Sources, History & Constitutional Division of Powers of Securities Regulation

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  • Sources, History & Constitutional Division of Powers of Securities Regulation
  • Division of power
  • Provinces have enacted securities acts under their power to legislate wrt “property and civil rights”- includes dealings in prop, contracts, and reg of business, trades and professions

o Provincial laws upheld even where there is some overlapping, but not conflicting, federal law

o sometimes prov securities laws do not apply to federal companies

  • Federal government could justify regulating securities under the trade and commerce power (may be necessary due to globalization)
  • History of securities regulation
  • Securities reg (regulating brokers, requiring prospectus disclosures, etc.) is a rel recent phenomenon, beginning in mid 19th century (ON first jurisdiction to adopt English Directors Liability Act in 1891; 1920 fraud protection acts, prospectus disclosures in 1947)

o Modern Can securities reg = derived from Kimber Report, 1965 (addressed insider trading, takeover bids and ongoing disclosure requirements) and Merger Report, 1970 (led to “closed system” statute with emphasis on ongoing disclosure for the purposes of secondary market trading)

o Interprovincial cooperation has also been an important part of securities reg, although there is no national regulator yet

  • Sources of Provincial Securities Regulation

1) Securities Law & Related Sources

  1. Provincial and Territorial Securities Acts
  2. Provincial regulations and rules: originally security acts give extensive powers to Lieutenant Governor in Council to make regs. Now, securities commissions also have power to make rules and regs, subject to procedural requirements
  3. Procedural requirements include: commission must publicize proposed rule and accept comments for 90 days; if commission makes material changes to rule must publish amended rule and give further period for comment; when finalized, rule goes to Minister who can accept/ reject/ return rule to commission for further consideration
  4. National and multi-lateral instruments: developed cooperatively and agreed to by all securities administrators across country (no binding legal effect, but can be adopted in each jurisdiction).
  5. when some but not all of Can Securities Administrators is sue an instrument, it is a multilaterial instrument
  6. Policy statements: issued by securities administrators in Can and indicate how they interpret the legislation, regs or rules and provide guidance to market participants in complying with legislation, regs and rules
  7. National policy statements: issued jointly by Can Securities Administrators
  8. Notices and Accounting Communiques: released by securities commission and contain info of interest to those who deal with regs on a regular basis
  9. Memoranda of Understanding: between diff securities administrators in Can or abroad
  10. Decisions & rulings
  11. Blanket orders: securities commissions can issue orders (usually sought and provided on a case- by-case basis)- in ON this is no longer allowed (must instead pass a rule)
  12. Bulletins, Websites and Canadian Securities Administrators Communiques
  13. International Organization of Securities Commissions: review major reg issues, promote development and improvement of efficiency of emerging securities markets by establishing principles and min standards, prepare training and facilitate exchange of info/ expertise
  • Self-regulatory bodies
  1. Stock exchanges: pass by-laws and rules to govern qualifications and continued fitness of members for membership in exchange, set out requirements for listing of securities of issuers and conditions to be met by listed issuers to maintain their listing, and govern manner in which trading is conducted
  2. Will also issue policy statements
  3. Other self-regulatory orgs: Investment Dealers Association of Canada, Canadian Securities Institute, Institute of Chartered Financial Analysts (have tests etc.)
  4. Securities Commission Review: have power to review and make decisions wrt a by-law, rule or other reg instrument made by a self-regulatory org or stock exchange
  • Commission and Administrators: Commissions are 2 tiered structures
  1. Panel of commissioners: makes orders and rulings and acts as an appeal tribunal from decisions of administrator; also formulates policies and makes recommendations to govt for changes in legislation/regs
  2. Admin agency headed by chief admin officer: exercises admin functions assigned to administrator under applicable act and implements decisions/directives of commission

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Securities Trading – Securities Regulation

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  • Securities Trading
  • Open Market in Capital

Primary market (sale of securities to investors) and secondary market (investors exchange sec in return for payment from another invested) together permits continued marketability / liquidity of shares

  • Crucial term, two parts together constituting “open market in capital”

o Primary market: sale of securities to investors. The money flows through from investors to the company (have benefit of liquidity)

o Secondary market: investors exchange securities in return for payment from another invested (issuer not generally involved)

  • Permits continued marketability/ liquidity of shares: For investors to realize on their investment, they must be able to sell among themselves on various exchanges (g. TSX)
  • Simplifications for trading

o Brokers: Takes orders from buyers/sellers, locates buyers/sellers for clients and executes trades on behalf of clients.

o Stock exchange: Trading involves 1) communication between buyer and seller; 2) exchange upon agreement. A stock exchange facilitates both elements, saving the client time/money and increasing the likelihood that security will be sold (for sellers). Issuers want securities to be traded on exchange b/c it increases their securities’ value and therefore, the amount of capital they can raise

