June 2007

Archived - Modernizing the Legal Framework for Financial Transactions: Reforming Federal Securities Transfer Rules

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Consultation Paper

Department of Finance Canada
Department of Industry Canada

1. Introduction

Canada competes with other jurisdictions around the world for capital and for investment opportunities. Canada's New Government recently outlined its vision for working with provinces and other partners to secure a competitive advantage in global capital markets in Creating a Canadian Advantage in Global Capital Markets ("capital markets plan"), which was released with the 2007 Budget[1]. One of the core objectives of this plan is to enhance regulatory efficiency, and the legislative and regulatory framework supporting the transfer of securities needs to be part of our competitive advantage.

Canada's federally incorporated financial institutions[2], federally incorporated corporations and cooperatives are among the major participants in domestic and global capital markets. They may be issuers, investors, intermediaries, transferees or use securities for collateral purposes. These federally incorporated entities[3] are important contributors to economic growth and job creation. They provide services critical to Canadian businesses and consumers, facilitating commerce and allocating credit. These same businesses and consumers also need the most efficient capital markets possible in which to invest their savings and borrow to finance their needs.

Securities settlement systems[4], and in particular the processes relating to the holding and transfer of securities, are a vital component of the infrastructure for capital markets. It is important that securities transfers be completed simply, timely and safely in order to achieve market efficiency, improve liquidity and reduce the risks for market participants.

Legal certainty is a key element of an efficient securities settlement system. Federally incorporated entities, as well as their clients (both retail and institutional), are affected by federal and provincial[5] laws governing securities transfer, most of which have not, until recently, adequately supported modern commercial practices in this area. This can create legal uncertainty for Canadian capital market participants. To ensure there is a solid legal framework for securities transfer, the provinces[6] have begun adopting highly harmonized legislation based on a model Uniform Securities Transfer Act (USTA) developed by the Canadian Securities Administrators (see Annex A for more information on the USTA).

As stated in the capital markets plan, Canada's New Government supports the efforts by provinces to implement modernized, functionally uniform securities transfer laws as they will provide greater legal certainty for securities transfer practices. If these legal reforms are to be comprehensive and complete, however, the securities transfer provisions that exist in a number of federal statutes should also be modernized to ensure there is a harmonized and solid legal foundation underpinning securities settlement practices in Canada.

The Departments of Finance and Industry Canada ("the Departments") are seeking views on how to best align the securities transfer rules contained in the federal statutes listed below[7] with the provincial Securities Transfer Acts (STAs) in a manner that meets the needs of affected stakeholders. Views are also being sought on a number of incidental issues relating to the impact of the provincial STAs on the overall legislative and regulatory frameworks governing these federally incorporated entities. Finally, stakeholders are invited to comment on whether other federal statutes, including those governing bills of exchange and promissory notes, need to be amended to be compatible with the provincial STAs.

The list of statutes being reviewed by the Department of Finance includes the following:

The list of statutes being reviewed by Industry Canada includes[8]:

This paper sets out a number of issues and asks a number of high-level questions (supplemented by questions in Annex C) as a starting point for discussion.

As the largest issuer of Canadian securities, the Government of Canada has an interest in maintaining a well-functioning marketplace to ensure that its debt is issued and traded efficiently. In that context, the Department of Finance is seeking views on whether the legislative and regulatory framework governing federal Crown debt securities needs to be amended to ensure that it continues to work well in today's marketplace.

Submissions should be received no later than September 14, 2007. Subject to the consent of the submitting parties, comments received will be made available on the Department of Finance's website in order to promote greater transparency in the consultation process.

2. Context

Securities transfer law is an area of commercial private law that concerns the rights of an investor in a security and governs how an investor may hold, transfer and pledge securities. It is not securities regulatory law.

Securities may be held directly by an investor or held indirectly[9] by an intermediary (e.g., a broker or financial institution) on the investor's behalf. Most of the existing securities transfer legislation in Canada was developed to support what is known as the "direct holding" system, a traditional system of securities settlement in which owners[10] of securities have a direct legal relationship to the issuer. Investors are either recorded on the issuer's register or in physical possession of negotiable security certificates, and transfers are settled through the physical delivery of paper certificates. The direct holding system works well for closely held securities, where there are only a few investors and shares do not change hands very often. It does not work very efficiently for publicly traded securities. The requirement for delivery of certificates can make transactions expensive in terms of labour and time, and can also be risky since paper documents could be lost, stolen or counterfeited. Furthermore, while in transit, securities are not available for use or investment, thus hampering liquidity.

