Canadian capital markets and instruments

• Author: Christopher Nicholls
• Pages: 1-22

1

CHA PTER 1

CANADIAN CAPITAL

MARKETS AND

INSTRUMENTS

A. INTRODUC TION

Harvard Law School Professor Louis Loss coined the ter m “Securities

Regulation.” He adopted the phrase as the title of his seminal 1951 trea-

tise.1 That groundbreaking book evolved from Loss’s own earlier case-

book, Cases and Mate rials on SEC Aspects of Corporate Finance, which he

had developed for the course on that subject he f‌irst began teachi ng at

the Yale Law School in 1947.2 In those days, US federal secur ities regula-

tion was still relatively new. The Securities and Exchange Commission,

created in 1934, still seemed a somewhat mysterious agency to many

legal practitioners. Loss, who had worked as a law yer and ultimately as

associate general counsel of the SEC, had a unique inside perspective on

the workings of the regulator, and his book attracted considerable atten-

tion from Wall Street attorneys eager to learn from Loss’s insights.

Times have changed. The complexity of securit ies law and regulation

has increased dramatically and t he number of specialists w ith expertise

1 Louis Loss, Se curities Regulation (Bos ton: Little Brown, 1951).

2 Louis Los s, Anecdotes of a Securities Lawyer (B oston: Little Brown, 1995) at

49–52. Though Profess or Loss taught part-time at Yale whi le working at the SEC,

he spent most of his f ull-time academic care er at Harvard. He was recr uited

to Harvar d in 1952 to take over, among other things, the t eaching of a section

of Corporations L aws previously taught by Mer rick Dodd, who had died in an

automobile accident in the f all of 1951. Ibid at 52. Loss re mained at Harvard for

the rest of his c areer. He died in 1997.

SECU RITIE S LAW2

in the f‌ield has grown r apidly. Major corporations today routinely employ

legions of lawyers speci alizing in the f‌ield. Still, the es sential subject mat-

ter is unchanged from the ti me Loss f‌irst conceived his pioneering course

at Yale. Securities law, regulation, and policy prescr ibe the legal and

regulatory environment within which people buy and sell shares, bonds,

debentures, notes, and other f‌inanci al instruments and investment prod-

ucts. These f‌inancial product s are all broadly referred to as “securities.” It

is a peculiar ter m, in some respects, and even a potentially confu sing one.

In other f‌inancial context s, a security interest typically refers to a lien or

charge granted by a borrower to a lender as an assurance of repayment.

But “securities” (as that term is used i n securities law statutes) are not

security interest s at all. They are investment instruments the trading of

which occurs withi n a legal environment that comprises a sophisticated

body of statutory and policy instruments that regul ate our capital mar-

kets. Use of the word “securities” to refer to investments has a very long

history, as the English Court of Appeal recognized more than a centur y

ago in the 1904 decision, In re Rayner.3

Well-functioning capital markets are important for businesses and

governments because they m ake it possible to raise money eff‌iciently

and at reasonable cost. They are also important for investors trying to

accumulate wealth to provide for their retirement, their children’s edu-

cation, or any number of other personal goals. Capita l markets could

exist without government regulation, but unregulated markets are fre-

quently hampered by exploitive practices t hat can hurt some investors

and shake the conf‌idence of other investors, maki ng them reluctant to

participate. Thoughtful and bala nced regulation can address both prob-

lems, protecting investors and shielding them from misconduct while

lowering the cost of capital for businesses and governments by helping

to restore conf‌idence in securities m arkets. But all regulation comes at

a cost. Over-regulation can be at least as h armful as under-regulation.

Finding the optimal level of regulation, in any f‌ield, is the perennial,

and often elusive, goal of wise policy makers. Whether any specif‌ic

regulatory regime, such as Canada’s, has achieved this optimal goal

will always be open to debate.

Before embarking upon a detailed review of how Can adian regula-

tors and policy makers have tried to frame rules th at balance the costs

and benef‌its of securitie s regulation, it is useful, by way of background,

to provide a brief sketch of some fundamental features of the Canadian

capital markets and the f‌inancial instr uments used for fundraising and

investment purposes.

3 In re Rayner, [1904] 1 Ch 176 at 187.