  1. Buyers can find sellers and sellers can find buyers (brokers meet in a specified place – either real or online)
  2. When asking and bid price correspond, there would be an offer, acceptance and consideration (money to be paid in return for shares). Payment would occur and the ownership would change hands (bearer form – less used to prevent theft; or registered form with the name of the owner on the certificate and on books of company with endorsements)

o Clearing agency: created to simplify transfers between brokers by tracking obligations and notifying brokers of their net obligation

o Broker inventories: reduce amount of issuances and re-issuances (instead of performing full transfer for every transaction, brokers would record in their books who the beneficial owners of securities were)

o Nominee owners: as brokers began to hold too many securities, nominee owners name and securities registered to them – bookkeeping entries keep track of who the beneficial owners are o Securities Depository corporations: represent a single nominee owner (and sometimes perform clearing role (e.g. Canadian Depository for Securities Ltd – CDS) o Computerized stock exchanges and trading: Increases transaction speed AND further facilitates communications.

  • Private Trades
  • Private trade: Trades without using brokers or a stock exchange – take place directly between the buyer and the seller
  • Upstairs market: involves trades by large, institutional investors buying or selling in large volumes
  • Over-the-Counter Trades: when issuers are unable to meet listing requirements of a formal stock exchange they may trade over-the-counter, with the assistance of a broker

o used for bonds/debentures too b/c 1) large denominations, 2) nature of investment – longer time horizons, 3) held in large Q by institutional investors

  • Other trades:

o Alternative trading systems: less restrictive listing requirements, and largely automated o Margin trading: Broker loans funds to clients to purchase securities

  • Restrictions exist regarding 1) the % that the client must pay and 2) to maintain a particular % if the value of the security changes.

o Short selling: Investor sells securities that he/she doesn’t own and takes on a contractual obligation to supply the shares in return for payment by the person purchasing the securities.

  • Broker can facilitate this trade by loaning the investor the securities.

NOTE: Major investors in Canadian Securities Market include banks, trust companies, credit unions/caisses populaire, life insurance companies, pension funds, investment funds (mutual funds/investment companies), and individuals (to a lesser extent).

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Introductory Concepts – Securities Regulation

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  • Purpose of Selling Securities
  • Securities are primarily sold to raise funds for investment, e.g. the launching of a business venture/ expanding existing venture (private company goes public ^becomes a reporting issuer)

o To purchase assets that will be used to produce goods/services for which there is a demand sufficient to generate profits comparable to that of other investment opportunities of similar risk.

  • Types of Securities

Two main types of securities

  • Debt: Funds can be borrowed, offering interest payments and principal repayment

o Includes trade credit (e.g. ST accounts payable), short-term bank loan (e.g. line of credit), long­term bank loan (e.g. with security interest – property and/or adherence to ratio tests that may indicate risk of bankruptcy), commercial paper (obligation to pay specified amount at specified date), bonds (evidence of indebtedness secured by an asset of borrower), debenture (unsecured evidence of indebtedness)

o Other characteristics of bonds/ debentures:

  • Call feature: allows borrower to repurchase bond after specified date for specified price (usually prem to face amount/ par value)
  • Sinking fund: indenture may provide for a fund built up each year to redeem some portion of bonds before maturity or to meet the obligations to pay at maturity
  • Convertible: right to convert bonds into shares
  • Warrant: right to buy securities from issuer for exercise/striking price during a specified period
  • Equity: rights to share in the distribution of the profits and the proceeds remaining after the sale of the assets of the business and payment of amounts borrowed.

o Common Shares: most frequent bundle of rights in a company that includes the following rights

  1. Right to vote (on important matters – e.g. election of directors, how company will be managed etc.)
  2. Right to dividends (not obligation – corp can decide to declare dividends to which each common share has a right a share in $ or in stocks where there is a stock dividend)
  • Liquidation right: entitled to share pro rata in any proceeds of liquidation (to the extent proceeds remain after satisfaction of other claims)

o Preferred Shares: given preference wrt distrib of dividends and proceeds of liquidation (usually non-voting). May carry the following special features:

  1. Cumulative: if div are not declared or are not suff to pay full amount of annual preferred div on preferred shares, amount unpaid carries over to the next year (usually preferred shares are cumulative)
  2. Participating: participate in div beyond the specified preferred amount (preferred amount + included in common share amount left over)
  • Redemption/Call provision: if shares are redeemable by the company (to facilitate financing of company at specified price)
  1. Retraction rights: permits shareholder to tender share to co and co has to buy it back at specified price

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