PART 4 – FORMS OF BUSINESS
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Chapter 18 – Securities
Regulation
Prepared by Douglas H. Peterson, University of
Alberta
Copyright © 2004 McGraw-Hill Ryerson Limited
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SECURITIES REGULATION
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Introduction
Historical Development of Securities
Regulation
Securities at Law
Purpose and Administration of Securities
Regulation
Mechanics of Regulation
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SECURITIES REGULATION
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Registration
Disclosure
Conduct of Trading
Insider Trading
Proxy Voting and Proxy Solicitation
Takeover Bids
Investigation and Enforcement
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INTRODUCTION
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SECURITIES LEGISLATION - AIM
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To provide the mechanism for the transfer of securities
To ensure that all investors have the ability to access adequate information in order to make informed decisions
To ensure that the system is such that the public has confidence in the marketplace
To regulate those engaged in the trading of securities
To remove or punish those participants not complying with the established rules
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INTRODUCTION
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Security – a document or other thing that stands as evidence of title to or interest in the capital, assets, property, profits, earnings, or royalties of any person or company, including any document commonly known as a security
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A corporation is one full of promises
System requires integrity and efficiency
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INTRODUCTION
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Outline of Securities Legislation
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Nature of securities
Method of distribution and trading
Obligations
Registration
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HISTORICAL DEVELOPMENT
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Roaring twenties - beginning of assets being held broadly across the spectrum
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Many investments wiped out in the Great
Depression
Led to government intervention
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Securities Frauds Prevention Act 1928
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Precursor to Ontario Securities Commission
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Various revisions over the years
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SECURITIES AT LAW
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Security – open ended for purposes of law
Catch and Release system – securities law catches all and then releases those exempt
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Anything that can be termed as a security is a security
Exemptions: those matters usually covered by other legislation
Increase in items defined as a security a reflection of the growth in financial markets
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PURPOSE OF SECURITIES REGULATION
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Purpose: Efficiency and Integrity
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Providing protection to investors from unfair, improper or fraudulent practices; and
Fostering fair and efficient capital markets and confidence in capital markets
Problem: Balance – confidence with over burdensome regulation
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ADMINISTRATION OF SECURITIES
REGULATION
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Securities regulation with provincial boards – securities commissions
SRO’s – Self Regulatory Organizations
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Investment Dealers Association
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Stock Exchanges
Mutual Fund Dealers Association
Impose obligations on their member firms
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MECHANICS OF REGULATION
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Regulate
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Who can trade
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Service providers are registered and licensed
How trades take place
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Requirement of disclosure of pertinent information
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Special protection in special circumstances; proxies, takeover bids, insider trading
No regulation of what is being offered
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Caveat Emptor – “let the buyer beware”
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Securities regulation does not get into the business wisdom of particular investments
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MECHANICS OF REGULATION
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Issue: What is regulated?
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Registration and licensing - prescribes manner in which trading is conducted
Disclosure – timely and accurate material information
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Special Protection
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Proxies
Takeover bids
Issuer bids
Insider trading
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REGISTRATION
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Registration and Licensing requirements
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Any company or person acting as an intermediary in trading of securities must be registered as a dealer or salesperson
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Required for underwriting
Licensing requirements
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Education and training
Examinations for competency
Administered by SRO’s
Exemptions: relates to profession in giving advise
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Bankers, lawyers, accountants, financial media commentators
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DISCLOSURE
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True, full and plain disclosure of all material facts
Two principles of disclosure:
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Prospectus disclosure – document stating detailed particulars about the issuer and the security
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Continuous disclosure - material facts or changes
– that affect the security after issuance
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PROSPECTUS DISCLOSURE
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Prospectus – public document required by law before securities are issued, revealing material facts about that security and its issuer, with such true, full, and plain disclosure that a potential investor may make an informed decision as to the friskiness and price of that security
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Trading – prospectus does not confer any rights to stock-exchange trading
Exemptions – under the Act where prospectus not necessary – relates to trade in question not to the security
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PROSPECTUS DISCLOSURE
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Purpose: to provide information so a potential investor can make an informed decision
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Used when new securities are brought to market
Prospectus – a public document required for issuance of new securities
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Reveals information about the security
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Relevant to the security not to trading
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PROSPECTUS DISCLOSURE
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Issuers – those who raise funds through the distribution of securities
Prospectus includes:
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Price and number of securities to be issued
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The net proceeds expected
Fees of underwriting
How funds will be used
Business risk factors of the issuer
Financial statements
Other relevant reports or opinions
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PROSPECTUS DISCLOSURE
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Filing Procedure
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Prospectus filed with relevant securities commission
