As Brookfield seeks U.S. stock index membership, it could continue to turn American

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The Brookfield family of companies are Canadian colossi, cream of the country’s corporate crop. But they also have a distinctly New York flavour to them, what with many of their executives and clients working in Gotham.

So the news that the freshly created investment arm Brookfield Asset Management Ltd. BAM-T is considering moving its headquarters to New York may give Canadians pause.

The aim, Brookfield says, is to get Brookfield Asset Management considered for inclusion in U.S. stock indexes, thereby expanding the investor base. Mutual funds and exchange-traded funds that track the indexes have trillions of dollars of assets – and they must buy the equities that make up those indexes. That creates demand, and price support for the stocks.

But what if this move augurs a wholesale flight south of the border by the Brookfield companies – like a flock of geese in the wintertime, except they wouldn’t return? It could happen, leaving Canada out in the cold.

At this time, Brookfield’s American dream is limited to just Brookfield Asset Management, the company it created in a 2022 spinoff from the parent company, now called Brookfield Corp. There are now nine major publicly traded Brookfield entities, and Brookfield has not said that it is desirous of U.S. index membership for any of the others.

However, once one goes, the others may follow. Why? Let’s talk indexes and their methodologies.

The big ones in Canada are the S&P/TSX Composite, a broad group of 200-plus companies, including five Brookfield entities, listed on the Toronto Stock Exchange, as well as the S&P/TSX 60, a selection of the biggest TSX members, which include Brookfield Asset Management, Brookfield Corp. and Brookfield Infrastructure LP. The maker of these, S&P Dow Jones Indices, is also responsible for the U.S.-based S&P 500 and the musty but enduring Dow Jones Industrial Average.

But they’re not the only game in town. The Financial Times Stock Exchange, now known as FTSE and pronounced “footsie,” produces the Russell indexes, which include broad measures of the U.S. markets. And MSCI Inc. has created plenty of global indexes that are used to capture big chunks of the world’s equities.

If you’re going to produce indexes of countries’ top stocks, you need to decide every stock’s one and only home country.

The core rule in all of the domicile methodologies, historically, has been where the company is incorporated. For many companies, that’s the same country as their headquarters, where they do most of their business and where most of their stock trades. But other companies mix it up in this increasingly globalized world. So all three index providers deal with these realities by considering a long list of criteria.

Brookfield Asset Management said that to pursue U.S. index membership, it’s considering naming New York its headquarters, but keep its incorporation in Canada. When The Globe and Mail first reported Brookfield’s plans, the vibe was that it was focused on FTSE Russell and would stay in the S&P/TSX indexes.

But maybe not. As spokesperson Kerrie McHugh told me, “Ultimately it’s up to the S&P index committee if they decide to keep or remove us” from Canadian indexes.

Place of incorporation is still important to S&P and the other index companies, and yes, no Brookfield public entity is incorporated in the U.S. (The focus on incorporation status in index membership is why the former Encana Corp., now Ovintiv Inc., took the nuclear option and held a successful shareholder vote in 2020 to switch its incorporation from Canada to the U.S.)

But S&P’s index committee also considers operational headquarters location and primary stock exchange listing as the two other “principal factors” determining country of domicile. And it will also consider the geographic breakdown of revenue and assets, ownership information, location of officers, directors and employees, investor perception, and “other factors deemed to be relevant.” MSCI and FTSE Russell also have similar lists of considerations.

So, what’s pointing south for Brookfield? “Primary exchange” is actually a mushier concept than you’d think. You’ll see definitions that say the primary exchange is the first exchange on which a company ever listed its shares. But many argue that it’s the exchange where there’s the most trading volume.

Eight of the nine Brookfield publics traded more shares on the New York Stock Exchange in the past year than on the TSX, including all three of the entities in the S&P/TSX 60. (Ms. McHugh says Brookfield Asset Management believes the primary listing is where there’s the most volume.)

S&P declines to say how it defines “primary listing,” and it’s also considering changing that domicile-determination criterion to “any listing.” MSCI also fails to define “primary listing” in its methodology. FTSE flat-out says it may simply assign a company with mixed geographic characteristics to the country which exhibits the greatest liquidity of trading.

The S&P Dow Jones indexes that are branded “Dow Jones” say a U.S. company must make filings with the Securities and Exchange Commission as a domestic company, not a “foreign private issuer,” as all nine Brookfield entities are currently. But Ms. McHugh says that Brookfield Asset Management is considering switching to domestic SEC filings, in addition to the headquarters change.

To file with the SEC, a domestic U.S. company must have adopted U.S. Generally Accepted Accounting Principles (GAAP), not the International Financial Reporting Standards that most Brookfield entities use. That switch would be an expensive hurdle – but Brookfield Asset Management (and insurer Brookfield Wealth Solutions Ltd.) are already using U.S. GAAP.

The location of the company’s revenue and assets is another criterion all three examine. Brookfield Asset Management could easily classify all its operations as U.S. if it moved its headquarters there. Parent Brookfield Corp. also gets more of its revenue, and has more of its assets in the United States than any other country. Brookfield Business Partners LP and its Brookfield Business Partners Corp. have more assets in the U.S. than anywhere else.

The bottom line is that every one of Brookfield’s major public companies has one or more factors that point to it being a U.S., not Canadian, concern. In the near term, a commitment to keep its incorporations in Canada, versus the U.S., may preclude a major reclassification of their domiciles, and their index memberships.

In the long term, though, Canadians could see a day where the country’s major stock indexes are Brookfield-free – a major blow to the country’s corporate pride.