill C-4 proposes to amend certain acts so they conform with Canada’s obligations under the Canada-U.S.-Mexico Agreement, including the record-keeping requirements under the Bank Act (Canada), the Trust and Loan Companies Act (Canada) and the Insurance Companies Act (Canada) (collectively, the Acts).

Additionally, on January 31, the Office of the Superintendent of Financial Institutions (OSFI) published a new Advisory No. 2020-01: Mergers Involving Foreign Entities and revised Advisory No. 2020-02: Corporate Names, Registered Names and Trade Names and Advisory No. 2020-03: Control in Fact (collectively, the Legislative Advisories).

What you need to know

  • Bill C-4 proposes to amend the Acts to allow for certain records to be held outside Canada in respect of institutions whose parents are subject to a trade agreement with Canada (subject to certain exceptions);
  • The proposed Bill C-4 amendments would come into force on the earlier of: a) a day to be fixed by order of the Governor in Council; and b) the day before the first anniversary of the day fixed for the coming into force of Bill C-4 generally.
  • OSFI published a new advisory in respect of mergers involving foreign entities, and updated its existing advisories in respect of corporate, registered and trade names (most recently revised in 2004) and respecting indicia it considers when assessing whether an institution “controls in fact” an entity (first issued in October 2007).

Record-keeping requirements

The Acts currently provide that certain records (e.g., records showing, for each customer of the institution, on a daily basis, particulars of the transactions between the institution and that customer and the balance owing to or by the institution in respect of that customer) must be kept at the head office of the institution or such other place in Canada as the directors think fit.

Bill C-4 proposes to amend the Acts to provide that the record keeping requirements above do not apply to an institution that is a subsidiary of a “regulated foreign entity”1 or, in the case of a bank, that is a subsidiary of a foreign bank incorporated or formed outside of Canada in which a trade agreement listed in a new Schedule IV of the BA is applicable2. However, where such an institution maintains those records outside Canada, the Superintendent may, in the case of “a”, and must, in the case of “b”, direct the institution by order to maintain a copy of those records at any place in Canada as the directors see fit:

a. if the Superintendent is of the opinion that he or she does not have immediate, direct, complete and on-going access to those records; and

b. if the Superintendent is advised by the Minister that the Minister is of the opinion that it is not in the national interest for the institution not to maintain a copy of those records at any place in Canada.

A new provision was also proposed to allow for regulations to be published respecting the records, papers and documents to be retained by an institution, including the length of time those records, papers and documents are to be retained, and what constitutes immediate, direct, complete and ongoing access, for the purpose of paragraph “a” above.

OSFI releases new and revised Legislative Advisories

We have briefly summarized below the key points of each Legislative Advisory and, in the case of the revised advisories, have identified the key differences from the former versions.

Mergers involving foreign entities

This new advisory sets out OSFI’s general views and expectations regarding situations where an approved foreign entity (AFE) merges with another entity under the laws of its home jurisdiction3. For purposes of the advisory, OSFI considers a “merger” to occur where one or more of the merging entities ceases to exist, which differs from an amalgamation under the Bank Act and the Insurance Companies Act (which results in each amalgamating entity losing its separate existence, but all of them continuing to exist).

The advisory examines the following three types of mergers: where the absorbed entity is an AFE; where the surviving entity is an AFE; and where the absorbed entity or the surviving entity controls or holds a significant interest in a federally regulated financial institution (FRFI).

The absorbed entity is an AFE

Where an absorbed entity is an AFE, OSFI will seek to understand the effect of a proposed merger on the business (or representative office) in Canada of an absorbed entity that is an AFE (and of the surviving entity, where it is also an AFE prior to the merger). As a result, an absorbed entity that is an AFE is expected to confirm to OSFI that all of the absorbed entity’s assets, and liabilities and other obligations, with respect to its business (or representative office) in Canada become those of the surviving entity on the effective date of the merger, and that all of the absorbed entity’s debtors and creditors with respect to its business (or representative office) in Canada become those of the surviving entity on the effective date of the merger, without further action. If the AFE is unable to make that confirmation, it must advise OSFI about how it will differ.

