Securities Regulation Outline

1.                                            Introduction to the Regulation of Capital
1.1.                                       The Meaning and Operation of Capital Markets
·          Channel to transform savings into investments.
1.1.1.                                   Operation of Capital Markets (Henning)
To analyse the numerous financial markets, it is useful to divide them into categories.
Primary & Secondary Markets
4 Markets
1.        Registered stock exchange, normally only equity issues
2.        Over the counter or unlisted market among registrants (brokers or dealers, recognised members of the stock market), also includes debt issues.
3.        Investors deal face to face
4.        Computers substitute for face to face.
There are also a number of ways of classifying markets:
1.        Loans and Securities
2.        Securities and Markets
·          Debt
·          Equity.
·          E.g. convertible debenture, option allows debt to be converted into equity.
·          Money and Capital Markets
·          distinction between these.
·          Money markets generally short term, max 1 year.
1.1.2.                                   Major Investors in the Canadian Securities Market (Gillen)
Major players in the Market
1.        Individuals
2.        Institutions (by far the majority in value but not in number)
·          Banks
·          Trust companies
·          Life insurance
·          Pension funds
·          Investment funds
i)                     open-ended funds (mutual funds)
ii)                   close-ended funds (investment companies)
1.2.                                       The Purposes Underlying the Regulation of Capital Markets
·          Promote growth of capital markets by protecting investors without stifling corporate activities.
·          Compare OSA s.1.1 to s.2.1 (Purposes and principles to be considered)
·          Registration of persons, issuers (requiring continuous disclosure) and anti-fraud provisions.
·          Commission has to be efficient and self regulated (under watchful eye of a publicly funded watch dog).
1.2.1.                                   OSA S.1.1 Purposes
The purposes of the Act are,
(a)      to provide protection to investors from unfair, improper or fraudulent practices; and
(b)     to foster fair and efficient capital markets and confidence in capital markets.
1.2.2.                                   Financial Systems of Canada (Neufeld)
Reasons for government intervention in capital markets:
·          Reduce instability,
·          Remove market rigidities,
·          Protection of savers and borrowers or users (prospectus and disclosures), and
·          Non-economic objective.
Types of Regulation
·          Government v. Self regulation
Government Regulation Objectives
·          Rational government would seek to achieve an optimum structure:
·          Remove obstacles to market functioning efficiently through:
i)                     requiring disclosure,
ii)                   determining prohibited activity & standards of conduct, and
iii)                  stipulating required procedures.
·          Government influence on flow of funds
i)                     Government guaranteed activities
ii)                   Tax incentives
iii)                  Prohibitions as in gambling
1.2.3.                                   Modern Reform Rationale-Kimber Report 1965
·          Investors were demanding more protection and efficient effective capital markets.
·          The principal economic functions of a capital market are to assure the optimum allocation of financial resources in the economy to permit:
i)                     optimum allocation of funds (which in Kimber’s view is the public interest)
ii)                   mobility and transferability
iii)                  continuing valuation
·          Securities regulation must be designed not only to serve the purpose of reducing the imperfections in the free and open capital market, but also to assure the efficient operation of the market in achieving long-run economic objectives.
·          Kimber recognised that one of the strongest single forces is public confidence and that a mature and respectable secondary market was necessary.
·          Importance of public confidence (scandal promotes legislative reform…).
·          Mature secondary market creates public confidence in primary market
·          Raise standards – improve disclosure = confidence.
·          Disclosure provides a key instrument
·          Theory – perfect knowledge, perfect access, perfect market
·          Practice – imperfect knowledge, imperfect access, imperfect mobility, imperfect economic development of a country
·          Conflicts
i)                     Full disclosure v. competitive secrecy.
ii)                   Early warning of trouble v. avoid panic decisions, dilemma regulators have all the time, ceasing (or holding) trading is widely used.
1.3.                                       Corporate Finance
1.3.1.                                   Debt finance
Sources
1.                    Trade credit
2.                    Bank loans
·          Short term
·          Long term
3.                    Commercial paper
4.                    Bonds/Debentures
·          Call,
·          Sinking Fund,
·          Convertible (debt into equity),
·          Warrants (option to purchase share at a price),
1.3.2.                                   Equity finance
1.                    Share capital
2.                    Common shares
·          Right to vote
·          Right to dividends
·          Liquidation right
3.                    Preferred shares
·          Cumulative (i.e. if you are not paid a dividend one year, it accumulates and added to the next year).
·          Participating
·