Conclusion

• Author: Christopher C. Nicholls
• Profession: Faculty of Law, Western University
• Pages: 562-580

562

CHA PTER 12

CONCLUSION

A. NIMBLE REGUL ATION FOR INNOVATIVE

M AR K ETS

The capital markets and the regulatory environment have been utterly

transformed since Joseph Norman Dolley posted his short advertise-

ments to Kansas newspapers in 1910, paving the way for the f‌irst Amer-

ican “blue sky” securities statute. The advances in f‌inancial theory, the

development of computers and communications technology, and the

increasing inter nationalization of markets have expanded opportun-

ities for industry and investors worldwide. But they have al so, sadly,

expanded the scope for chicaner y. Regulators have been told they must

be “nimble” to be eective in the complex and constantly changing

world in which they now must operate.

Some of the innovations and challenges t hat call for such nimble regu-

latory approaches have been discussed elsewhere in this book. However,

there have been many other import ant recent developments relating to

securities regulation which have not yet been dealt with. It is impossible

to survey all of these topics. This chapter will touch upon three develop-

ments with immed iate and specif‌ic implications for securities regul ation:

• the inf‌luence of behavioural f‌inance on securities regul ation;

• shareholder activism a nd regulatory initiatives relating to proxy

rules and shareholder voting; and

• f‌intech and regtech.

Conclusion 563

1) Behavioural Finance and Securities Regulation

Securities regulation, as discussed in Chapter 2, traces its history to

government initiatives introduced in response to f‌inancial crises or a

perceived proliferation of investor abuse. The optimal role of government

in responding to cri sis or preventing abuse was, and continues to be, a

subject of considerable debate. However, the dominant trend in secur-

ities regulation in most developed countrie s, including Canada, has been

to rely principally upon mandated disclosure to protect investors and

promote the fairness and eciency of capital markets. As the Supreme

Court of Canada stated in 20 07, “disclosure lies at the heart of an eect-

ive securities regime.”1

The importance of disclosure animates prospectus rule s, insider-

trading rule s, take-over bid rules, and even the relationship disclosure

regime of phase 2 of the Canadian securities reg ulators client relation-

ship model (CRM2).2 Regulatory reliance on the sanitizing and protect-

ive power of mandated disclosure3 i s premised on the assumption that

people to whom disclosure is made have sucient time a nd expertise to

review and fully underst and the disclosures of f‌inancial a nd other infor-

mation provided to them. That assumption ha s long been the subject of

considerable doubt.4 Indeed, whether the cost of mandated d isclosure

is invariably justi f‌ied by its benef‌its has also been cal led into question.5

But the general skepticism about the value of disclosure ha s now been

augmented by behavioural f‌in ance research that suggests th at investors

may be subject to a host of cognitive limitations a nd biases that mean

that they may not necessa rily respond to information and incentives in

quite the way the framers of our di sclosure-based system would expect.

Behavioural f‌in ance has emerged from the academic hinterland to

become an increasingly well-respected branch of f‌inancial economics.6

Several leading behav ioural economics scholars have now been honoured

1 Kerr v Danier Le ather Inc, [2007] 3 SCR 331 at 337.

2 For a discu ssion of the development of CRM and CR M2 see Chapter 5, section B(5).

3 Every securit ies lawyer is fami liar with Louis Bra ndeis’s famous aphorism,

“Sunlight is s aid to be the best of disinfe ctants; electric light t he most ecient

policeman.” Louis D Bra ndeis, Other People’s Money and How the Banke rs Use It

(Washington: Nation al Home Library Foundation, 1933) at 62.

4 See, for example, Homer Kr ipke, “The Myth of the Informed Lay man” (1973) 28

Business Lawyer 631.

5 See, for example, Omri B en-Shahar & Carl E Schnei der, More Than You Wanted

to Know: The Failure of Mandated Disclosure (Pr inceton, NJ: Princeton Unive rsity

Pr ess, 2014).

6 For a general discussion, se e Christopher C Nicholls, Corporate Fina nce and

Canadian Law, 2d ed (Toronto: Carswell, 2013) at 116–18.