If the absorbed entity is an AFE, and the surviving entity is not currently an AFE, the surviving entity will need to obtain an entry approval, effective on or before the merger (as OSFI is of the view that an entry approval of an absorbed AFE becomes void upon the absorbed entity ceasing to exist and does not follow to the surviving entity since the entry approval was the result of a decision unique to the absorbed entity).

OSFI also provides further clarity regarding the merger’s interaction with the Bank Act and Insurance Companies Act:

  • an authorized foreign bank must seek approval under section 537 of the Bank Act if a merger will cause its liabilities in Canada to be transferred to the surviving entity;
  • an absorbed entity that is a foreign company that will transfer policies in Canada to a surviving entity does not need to obtain approval under section 587.1 of the Insurance Companies Act since the merger does not cause the absorbed entity to be reinsured, on an assumption basis, by the surviving entity (e.g., the surviving entity will become the sole obligor of the absorbed entity’s policy liabilities in respect of its business in Canada). However, it must give notice to the Superintendent of the proposed merger, under section 587.3 of the Insurance Companies Act, where the merger will cause its policies in respect of its business in Canada to be transferred (i.e., conveyed) to the surviving entity4;
  • with respect to the deposit agreement under subsection 534(4) of the Bank Act (where the absorbed entity is an authorized foreign bank) and the trust agreement under subsection 611(3) of the Insurance Companies Act (where the absorbed entity is a foreign company), (i) the surviving entity is required to take all steps necessary to ensure that the agreement is effective against it, and (ii) subject to (i), on the effective date of the merger, the surviving entity is substituted for the absorbed entity as a party to the agreement; and
  • if an absorbed entity and surviving entity are both currently AFEs, amendments to the surviving entity’s entry approval may be required (i.e., if the merger will result in: a) the surviving entity offering a new class of insurance; or b) a change to the surviving entity’s corporate name).

Merger where surviving entity is an AFE, but absorbed entity is not

If the surviving entity is an AFE but the absorbed entity is not, the surviving entity’s entry approval remains valid without any need for amendment. However, the surviving entity must notify its lead supervisor about its proposed merger. The absorbed entity’s operations that relate to the surviving entity must be permissible under the Bank Act or Insurance Companies Act or be discontinued prior to the merger.

Merger where the absorbed entity or the surviving entity controls or holds a significant interest in an FRFI

Whether or not the entity is an AFE, mergers where the absorbed entity or the surviving entity controls or holds a significant interest in a class of shares of a FRFI are subject to approval requirements under the ownership rules that govern the FRFI.

Corporate names, registered names and trade names

OSFI’s amended advisory sets out the factors that the Superintendent considers in determining whether the corporate or trade name of a Canadian federally regulated entity, or the corporate, registered or trade name of a foreign regulated entity, is prohibited. Generally, if any of the factors below are found to exist, the Superintendent may intervene to prevent the use of a trade name by a regulated entity (RE).

The name is prohibited by an Act of Parliament (i.e., federal legislation)

The name is deceptively misdescriptive

In determining if the name is deceptively misdescriptive, the Superintendent will consider if the name is misleading with respect to the products or services of the RE; by implying relationships or affiliations that do not exist; or by suggesting that the RE carries on business in, or has an affiliation with, a location where this is not the case.

If a trade name of an RE (or a registered name of a foreign RE) could mislead persons to think that the entity is distinct from the RE, the Superintendent would consider if there has been adequate disclosure by the RE to depositors, policyholders and/or other creditors that the trade name or registered name identifies a division of the RE or particular products or services offered by the RE.

The name is substantially the same

If a name is substantially similar to an existing trade-mark, corporate or trade name in Canada, the Superintendent will consider if the two names have substantially the same elements in substantially the same order, including if there are any additional words in one of the names. However, a Canadian FRE that is affiliated with another entity may, with the consent of that entity, be incorporated with, or change its corporate name to, substantially the same name as that of the affiliated entity.