Because of these disadvantages, the direct holding system has largely been displaced by the indirect holding system for publicly traded securities, which evolved over the past few decades to accommodate sharp increases in trading volumes. Today, the vast majority of investors hold their securities indirectly through a chain of intermediaries that are ultimately connected to a central securities depository, such as the Canadian Depository for Securities (CDS). In contrast with the direct holding system, it is CDS or another intermediary, and not the ultimate owner, which is recorded on the issuer's register and has physical possession of the security certificate, should one exist. The ultimate owner is generally only recorded on the books of the financial institution or investment dealer with which he or she has an account. All transactions relating to the purchase, holding and transfer of an investment security are carried out electronically via book entries to the accounts concerned ("book-entry settlement system"). The book-entry settlement system makes the indirect holding system much more efficient than the direct holding system and its requirement for transfers to be effected through the delivery of physical certificates.

Despite the dominance of the indirect holding system for publicly-traded securities, the federal and provincial laws governing securities transfers have not, until recently, reflected commercial practices in this area. The legal concepts of possession and delivery of securities certificates, which underpin the existing direct holding laws, are not adequate to deal with the indirect holding and book-entry settlement systems or with the transfer of uncertificated securities[11]. While the indirect holding system works well overall, the lack of a solid, harmonized legal foundation for its associated practices can make securities transfers in Canada cumbersome, complicated, lengthy, expensive and uncertain. It can also make the pledging and acceptance of securities (i.e., granting a security interest) for collateral purposes somewhat difficult.

This legal uncertainty can result in legal risk, particularly for Canadian market participants active in cross-border securities trading and pledging transactions. Legal risk arises in capital markets where the laws applicable to market practices are incomplete, ambiguous or otherwise difficult to understand or access[12]. It affects customers (both retail and institutional), intermediaries, purchasers and those individuals or firms that pledge or accept securities as collateral. In situations where law reform does not keep pace with operational change, legal uncertainty can increase to the point where investors become unwilling to carry out transactions or must incur burdensome costs and delays to obtain the necessary assurances. The lack of legal certainty for securities settlement practices in Canada places our capital market participants at a competitive disadvantage vis-à-vis market participants in the United States (U.S.) and other major financial centres that have reformed, or are in the process of reforming, their laws in this area[13].

Provinces have begun modernizing their regimes by adopting very similar Securities Transfer Acts (STAs) based on a model Uniform Securities Transfer Act (USTA) published by a Canadian Securities Administrators-led task force in 2004[14]. The STAs provide improved clarity and certainty through a sound legal foundation for securities holding, transfer and pledging practices, particularly with respect to securities held through intermediaries (see Annex A for an overview). For these reasons, the STAs have been well received by capital market participants.

The continued implementation of provincial STAs is important as they will reduce risk and cost for market participants. The increased efficiency of the securities settlement system may also improve the liquidity of securities and enhance their value. The provincial STAs will also lead to greater compatibility with our global partners, including the U.S., with which our capital markets are closely integrated.

As noted previously, legislative provisions relating to securities transfer are not contained exclusively within provincial statutes. There are a number of federal statutes containing securities transfer rules (see Annex B) that need to be reformed if the legal framework governing securities transfer is to be seamless and harmonized across all jurisdictions in Canada. The following section sets out a number of issues for discussion relating to the reform of federal laws affected by the implementation of the provincial STAs.

3. Issues for Discussion

The sections below highlight a number of issues concerning the impact of provincial STAs on various federal statutes. High-level questions are also included as a starting point for discussion. Additional questions aimed at eliciting more detailed views can be found in Annex C at the end of this paper.

A.  Impact of Provincial STAs on Federally Incorporated Entities

There are many different types of federally incorporated entities. Some are quite large and operate on a national and/or international scale. Others are quite small and regional in their operations. In addition, while a number of these federally incorporated entities are publicly traded, there are many more whose shares are closely held by a small group of investors.

Many of these federally incorporated entities participate in Canadian capital markets as issuers, investors, intermediaries, and secured lenders (where securities are pledged as collateral in a financing transaction), often playing multiple roles simultaneously. As an example, a bank is typically both an issuer and investor, buying and selling securities for its own account. That same bank may also be both an intermediary for its client and an account holder in relation to a higher-level intermediary through which the bank holds its client's securities. The bank may also be a secured lender, accepting securities pledged as collateral in relation to certain financing transactions.

