Securities Dealers, Advisers and Other Registrants, and Self-Regulatory Organizations

• Author: Christopher C. Nicholls
• Profession: Faculty of Law, Western University
• Pages: 151-181

151

CHAPTER 5

SECURITIES DEALERS,

ADVISERS AND OTHER

REGISTRANTS, AND

SELF-REGULATORY

ORGANIZATIONS

A. INTRODUCTION

Securities regulation, traditionally, has focused on the activities of two

groups of market participants: securities issuers and securities market

professionals, such as brokers, dealers, and advisers.

This chapter provides a brief int roduction to the regulation of secur-

ities market professionals and the role of self-regulatory organizations

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

belong.

B. SECURITIES FIRMS: OVERVIEW

Like the sale of many consumer goods, the sale of securities to the

public requires sophisticated distribution 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 the 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 securities from the issuer, they are described

as underwriters, as discussed in Chapter 6.

SECU RITIES LAW152

The term “underwriting” in the securities industry means some-

thing quite dierent from underwriting in the insurance industry, but

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

when f‌irms made certain f‌inancial commitments in writing, they indi-

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

the commitment in the document. In modern securities industry par-

lance, underwriting refers to the business of raising money for f‌irms

by committing to purchase their newly issued securities (essentially

at wholesale prices) with a view to reselling them at a prof‌it. Once the

underwriter has made that contractual commitment, it is the under-

writer, not the issuer, who bears the risk of resale (subject to certain

contractual “outs” that will be discussed later in this chapter). Thus,

from the issuer’s point of view, the underwriter comm its itself to ensure

that f‌inancing i s provided. As discussed fur ther in Chapter 6, Canadian

securities law s extend the def‌inition of underwriting to include oering,

by f‌inancial f‌irms, of securities for sale to investors as part of a distri-

bution even when those f‌irms do not make such a def‌inite contractual

commitment, but instead merely agree to act as agents of the issuer.1

This means th at whenever a securit ies f‌ir m assists a company in the dis-

tribution of its shares or other secur ities to investors for a fee — whether

on a f‌irm commitment or merely on a “best eorts” agency basis — the

securities f‌irm will be deemed an underwriter for securities law pur-

poses. That legal characterization does not change even if the f‌irm has

not literally underwr itten the issue by committing itself to buy the is su-

er’s securities with a view to reselling them.

Securities f‌irms that carry on the business of underwriting are often

referred to as investment banks. In Canada, the largest domestic invest-

ment banks are now subsidiaries of the largest Canadian chartered banks,

that is, those banks found on Schedule 1 of the federal Bank Act.2This

was not always the case. Prior to 1987, Canadian investment banks were

independent f‌irms and, indeed, f‌inancial institution cross-ownership

was legally restricted.3 Historically, some of the world’s largest invest-

ment banks were not aliated with commercial or retail banks. In the

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

1 See, for example, Secur ities Act (Ontario), RSO 1990, c S.5 [OSA], s 1(1).

2 SC 1991, c 46.

3 For a detailed expl anation of the legal and regul atory changes that faci litated

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 136.