Canadian Capital Markets and Instruments

• Author: Christopher C. Nicholls
• Profession: Faculty of Law, Western University
• Pages: 1-26

1

CHA PTER 1

CANADIAN

CAPITAL MARKETS

AND INSTRUM ENTS

A. INTRODUC TION

Harvard L aw School Professor Louis Loss coined the ter m “Securities

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

tise.1 That groundbreaking book evolved from Loss’s own ea rlier 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 teaching

at the Yale Law School in 1947.2 In those days, US federal securit ies

regulation was still relatively new. The Securities a nd Exchange Com-

mission (SEC), created in 1934, still seemed an opaque and somewhat

mysterious agency to many legal practitioners. Loss, who had worked

as a lawyer and ulti mately as associate general couns el of the SEC, had

a unique inside perspective on the workings of the regulator, and his

book attracted considerable attention from Wall Street attorneys eager

to learn from Loss’s insight s.

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

2 Louis Loss, A necdotes 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 hi s full-time academic ca reer at Harvard. He was

recruited to H arvard in 1952 to take over, among other th ings, the teaching

of a section of Corpor ations law previously taught by Mer rick Dodd, who had

died in an automobile acci dent in the fall of 1951. Ibid at 52. Loss remained at

Harvard for t he rest of his career. He died in 1997.

SECU RITIE S LAW2

Times have changed. The complexity of securities law and regu-

lation has increased dramatically and the number of specialist s with

expertis e in the f‌ield has grown rapidly. Major corporations today

routinely employ legions of lawyers special izing in the f‌ield. Still, t he

essential subject matte r has persisted from the time Loss f‌i rst conceived

his pioneering course at Yale. Securities law, regulation, and policy pre-

scribe the legal and regulatory environment withi n which people buy

and sell shares, bonds, debenture s, notes, and other f‌inancial inst ru-

ments and investment products. Many of these f‌inancial products fall

within the broad def‌in ition of “securities.”

“Securities” is a peculiar term, in some respect s, and even a poten-

tially confusing one. In other f‌inancial contexts, a security interest typ-

ically refers to a lien or charge granted by a borrower to a lender as an

assurance of repayment. But “secur ities” (as that term is used in secur-

ities law statutes) are not security intere sts at all. They are investment

instruments the buying and selling of which occur s within a heavily

regulated environment comprising a sophisticated body of statutory

and policy instr uments that govern the operation of our capital mar-

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

history, as the English Court of Appeal recog nized more than a century

ago in the 1904 decision, In re Rayner.3

Well-functioning capital markets are important for businesses and

governments because they make it possible to raise money eciently

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.

Capital markets could exist without government regulation. Some

commentators have argued, in fact, th at regulation of securities markets

could impose costs on business es that are not always justif‌ied by t he

benef‌its of such regulation and which could have unintended adverse

consequences, including potentially deterring entrepreneurship on the

part of smaller enterpr ises.4 But unregulated markets are frequently

plagued by exploitive and predatory practices that can severely harm

some investors while rattling the conf‌idence of others, m aking them

reluctant to participate and so potenti ally depriving worthwhile busi-

nesses of much needed capital. Thoughtful and balanced regulation

can address both problems, protecting i nvestors from misconduct while

lowering the cost of capital for businesses and governments by helping

to restore conf‌idence in securities m arkets.

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

4 See, for example, George J. Stig ler, “The Theory of Economic Reg ulation” (1971)

Bell Journal of Economics a nd Management Science 3.