The enactment of modern securities transfer laws across Canada will provide federally incorporated entities with greater legal certainty in their securities-related activities. Reducing legal risk associated with pledging and acceptance of securities as collateral may enhance the credit-granting capability of financial institutions.

The Departments acknowledge that federally incorporated entities are enjoying the benefits of the USTA in those provinces where it has been implemented through the creation of new stand-alone securities transfer acts. As of June 6, 2007, Ontario, Alberta and British Columbia had Securities Transfer Acts (STAs) in force, while Newfoundland and Labrador and Saskatchewan were awaiting proclamation of their STAs. Other provinces, including Quebec and Manitoba, have announced their intention to introduce STAs within the year or are well into the planning stages.

While the USTA offers the potential to provide a national framework with uniform laws, it can only do so if all provinces adopt a functionally uniform version of the model Act, a sentiment that was emphasized by all industry participants throughout the CSA's consultations on the USTA. This would allow all capital market participants to benefit from the new legislative framework.

The Departments are seeking the views of federally incorporated entities as to whether the provincial STAs are providing the right level of certainty for their securities-related activities and whether there are any outstanding gaps.

B. Transfer Provisions in Federal Corporate Statutes

Now that the provinces have begun to modernize their securities transfer laws, reform of the federal statutes governing federally incorporated entities (listed in the Introduction section) is needed to ensure a cohesive, functionally uniform legal framework across all jurisdictions. Annex B provides an overview of where the provisions governing security certificates and transfers can be found in the federal corporate statutes.

The provisions in the financial institutions statutes are virtually identical to those found in Part VII of the CBCA. The CBCA provisions, enacted during the 1970's and based on the old U.S. UCC Article 8, were originally intended to facilitate the market practices of the time relating to the direct holding and transfer of securities. Part VII of the CBCA also contains basic administrative provisions relating to corporate governance that support the issuance of share certificates and creation of securities registries, legends on share certificates and rules regarding the transmission of securities on death, bankruptcy or changes in the legal status of the holder[15].

One of the key policy objectives for the provincial reform initiative is to achieve legal certainty and finality of settlement. The Departments support this objective, and as such, any reforms undertaken to the federal statutes should contribute to the achievement of this policy objective. A secondary objective is to ensure the federal statutes are modernized in a manner that is consistent and compatible with the provincial STAs, with no gaps between the federal and provincial frameworks.

The following paragraphs outline three broad options for reforming the federal corporate statutes that would satisfy the above policy objectives to various degrees:

Option 1: Comprehensive stand-alone Federal STA

The first option for reform would be for the Departments to assert their jurisdiction on federally incorporated entities and enact a stand-alone federal STA containing modern rules for both the direct and indirect holding systems[16]. While this approach would minimize the gaps for those entities, the confusion that may result from the existence of two equally applicable sets of rules would not provide for legal certainty, particularly for those transactions involving foreign counterparties.

Option 2: Repeal of federal securities transfer provisions

The second option would be to repeal the existing transfer provisions in the federal corporate statutes. This was recommended by the CSA Task Force in its 2004 proposal paper[17], on the basis that it would minimize confusion and remove overlap with the provincial STAs. Under this approach[18], federally incorporated entities would need to look to the provincial STAs for rules governing both the direct and indirect holding and transfer of their securities.

While repeal of the federal rules would contribute to the objective of achieving legal certainty, it presents a number of timing and transitional issues because not all provinces have implemented STAs. Immediate repeal of the transfer provisions would create a gap in the rules governing direct holdings and transfers of securities of federally incorporated entities that are not governed by a provincial STA. This could be avoided by leaving the federal transfer rules as they are (i.e., without any modernization) until all provinces have their STAs in force.

Repeal of the federal direct holding and transfer rules may not be attractive to those closely-held federally-incorporated entities who currently enjoy the convenience of dealing with only one statute for their corporate governance and securities transfer rules. Requiring closely-held federally incorporated entities to follow federal law for corporate governance and provincial law for securities transfer would likely cause confusion and difficulties for these entities who are already concerned about regulatory and paperwork burden.