The name is confusingly similar

OSFI notes that even if a name is not substantially the same as an existing name as described above, the name can still be confusingly similar to an existing name. If the Superintendent determines that there are commonalities in appearance (including logos) or sound between the two names, the Superintendent will then determine if the names are confusingly similar, considering several factors, including:

  • how long the existing name has been used;
  • if the common elements of both names are generic or descriptive in nature;
  • if the RE and the entity using the name are affiliated, including if the entity using the name has consented to the RE’s use of the name;
  • the nature of the products of the business with the similar name, and if there is any competition between the two entities;
  • the territory in which both entities operate; and
  • the extent of any material confusion between the two entities operating in similar markets in other countries.

The name is reserved

If the name is the same, substantially the same or confusingly similar to a name reserved with OSFI, its use will be prohibited.

Key differences from existing advisory

  • the advisory was updated to reflect that the foreign company provisions of the Insurance Companies Act were amended to conform more closely with the foreign bank provisions of the Bank Act in the years following the publication of the old advisory;
  • Part C was updated to address “substantially the same” and break out “confusingly similar” into its own Part (the old advisory did not discuss what “substantially the same” means, despite using the term in the heading to Part C);
  • a new “use of trade names” section was added to address the Superintendent’s discretion to direct an RE not to use a particular trade name; and
  • hypothetical examples were added to illustrate how the Superintendent will consider the factors provided to determine if a name is confusingly similar to an existing name.

Control in fact

OSFI sets out five types of influences that it will consider on a case-by-case basis when assessing if a person has control in fact of an entity for the purposes of the Acts, noting that all that is required is the possibility that the person could exercise sufficient influence, rather than if the person is actually exercising such influence.

Influence exercised through the ownership of the entity

As a general principal, OSFI will consider a person to control in fact an entity where the person has the ability to exercise voting rights attached to 35 percent or more of the equity of the entity and the ability of any other person to exercise voting rights attached to the equity of the entity is negligible. However, even if a person owns less than 35 percent of the voting rights, such person may still have control in fact over the entity depending on the specific facts.

Influence over the governors

Control in fact may occur if a person has significant economic, moral or financial influence over any governor of an entity. Also, if there are special voting rights attached to a person’s equity interests which allow the person to veto certain decisions or vote to break a voting stalemate, this could be construed by OSFI as control in fact.

Influence over the operations

OSFI will evaluate if a person can materially shape the operations of an entity through the person’s involvement in the day-to-day management of the business, including the person’s ability to appoint, remove or replace any senior officers.

Influence based on economic dependence of the entity

OSFI will consider if a person or an entity controlled by the person provides financial support (such as being a major creditor) or has an important business relationship (such as being a sole customer or client), which allows the person, or an entity controlled by the person, to exert pressure over the management and operations of the business.

Influence over the life of the entity

There may be control in fact if a person can initiate the liquidation or sale of all or substantially all of the business of the entity or appropriate the entity’s profits or property.

Key differences from existing advisory

  • OSFI is now generally of the view that a person controls in fact an entity where the ownership stake is 35 percent or more and the other owners hold a very small ownership stake;
  • the examples provided for in the advisory have been made generic (as opposed to referring to specific tax case law);
  • the indicia “representations made by the person to other stakeholders” as a consideration in which a person controls in fact an entity was removed; and
  • the “performance of key functions” factor, which considered the level of authority and accountability of the person in carrying out such person’s duties and functions, was removed from the “influence over the operations” consideration.

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1 “Regulated foreign entity” means an entity that is: a) incorporated or formed outside of Canada in which a trade agreement listed in Schedule IV of the BA is applicable; and b) subject to financial services regulation in that country or territory.

2 Schedule IV of the BA is proposed to include the following trade agreements: a) the Canada‑Chile Free Trade Agreement; b) the Canada‑Peru Free Trade Agreement; c) the Canada‑Colombia Free Trade Agreement; d) the Canada‑Panama Economic Growth and Prosperity Agreement; e) the Canada‑Honduras Economic Growth and Prosperity Agreement; f) the Canada‑Korea Economic Growth and Prosperity Agreement; g) the Canada‑European Union Comprehensive Economic and Trade Agreement; and h) the Canada‑United States‑Mexico Agreement.

3 “Approved foreign entity” refers to an authorized foreign bank, a foreign bank with a representative office in Canada or a foreign company (i.e., a foreign insurer operating in Canada on a branch basis).

4 The foreign company will be deemed to have given such notice where the surviving entity requests a new or amended entry approval.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

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