Once filed and securities issued become known as a “reporting issuer”
Short Term Prospectus – available to qualified reporting issuers
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PROSPECTUS EXEMPTIONS
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Own account, not for resale
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Financial institutions, the Crown, municipalities, other specific exemptions
Isolated Trade
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Specific security of own issue, part of amalgamation, collateral for debt, stock dividend
Sophisticated Investor – for own account
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Substantial minimums – varies ($97,000 - $150,000)
Small Group
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No more than 50 prospective arms-length and sales to no more than 25
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CONTINUOUS DISCLOSURE
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Reporting Issuers’
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Continuous obligation to file and disclose
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All material information that would affect valuation of securities
Includes routine and event-specific information
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Annual and quarterly basis file financial statements
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Material Change Report – filed when material change in affairs of issuer (good or bad)
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ELECTRONIC FILING AND DISCLOSURE
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SEDAR – System for Electronic Document and Analysis and Retrieval
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Allows electronic filing and disclosure to public via the internet
Holds most documents legally required to be filed
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CONDUCT OF TRADING
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Rule: Act and SRO’s place responsibility on intermediaries to
“Know their clients”
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Know their investment objectives
Requires disclosure
Avoid conflicts of interest
Note: structuring trading activity for a trader’s own gain or to the preference of one customer is prohibited
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CONDUCT OF TRADING
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Examples:
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Large block – try to slip ahead with personal order
Rapid buy/sell transactions out of own inventory
– creates a “frenzy” at a “pumped price”
Stock looks better on dealers books; and
Could be “pumped and dumped” at a considerable profit
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INSIDER TRADING
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Issue: nature of the relationship between the person with the knowledge and the company itself
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Deducted from afar – okay
Insider or “special relationship” – a violation
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“trading on undisclosed information”
Insiders – directors, senior officers of company or affiliates, subsidiaries, parents, shareholders with more than 10% and the company itself (the company is its own insider)
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INSIDER TRADING
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Special relationship
 person or company is an affiliate or associate of an insider (business partner, spouse or partner, or relative)
Takeover bidder
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Professional services firm acting for the reporting issuer or takeover bidder
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Employee of the reporting issuer or professional services firm
A person or company that can wind up having a special relationship if they learn of a material fact or change from someone who is already in a special relationship and the existence of that relationship was known or ought to have been known by them
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INSIDER TRADING
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Note: Insiders and special relationships can still trade in those securities
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Illegality – arises in trading on the basis of undisclosed information
Tipping – an offence to pass along privileged information relating to material changes or facts
Both tipper and tipee liable to prosecution
Must wait until material fact or change has been publicly and generally disclosed
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INSIDER TRADING
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Insiders – must record and submit particulars of their trading activity within 10 days of months end to commission
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Becomes public record
Penalty: imprisonment, up to 1 million in fines, or triple the profit made or loss avoided on the illegal trade
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PROXY VOTING AND PROXY SOLICITATION
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Proxy – a document evidencing the transfer of a shareholder’s voting right to an appointee, either with instructions for voting, or allowing discretion to be exercised by the appointee, at a meeting of shareholders of the corporation
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Note: most shareholders do not attend annual general meeting – cost, distance, relevance, voting impotence of a small shareholder
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Proxies address imbalance of “divide and conquer” by
Boards
Agent – get enough proxies can have sufficient votes to be a force at an AGM
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PROXY VOTING AND PROXY SOLICITATION
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Proxy right – important political weapon in corporate politics
Solicitation of Proxies – accompany by a
Information Circular
Information Circular – discloses who is doing solicitation and their ownership in company
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Limitations and revocation of proxy must be stated and how proxy is to be employed
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TAKEOVER BIDS
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Takeover – when target is 20% or more
Regulations address:
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Ill informed shareholders knowledge of proposed new management
Views of current management
Unfair denial or acceptance of bidder’s offers against shareholders wishes
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TAKEOVER BIDS
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How:
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Bids must be made to all holders of securities of the class being sought
Disclose all financial terms
Disclose offeror’s existing interest in company
Board issues own circular within 10 days of bid with reasons for acceptance or rejection
Investors have 21 days to deposit shares with trustee
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INVESTIGATION AND ENFORCEMENT
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Far reaching powers of the commissions
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Suspend memberships
De-listing from an exchange
Fines
Imprisonment
Civil liabilities for misrepresentation
Termination of registrations
Cease-trading orders
Withdraw of exemptions
Hand over documents
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SUMMARY
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Securities Regulation
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Governs the nature of securities
Method of distribution and trading
Obligations to disclose information as to their risk
Purpose: so investors can make informed decisions
Governed by provincial legislation
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Balance
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Market efficiency
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Market integrity
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Copyright © 2004 McGraw-Hill Ryerson Limited

SUMMARY
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Security (definition)
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Very broad, includes anything that can be
Catch and release system
True, full, and plain disclosure
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Prospectus
Continuous
Issuers
Takeover Bids
Insider Trading
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