Option 3: Update of existing securities transfer provisions

This option is an intermediate model incorporating features of the first two options. The direct holding and transfer rules in the federal financial institutions statutes, the CBCA and CCA would be updated so that they are consistent with the provincial STAs. There would be no federal rules governing indirect holdings and transfers; securities held or transferred within the indirect holding system would be governed solely by the provincial STAs. The updated federal rules would be left in place permanently.

While this approach would not provide federal rules for indirectly held securities of federally incorporated entities, it would ensure that there is no gap in the transfer rules for directly held securities as a result of some provinces not having yet passed STAs. Moreover, federally incorporated entities would enjoy the benefit of modernized transfer rules for directly-held securities. Those entities that are closely held may also appreciate the convenience of having to look to only one set of rules, which would not be the case if the federal rules were repealed.

The existence of duplicative federal and provincial rules could be criticized on the basis that it does not contribute to legal certainty. However, this possible downside would be minimized by ensuring that the federal rules are functionally the same as those found in the provincial STAs.

The Departments are seeking stakeholder views on the options presented above or any other proposal for reforming the transfer rules in the federal corporate statutes, and how any associated timing and transitional issues could be managed.

C. Interactions of the Provincial STAs with the Overall Legislative/Regulatory Framework for Federally Incorporated Entities

Identification of Ultimate Owners of Financial Institutions

Underlying the regulatory framework for federal financial institutions is the concept that ownership of shares in a federal financial institution confers certain rights and responsibilities. To ensure that the regulatory framework works as intended, it is necessary to be able to trace ownership of shares or securities of a financial institution through to the ultimate or beneficial owner. For example, this applies in respect of the ownership framework for investors in a financial institution, permitted investments of a financial institution, and limits on related party transactions. It is not clear how the tracing of beneficial ownership can be applied to security entitlement holders within the provincial STA framework for the indirect holding system.

The provincial STAs' core concept of a "security entitlement holder", with a package of rights enforceable only against the holder's intermediary, reflects the severance of the ownership link between the issuer and the ultimate owner that is an inherent characteristic of the indirect holding system[19] . This could raise concerns for the framework governing federal financial institutions, particularly with respect to the identification and recognition of investors in financial institutions. There is a question of whether the financial institutions statutes need to be amended to accommodate the concept of a security entitlement holder to ensure that the rights and responsibilities of investors in financial institutions are maintained.

Shareholder Rights

On a more general level, all of the federal corporate statutes contain a number of provisions governing the relationship between the company and its shareholders. Many of these provisions are quite clear in whether they apply in respect of registered shareholders (i.e., direct holders) and/or beneficial owners, but there are other circumstances where the meaning must be drawn from the context of the provision. Again, there may be some uncertainty as to whether a security entitlement holder would be recognized as a shareholder or beneficial owner of a security, and this could result in different rights and responsibilities for shareholders versus security entitlement holders.

Other Legislation

The provincial STAs may also impact the Winding-up and Restructuring Act (WURA) and the Bankruptcy and Insolvency Act (BIA), the federal statutes governing bankruptcy and insolvency that apply to federally incorporated entities. An amendment to the definition of "security" as used throughout these statutes may be needed to accommodate security entitlement holders as defined in the STAs.

On a final note, the number of potential consequential amendments to federal statutes arising from the question of "who is a shareholder" in the indirect system could be extensive. There are many federal statutes in which the word "shareholder" appears at least once.

Dematerialization of Securities

The implementation of provincial STAs also raises questions about uncertificated and dematerialized securities.[20] At present, the federal corporate statutes entitle all registered shareholders to receive a security certificate or a non-transferable written acknowledgement of that right. Thus, federal corporate securities may be certificated or uncertificated, but they are not dematerialized[21].

The provincial STAs currently in force give entitlement holders the right to direct his or her intermediary to change a security entitlement into such other form of holding as the issuer may make available to holders of the security, which may include a registered holding on the books of the issuer with a security certificate in the holder's name. However, direct registration is not always an option as some securities are issued in book-entry form only.

As part of the efforts to shorten settlement times in capital markets, the securities industries in Canada and the United States have suggested that further immobilization and dematerialization of physical securities will be necessary. While the provincial STAs may facilitate proceeding towards greater dematerialization, the gains in efficiency must be weighed against the potential loss of shareholder choice, as shareholders may no longer have the option of receiving a share certificate.

