Securities Dealers, Other Registrants, and Alternative Trading Systems (ATSs)
| Author | Christopher C. Nicholls, Jeffrey G. Macintosh |
| Pages | 91-122 |
CHAPTER
4
SECURITIES
DEALERS,
OTHER REGISTRANTS,
AND
ALTERNATIVE
TRADING
SYSTEMS
(ATSs)
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
and
dealers.
In
this chapter,
we
discuss
the
regulation
of
securities market pro-
fessionals,
the
stock exchanges,
and
other organizations (such
as
self-
regulatory
organizations,
or
SROs)
to
which such professionals belong.
We
also touch
briefly
upon
the
recent challenges
and
opportunities
offered
by
computerized alternative trading
systems.
B.
SECURITIES
FIRMS: OVERVIEW
Like
the
sale
of
many consumer goods,
the
sale
of
securities
to the
public requires sophisticated distribution channels. Automobile man-
ufacturers,
for
example,
do not
typically
sell
their products directly
to
consumers. Instead, they sell their products
to
dealers
at
wholesale,
and
those
dealers
then
resell
the
products
at a
profit
to
retail buyers.
In
the
securities industry, these
two
functions
—
buying
from
the
producer
(or
issuer)
at
"wholesale"
and
subsequently reselling
to the
public
—
also
are
performed
by
firms
known
as
dealers, although
91
92
SECURITIES
LAW
when dealers initially purchase securities
from
the
issuer, they
are
described
as
underwriters.
The
term "underwriting"
in the
securities industry means some-
thing quite
different
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 parlance,
underwriting
refers
to the
business
of
raising money
for
firms
by
pur-
chasing their securities (essentially
at
wholesale prices) with
a
view
to
reselling them
at a
profit.
It is the
underwriter,
not the
issuer,
who
bears
the
risk
of
resale. Thus,
from
the
issuer's
point
of
view,
the
under-
writer commits itself
to
provide financing.
As
discussed
further
in
chapters
5 and 6, the OSA
actually extends
the
definition
of
underwrit-
ing to
include
the
sale
of
securities
by
financial firms even when those
firms
do not
make such
a
firm
contractual commitment,
but
merely
act
as
agents
of the
issuer
in a
distribution.1
In
other words, whenever
a
securities
firm
assists
a
company
by
distributing
its
shares
or
other
securities
to
investors
for a
fee,
the
securities
firm
will
be
deemed
an
underwriter
for
purposes
of the
OSA. That legal characterization does
not
change even
if the
firm
has not
literally underwritten
the
issue
by
committing itself
to buy the
issuer'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,
in a
process that
began with changes
to
financial institutions legislation
in
1987,
the
largest
investment
banks
have become
subsidiaries
of the
largest
Canadian
chartered banks. But, investment banks need
not be
affiliat-
ed
with such commercial
or
retail banks,
and
some
of the
world's
largest
investment banks, such
as
Goldman Sachs,
are not so
affiliated.2
1
Securities
Act
(Ontario),
R.S.O.
1990,
c. S.5
[OSA],
s.
1(1).
2
It has
occasionally been suggested that there
are
increasing commercial pressures
on
investment banks
to
have commercial bank
affiliations.
It
has
been reported
that
some large securities issuers demand access
to low
interest commercial loans
as a
condition
for
awarding lucrative underwriting engagements. Investment
banks
affiliated
with large commercial banks able
to
make such loans are,
accordingly,
frequently
in a
better position
to win
such engagements than inde-
pendent
securities
firms.
See, e.g., Andrew Willis,
"Is a
Bank
Loan
Better
than
Good
Analyst
Coverage?"
Globe
and
Mail
(30
August 2001) B13.
Securities
Dealers, Other Registrants,
and
Alternative
Trading Systems
93
Underwriting
firms,
of
course,
do
much more than simply pur-
chase securities
for
resale. They also provide advice
to
issuers about,
among other things,
how to
structure financings
and how to
design
and
price securities
to be
issued.
Securities
firms
are
well equipped
to
provide such advice. They
are in
constant touch with
the
markets
and
have
developed special systems
and
expertise enabling them
not
only
to
evaluate
what
features
securities ought
to
have
to
make them attrac-
tive
to
investors,
but
also
how to
price
the
most complex
and
innova-
tive
of
securities.
Moreover,
because underwriting
is a
competitive
business,
firms
have significant incentives
to
develop
new
financial
products
to
meet
the
needs
of
both issuers
and
investors
so
that
the
firms
may win new
underwriting engagements.
Traditionally,
when securities
firms
purchased shares
for
their
own
account,
as
principals
and not
merely
as
agents
for
their clients, they
were said
to be
engaged
in
securities "dealing."
When
they purchased
and
sold shares
as
intermediaries
or
agents
for
others,
they were said
to
be
acting
as
"brokers." This distinction between
the
terms "dealer"
and
"broker"
is
still important
in
some contexts, but,
for
purposes
of
Ontario securities law,
the
meaning
of the two
terms
is
modified,
as
discussed
further
below.
Finally,
some securities industry professionals
act
neither
as
deal-
ers
nor
brokers,
but
rather
(or
perhaps additionally) hold themselves
out
as
investment advisers whose investment advice
may be
obtained
for
a
fee.
What should
be
clear, however,
is
that both
issuers
and
investors
rely
on
securities
firms
for
their integrity
and
expertise, whether
the
firms
engage
in
underwriting, broker-dealer activities,
or
advising
activities.
It is
well known that
in
markets
for
many tangible consumer
goods, unscrupulous sales people
often
prey upon vulnerable
or
gullible
consumers
by
using high-pressure tactics
and
grandiose,
unsubstantiated claims.
In the
case
of the
sale
of
intangible assets, such
as
securities, these
risks
are
magnified.
Even
the
most educated con-
sumer,
after
all, cannot "kick
the
tires"
of an
original issue, high-yield
bond. Securities
fraud
is,
sadly,
all too
easy
to
perpetrate.
And
honest
but
incompetent securities dealers
and
advisers
can
also lead investors
to
their
financial
ruin.
History,
ancient
and
modern,
is
filled
with stories
of
securities
scams
and
debacles. Securities regulators hope that similar disasters
can
be
avoided
in the
future
by
imposing
strict rules
upon
firms
whose
business turns
on the
buying
and
selling
of
securities
—
firms
that
are
thought
to act as the
securities market's "gatekeepers."
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