The Need for Reform
If you own shares in a public company, you’ve likely never laid eyes on a share certificate for those shares. Nowadays when you buy publicly traded securities through a broker the only evidence of ownership you have is a trade confirmation and an account statement. That’s because the vast majority of transactions in publicly traded securities today are settled electronically through "clearing agencies" such as The Canadian Depository for Securities Limited, or CDS. If an actual share certificate exists at all, it’s "immobilized" in one of CDS’s vaults and it’s registered in the name of a CDS nominee. Your broker is a "participant" in CDS, and trades in positions in a given security are initiated and settled on a net basis between participants through a sophisticated computerized system. This modern "book-based", "indirect" or "tiered holding" system works very well from an operational standpoint and makes possible the processing of huge volumes of trades far more cheaply and efficiently than could ever be accomplished by moving around physical pieces of paper.
But there’s one big problem: in Ontario and most other provinces, the law has not yet caught up with the electronic realities. The legislation governing the transfer and pledging of securities now on the books reflects an era when most trades in securities were paper-based and the multiple levels of "securities intermediaries" between the issuer and the beneficial owner of a security did not yet exist. While the Ontario legislature did make some attempts in the 1980’s to amend the Business Corporations Act and the Personal Property Security Act to reflect the growing use of electronic settlement, these were at best halfway measures. Serious flaws and gaps remain, and the law is still a confusing patchwork. As a result counterparties to complex multi-million dollar transactions involving the transfer or pledging of "book-based" securities lack the level of legal certainty that capital markets demand. It’s often unclear exactly how or where a lender or swap counterparty should perfect its security interest in book-based securities, and legal opinions tend to be so highly qualified and equivocal that they offer very little real comfort to capital market participants.
Revised Article 8 of the Uniform Commercial Code
In this area Ontario is at a real competitive disadvantage relative to the US because all 50 states have now enacted Revised Article 8 of the Uniform Commercial Code, first published in 1994, which put the law of securities transfer on a sound theoretical footing. Revised Article 8 introduced a new form of property called a "security entitlement" that accurately captures the bundle of rights that a beneficial owner of a security has against its securities intermediary and replaced the awkward fictions of "deemed possession" of an immobilized certificate (still used in our law) with the concept of "control". The new legislation sets out clear "conflicts of law" rules that leave no doubt about where to perfect a security interest in a security entitlement and details the methods by which a secured party can exercise "control" over security entitlements to perfect its security interest. Legal opinions in the US are now simple and certain.
The Uniform Securities Transfer Act: Modernizing Canadian Law
For the last seven years the Uniform Law Conference of Canada, in conjunction with the Canadian Securities Administrators, has been working on drafting uniform legislation that will bring Revised Article 8 to Canada. Adopting many of the concepts and terms of Revised Article 8, this draft Uniform Securities Transfer Act (USTA) promises a much-needed overhaul of the Canadian law of securities transfer. If enacted across the country, the USTA will at least level the legal playing field between Ontario and New York and greatly increase the legal certainty that players in the capital markets demand.
One of the major objectives of the USTA initiative is word-for-word uniformity from province to province, without the provincial variants that have bedevilled attempts to create uniform corporate and personal property security legislation in the past. Having the same legislation in each province would eliminate the uncertainty that comes from even subtle variations in language and, with its close similarity to Revised Article 8, it would recognize the reality of a unified North American capital market.
McMillan Binch Support Supports the USTA
Although not yet on any province’s legislative agenda, the USTA is being actively considered by the Ontario Legislative Assembly’s Standing Committee on Finance and Economic Affairs as part of its mandate to review the recommendations contained in the Five-Year Review Committee Final Report: Reviewing the Securities Act (Ontario). Public hearings were held the weeks of August 16 and 23, and the final report of the Committee is due by October 18.
McMillan Binch lawyers Robert Scavone and Wayne Gray presented a written submission to the Committee in support of the USTA, and Mr. Scavone appeared before the Committee on August 18. The transcript of his remarks in Hansard can be viewed at: http://www.ontla.on.ca/hansard/committee_debates/38_parl/session1/finance/F025.htm#P899_277036.com.
The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.
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