The Departments are seeking views on the interaction of the provincial STAs with the overall regulatory framework for federally incorporated entities, in particular whether there is a need to accommodate the concept of security entitlement holders and how this could be accomplished.

The Departments are seeking views on whether the federal corporate statutes should facilitate dematerialized issuances by these entities or whether they should continue to provide shareholders with the right to obtain a share certificate and/or be recorded on the issuer's share register.

D. The Bills of Exchange Act and the Depository Bills and Notes Act

The provincial STAs also interact with federal legislation relating to bills of exchange and promissory notes ("bills and notes"), financial instruments over which the federal government has exclusive constitutional authority[22]. The issuance and transfer of bills and notes are governed by two federal acts, the Bills of Exchange Act (BEA)and the Depository Bills and Notes Act (DBNA). Financial instruments issued under these Acts play a significant role in Canada's capital markets, and include negotiable debt securities such as bankers' acceptances[23] as well as short-term debt securities[24] and commercial paper[25]

Bills of exchange and promissory notes are financial instruments characterized by negotiability, which gives them a special advantage over other classes of contracts, as negotiability gives a good faith purchaser of a bill or note guaranteed title to the financial instrument. The BEA prescribes the form of bills and notes, determines the rights and obligations of the parties to the instruments and establishes procedures for their drawing up and resale. Thus, the direct holding and transfer system of certificated debt securities that are bills of exchange or promissory notes is governed by the BEA.

The statutory requirements of the BEA governing the issue and transfer of bills and notes potentially apply to all participants in the short-term money market. More particularly, the Act may apply to any person who is capable (at law) of becoming a party to a bill of exchange or a promissory note by drawing or accepting it, or who becomes a party to a bill or note by way of transfer of ownership. Thus, the BEA applies to both the primary issue of bills or notes and to any secondary sale of bills or notes.

The provincial STAs in force state that a bill of exchange or promissory note is not a security, and so the provincial rules governing the direct holding and transfer do not apply. Thus, there is no overlap between the direct holding rules of the BEA and those contained in provincial STAs, and so no amendments are needed to ensure that the BEA continues to apply to directly held and transferred bills and notes. The provincial STAs governing indirect holdings would apply, however, to a bill or note that meets the definition of a "financial asset" and is held in a security account.

However, direct transfers of bills and notes constitute a very small part of market activity. The vast majority of transactions involving bills and notes occur through the indirect holding system. The BEA cannot accommodate the indirect holding and transfer of bills and notes, as it requires the physical possession of the negotiable instrument to describe the rights of the parties involved in the transaction. For financial instruments held by a depository or other intermediary, these rules are impractical.

To resolve this, the DBNA was enacted in 1998 to create, under federal law, two new negotiable instruments, the depository bill and the depository note. These instruments were expressly designed to be held and transferred by intermediaries in the indirect holding system in accordance with the provisions of provincial law. The DBNA sets out the rights and responsibilities of buyers, sellers and holders of these instruments in a way that is compatible with the use of depositories and book-entry transfers. Thus, the DBNA governs the transaction of creating the depository instrument, the transaction of depositing it with the clearing agency (i.e., CDS) to whom it is payable, and transfers of the depository instrument between accounts of participants in CDS.

Unlike the BEA, there is overlap between the DBNA and provincial STAs. The DBNA governs not only deposits of securities into the CDS system, but also transfers between CDS participants. The STAs also govern transfers between CDS participants given that the acts apply to security entitlements in DBNA instruments that are held indirectly as "financial assets" in "securities accounts". In addition to this overlap, there is inconsistency between the STAs' modern concept of security entitlements and the DBNA's outdated notion of deemed transfers of possession for transactions occurring among CDS participants.

To resolve this issue, the CSA Task Force recommended that the DBNA be repealed, but this could be problematic for market participants. The DBNA has become a very popular and important legal regime for issuers of debt securities. Repealing the Act in its entirety could result in legislative gaps as well as the loss of simple, efficient legislative regime for debt securities. A better option may be to amend the DBNA so that it governs transfers of depository bills and notes to the first tier only (i.e., deposits into CDS) The provincial STAs would then apply in respect of transfers occurring in the tier below this, that is, between CDS participants, and all subsequent transfers.

The Department of Finance is seeking views on how the DBNA should be reformed to minimize overlap and inconsistency with provincial STAs.

