Securities dealers, advisers and other registrants, and self-regulatory organizations

• Author: Christopher Nicholls
• Pages: 107-126

107

CHA PTER 4

SECURITIES DEALERS,

ADVISERS, AND OTHER

REGISTR ANTS, AND

SELF-R EGUL ATORY

ORGA NIZ ATIONS

A. INTRODUC TION

Securities regulation, traditionally, has focused on the activ ities of two

groups of ma rket particip ants: secur ities is suers and securities market

professionals, such as brokers, dealers, and adv isers.

This chapter provides a brief introduction to the regulation of secur-

ities market professionals and t he role of self-regulatory organizations

or SROs to which many (but not all) such professionals are required to

belong.

B. SECUR ITIES FIR MS: OV ERVIEW

Like the sale of many consumer good s, the sale of securities to the

public requires sophisticated di stribution channels. Automobile manu-

facturers, for example, do not typically sell their products directly to

consumers. Instead, they sell their products to dealers at wholesale.

Those dealers then resell t he products at a prof‌it to retail buyers. In the

securities indust ry, these two functions — buying from the producer of

securities (or issuer) at “wholesale” and subsequently reselling to the

public — also are performed by f‌irms k nown as dealers, although when

dealers initially purchase securitie s from the issuer, they are described

as underwr iters, as discussed in Chapter 6.

SECU RITIE S LAW108

The term “underwriting” in the securities i ndustry means some-

thing quite different from under writing in the insurance industry, but

both sorts of “underw riting” share a common element. Historically,

when f‌irms made cert ain f‌inancial commitments in writing, t hey indi-

cated that commitment by writing the f‌irm name under the terms of the

commitment in the document. In modern securities industr y parlance,

underwriting refers to the business of raising money for f‌irms by pur-

chasing their securities (essentially at wholesale price s) with a view to

reselling them at a prof‌it. Once the under writer has made t hat contrac-

tual commitment, it is the under writer, not the issuer, who bears the risk

of resale. Thus, from the issuer’s point of view, the underwr iter commits

itself to provide f‌inanci ng. As discussed further in Chapter 6, Canadian

securities laws extend the def‌inition of underwr iting to include the sa le

of securities by f‌in ancial f‌irms even when those f‌irms do not make s uch

a f‌irm contractual comm itment, but instead merely agree to act as agents

of the issuer in a distribution.1 This means that whenever a securities

f‌irm assists a company by distributing its shares or other securities to

investors for a fee, the securities f‌ir m will be deemed an underw riter

for securities law purp oses. That legal characteri zation does not change

even if the f‌irm has not literally underwritten t he issue by committing

itself to buy the issuer’s securities with a view to re selling them.

Securities f‌ir ms that carry on the bus iness of underwriting are often

referred to as investment ban ks. In Canada, the largest inve stment banks

are now subsidiaries of the largest Canadian ch artered banks. This was

not always the case. Prior to 1987, Canadian investment ba nks were

independent f‌irms and, indeed, f‌i nancial institution cross-ownership

was legally restricted.2 Historically, some of the world’s largest invest-

ment banks were not aff‌iliated w ith commercial or retail ban ks. In the

United States, Depression-era ban king law reforms in the Banking Act

of 193 33 (commonly known as the Glass-St eagall Act) prohibited banks

from being aff‌iliated w ith securities dea lers and so separated commer-

cial banki ng from investment banking in t he United States for decades.

That historical commercial b ank/investment ba nk divide was gradual ly

eroded in the United States by a number of interst itial regulatory in itia-

tives. Most of the remaining practical barriers preventi ng consolidation

of securities and commercial banking f‌irm s were f‌inally removed with

1 See, for example, OSA, s 1(1).

2 For a detailed expl anation of the legal and regu latory changes that fac ilitated

bank owner ship of Canadian secur ities dealers, and the force s underlying those

changes, see C hristopher C Nicholls, “The Regulat ion of Financial Instit utions:

A Ref‌lective But Select ive Retrospective” (2011) 50 Canadian Business Law Jour-

nal 129 at 136ff.

3 Pub L 73-66.