As you may have heard, the new Ontario Securities Transfer Act (STA) creates a comprehensive system of rules dealing with the transfer and holding of securities and interests in securities. Modeled on Article 8 of the U.S. Uniform Commercial Code, the STA, once in force, will essentially bring Ontario practice into line with current international commercial practice.
What if I’m not in Ontario?
The intention is that similar legislation will be adopted by all of the Canadian provinces and territories, resulting in a harmonized set of rules for the transfer, holding and pledging of securities across Canada. As noted below, Alberta’s very similar STA has already been passed, and it is expected that British Columbia will follow suit shortly.
Why the reform?
Securities transfer law in Canada has not kept pace with international market practice. In particular, the existing law governing the transfer and pledging of securities largely presupposes paper-based trading of securities by the direct holder, and does not reflect the modern-day reality of an intermediated securities holding system. Previous attempts at updating the system have resulted in a myriad patchwork of confusing laws. By consolidating Ontario’s current securities transfer laws and providing comprehensive rules for attaining clear title to directly held securities and securities in the indirect holding system, the STA supports international securities transfer and holding practices which will lead to increased market stability.
Who will be affected by the STA?
If you deal with share purchases or other transfers of securities, take security interests in securities, work with securities intermediaries, or are a securities intermediary, you need to know about the STA. It will have an impact on all players in the direct and indirect holding systems, including issuers of securities, transfer agents, purchasers and holders of securities (either from treasury or previously issued securities), transferors of securities, borrowers, lenders and other secured parties, depositories and clearing organizations such as The Canadian Depository for Securities Limited (CDS), CDS participants, and dealers as well as investors that have accounts with securities intermediaries.
When does the STA take effect?
The STA was passed by the Ontario legislature and given Royal Assent on May 18, 2006. It has not yet been proclaimed into force, but is widely anticipated that this will happen before the end of the year. The STA is expected to come into force together with its counterpart legislation, the Alberta Securities Transfer Act which was passed on May 24, 2006.
What does the STA do?
- The STA modernizes the process of transferring and pledging a security in Canada by clarifying the relationships among the various parties involved in holding and transferring securities. It does so by unifying and codifying existing law and practice into one comprehensive package, and by making significant amendments to the Personal Property Security Act (PPSA) and the Ontario Business Corporations Act (OBCA).
- The STA replaces rules relating to the issuance of shares and transfers of shares which were previously contained in the OBCA, with some changes. By moving them into the STA, these transfer rules will now also fully extend to securities issued by enterprises such as real estate investment trusts and business income trusts, to government securities, and, in some instances, to limited partnerships and instruments such as bills and notes.
- The STA clearly distinguishes between the direct holding system (where the holder is the person with the rights against the issuer) and the indirect holding system (where a "financial asset" is held through a securities intermediary), and establishes a framework to understand the relationships among, and priority of interests held by various parties involved.
- Amendments to the PPSA when read together with the STA, provide coherent and comprehensive rules and procedures for taking security over "investment property", the new basket concept for certificated securities, uncertificated securities, security entitlements, securities accounts, futures contracts and futures accounts. Additionally, rehypothecation of investment property held as collateral is expressly allowed if the security agreement permits.
- New conflicts of law rules in the PPSA and the STA will make it easier to determine which jurisdiction’s laws apply in respect to the validity and enforcement of a security in the direct holding system, the acquisition of a security entitlement, the rights and duties of a securities intermediary in the indirect holding system, and the taking of security interests over certain types of property.
- The STA sets out the obligations of securities intermediaries, providing that an investor’s property interest in a particular financial asset may be enforced against the securities intermediary only by the exercise of their rights under the STA.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.