E. The Issuance of Federal Debt Securities

As the largest issuer of Canadian securities, the Government of Canada has an interest in maintaining a well-functioning marketplace to ensure that its debt is issued and traded efficiently. The issuance of federal debt securities is governed by the Financial Administration Act and corresponding Domestic Bonds of Canada Regulations. Government securities are handled in the same way as other securities in the clearing and depository systems. They are also used as a primary source of collateral to underpin the entire Canadian securities settlement system. The validity and enforceability of such securities must therefore be certain. In that context, the legislative and regulatory framework governing the issuance of federal Crown debt will be reviewed to ensure that is continuing to work well in today's marketplace.

The Department of Finance is seeking stakeholders' views on what amendments would be desirable to enhance the effectiveness and efficiency of the legislative and regulatory regime governing the issuance of federal Crown debt.

4. Next Steps

The Departments of Finance and Industry Canada invite all interested stakeholders to provide written comments regarding any element of this paper or on any other issue of concern relating to federal rules governing the holding and transfer of securities. Submissions should be sent to the Departments by September 14, 2007. As a matter of convenience, the Department of Finance will coordinate the intake and distribution of all submissions.

Comments may be e-mailed to securities-valeurs@fin.gc.ca

Should you have any questions regarding this consultation process please contact

Timothy C. Sargent
Director, Financial Institutions Division
Financial Sector Policy Branch
Department of Finance Canada
Tel: (613) 992-1631

Subject to the consent of the submitting party, comments will be posted on the Department of Finance Web site to add to the transparency and interactivity of the process. Once received by the Department of Finance, all submissions will be subject to the Access to Information Act and may be disclosed in accordance with its provisions. Should you express an intention that your submission be considered confidential, the Department will make all efforts to protect this information within the legal requirements of the law.

Annex A

Overview of the Provincial Securities Transfer Acts (STAs)

The provincial STAs consolidate current securities transfer laws and provide comprehensive rules for attaining clear title to directly held securities and securities in the indirect holding system. They are based on a model Uniform Securities Transfer Act (USTA) developed by the Uniform Law Conference of Canada and the Canadian Securities Administrators. The USTA, in turn, draws heavily from Revised Article 8 of the U.S. Uniform Commercial Code.

The STAs provide a new framework to understand the relationships among, and interests held by various parties involved in, both the direct and indirect holding of securities and interests in securities.

Those who are affected include:

The rules governing direct holdings of securities are essentially those that had existed previously. The provisions governing indirect holdings and securities interests are new.

The STAs set out basic rules that apply to securities and other types of financial assets that are commonly held through securities intermediaries. They define and classify different types of interests in securities, provide rules governing how these interests may be validly acquired and transferred and how different parties may obtain control and priority over these interests.

The STAs also set out obligations, warranties and restrictions that apply to the various parties involved in the holding and transfer of securities in both the direct and indirect system. These rules apply to issuers of securities and to all parties that hold interests either directly for their own account or indirectly for others, such as clearing agencies, transfer agents and brokers.

In order to prioritize and regulate the interests held by various parties involved in both the direct and indirect holding systems, the STAs provide rules governing conflicts of laws, seizure of securities, enforceability of contracts and evidence in legal proceedings.

The STAs involve conforming amendments to the provincial Personal Property Security Acts (PPSAs) that govern the use of securities as loan collateral, commonly referred to as pledges. They also remove securities transfer rules currently contained in the provincial Business Corporations Acts (BCAs).

The STAs also support international securities transfer and holding practices, thus leading to increased market stability.

Annex B

Federal Corporate Statute Provisions Regarding Security Certificates and Transfers

Statute Location of Provisions Governing Security Certificates and Transfers  

Bank Act

s.81 - 135: Security certificates and transfers

s.724: Application of sections 81-135 to bank  holding companies

Canada Business Corporations Act s.48 - 81: Security certificates and transfers
Canada Cooperatives Act

s.177 - 246: Security certificates and transfers

Cooperative Credit Associations Act[26]

s.88 - 142: Security certificates and transfers

Insurance Companies Act

s.85 - 139: Security certificates and transfers

s.763: Application of sections 85-139 to insurance holding companies

Trust and Loan Companies Act s.84 - 138: Security certificates and transfers

Annex C

Detailed Questions on Part Three

3A -- Impact of Provincial STAs

This section of the paper explores whether the provincial STAs are meeting the needs of federally incorporated entities or whether there are gaps in the legal framework governing these entities

1. How have the existing direct holding and transfer provisions in the federal corporate statutes affected the ability of federally incorporated entities to participate in domestic and international capital markets as an issuer, investor, intermediary and/or secured lender? Concrete examples, including illustrations of the costs incurred due to legal uncertainty surrounding these activities, would be appreciated.

