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

AuthorChristopher C. Nicholls
ProfessionFaculty of Law, Western University
Securities regulation, traditionally, has focused on the activ ities of two
groups of ma rket particip ants: securities is suers and securities market
professionals, such as brokers, dealers, and adv isers.
This chapter provides a brief int roduction 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
Like the sale of many consumer goods, the sale of securities to t he
public requires sophisticated di stribution channels. Automobile manu-
facturers, for example, do not typically sell their products directly to
consumers. Instead, they sel l 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.
The term “underwriting” in the securities i ndustry means some-
thing quite dierent from under writing in the in surance 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 wr iting the f‌irm name under t he terms of
the commitment in the document. In modern securities industr y par-
lance, underwr iting refers to the business of ra ising money for f‌irms
by committing to purchase their newly issued securities (essentially
at wholesale prices) with a view to reselli ng 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 f‌ir ms, of securities for sale to investors a s 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 f‌ir m will be deemed an underwriter for securities law pur-
poses. That legal character ization 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 wit h 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.2 This
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.

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