2. How have the securities-related activities of federally incorporated entities benefited from the provincial STAs in both domestic and international capital markets? Again, specific examples of the benefits and/or efficiencies achieved would be helpful.

3.  Are there any outstanding gaps in the legal framework? Are these gaps transitional in nature? Is there a need for the Government to address them?

3B -- Transfer Provisions in Federal Corporate Statutes

This section of the paper discusses the provisions relating to security certificates and transfer contained in the statutes governing federally incorporated entities. The questions below seek to elicit more detailed views on the three options suggested for reforming these statutes and to assess whether there are any related transitional issues.

1.  Is there a need to address the lack of rules for indirect holdings and transfers in the federal corporate statutes? More specifically, are there competitive disadvantages for federally incorporated entities that are situated in provinces that have not yet implemented an STA and if so, should this be addressed as set out in Option 1?

2.  If the federal transfer provisions should be repealed as discussed in Option 2, when should this be done – immediately or once all provinces have STAs in place? Is there a need for transitional measures to accommodate those provincial STAs that are in place?

3.  Does the immediate repeal of the federal transfer provisions raise any concerns regarding existing security issuances, and if so, how could these be addressed?

4.  Under Option 2, no interim amendments would be made to the federal transfer rules to make them consistent with the provincial STAs. Would this approach result in conflicts between the federal and provincial rules governing direct holdings and transfers?

5. Should the federal transfer rules for directly held securities be retained and updated, as set out in Option 3?

6. Would the continued existence of federal rules for direct holdings and transfer of securities, updated to be functionally uniform with the provincial STAs, result in confusion and uncertainty, or might the impact be neutral or even have benefits for closely held federally incorporated entities?

7. If the federal transfer provisions are updated and retained, is there a need for transitional measures to minimize overlap between federal laws and the provincial STAs? For example, is there a need to consider measures such as providing an exemption for provinces that have STAs in force?

8. What provisions should be retained in the parts of the federal corporate statutes dealing with security certificates and transfer? What amendments, if any, would need to be made in respect of these remaining provisions?

3C -- Interactions of the Provincial STAs on the Overall Legislative and  Regulatory Framework for Federally Incorporated Entities

This section of the paper illustrates several areas where the STAs may impact on the legislative and regulatory frameworks governing federally incorporated entities. Question 1 is specific to the framework governing federal financial institutions, while the remaining questions relate to the federal corporate statutes more generally.

1.  Do the differences between the concepts of "beneficial owner", "shareholder" and "security entitlement holder" create any difficulties in respect of the ownership tracing requirements embedded in the framework for federal financial institutions? If so, how could these be managed?

2.  Are there any other federal statutes affected in the same manner, for example, the Investment Canada Act?

3.  Is it desirable or necessary to amend the corporate governance provisions found in federal corporate statutes relating to shareholder rights to explicitly extend these rights to security entitlement holders? Please consider the following areas as they apply to federal financial institutions and/or corporations:

(a) Dividends and liquidation distributions

(b) Notices of meetings of shareholders

(c) Receipt of financial statements

(d) Rights to attend meetings of shareholders

(e) Voting and the appointment of proxy holders

(f) Dissent and appraisal rights

(g) Rights and obligations under take-over bids and going-private transactions

(h) Access to corporate records

(i) Shareholder proposals

(j) Shareholder remedies

(k) Unanimous shareholder agreements and unanimous shareholder declarations.

4.  Should the federal corporate statutes be amended to allow issuers to dematerialize their share issuances?

5.  Are any amendments needed at the federal level to facilitate the direct holding and transfer of uncertificated securities?

6.  Are there any other interactions between the provincial STAs and the federal statutes governing bankruptcy and insolvency (BIA, WURA)?

3D -- The Bills of Exchange Act and the Depository Bills and Notes Act

This section looks at the interaction of the provincial STAs with the Bills of Exchange Act (BEA) and Depository Bills and Notes Act (DBNA), federal laws governing bills of exchange and promissory notes

1. Does the BEA need to be amended to clarify the relationship between the BEA and provincial STAs?

2. Should the DBNA be repealed in its entirety?

3. Should the DBNA be amended, and if so, in what manner? Are there any transitional issues that should be addressed?

1. The complete set of budget documents can be found at www.budget.gc.ca.[Return]

2. The list of federally incorporated (and federally regulated) financial institutions includes banks, insurance companies, trust and loan companies and cooperative credit associations. For simplicity, they will be collectively referred to as "financial institutions".[Return]

3. For ease of reading, federally incorporated financial institutions, corporations and cooperatives will be collectively referred to as "federally incorporated entities".[Return]

4. A securities settlement system is a system that permits the holding and the transfer of securities, either free of payment (e.g., pledge) or against payment. It comprises all of the institutional arrangements required for the clearing and settlement of securities trades and the safekeeping of securities.[Return]

5. Throughout this paper, the reference to provinces also includes the territories where appropriate.[Return]

6. As of June 6, 2007, Ontario, Alberta and British Columbia had their Securities Transfer Acts in force, while Newfoundland and Labrador and Saskatchewan were awaiting proclamation of their acts. Other provinces have announced intentions to table legislation within the next year.[Return]

7. The term "federal corporate statutes" will be used to collectively refer to the financial institutions statutes, the CBCA, and Co-ops Act. Information on where the transfer provisions can be found in the various statutes is provided in Annex B.[Return]

8. There are other federal corporate statutes, such as the Canada Corporations Act, Railway Act and those governing corporations created by special Acts of Parliament that contain share transfer provisions, but they will not be considered in detail for the purposes of this discussion paper. Once a course of action has been decided upon, the Departments will then consider whether and how to address these statues within any legislative or regulatory initiative that follows.[Return]

9. Hereafter referred to the "indirect holding" system.[Return]

10. The terms "owner", "investor" and "shareholder" are used interchangeably throughout this document.[Return]

11. An uncertificated security is one for which a security certificate does not currently exist. Further discussion of this issue can be found in section 3C.[Return]

12. Legal risk can also give rise to credit or liquidity risks for market participants. At the global level, where such risks are magnified, there is potential for systemic risk, which is the risk that the failure of a major player in the market will have a domino effect and lead to other failures, thereby threatening financial stability.[Return]

13. The conflicts-of-law problem for the indirect holding system has been addressed internationally by "The Hague Conference on Private International Law – Convention On The Law Applicable To Certain Rights In Respect Of Securities Held With An Intermediary", a multilateral choice-of-law Convention which was finalized in 2001. The International Institute for the Unification of Private Law (UNIDROIT) is currently in the process of developing a convention on substantive rules regarding intermediated securities. Canada is a participant in this project through a delegation led by the Department of Justice.[Return]

14. The USTA project was adopted by the Uniform Law Conference of Canada (ULCC) in 1993 on the basis of a report produced by the Alberta Law Reform Institute, Report No. 67 Transfers of Investment Securities (1993). The Canadian Securities Administrators (CSA) took on leadership of the project in 1998, at the request of the CSA Chairs and the ULCC. The USTA is based on Revised Article 8 of the U.S. Uniform Commercial Code (UCC), legislation that has worked well for a number of years in the U.S. market.[Return]

15.  Transmissions refer to a transfer of corporate securities that is founded by operation by some rule of law as opposed to the voluntary and consensual agreement of two parties. Transmissions often arise in the case of deceased persons, infants, mentally incompetent persons, missing persons, or bankrupts. Under such circumstances, a company may treat certain other persons as a constructive registered holder entitled to exercise all the rights of the security holder represented, provided certain procedural and evidentiary requirements are met.[Return]

16. Note that the federal government is not proposing to cover topics related to the acceptance of securities as a pledge against a debt that are under the provincial Personal Property Security Acts.[Return]

17. See Canadian Securities Administrators' Uniform Securities Transfer Act Task Force, "Proposal for a Modernized Uniform Law in Canada Governing the Holding, Transfer and Pledging of Securities", Consultation Paper, May 28, 2004.[Return]

18. It is important to note that only those provisions dealing with the transfer of securities would be repealed. The administrative provisions outlined earlier in this section would need to be retained in the federal corporate statutes because they are fundamental to corporate governance and do not relate to the issue of securities transfer. There would likely have to be some amendments to the administrative provisions that remain in the corporate statutes to update the provisions where required and to remove cross-references to the repealed transfer provisions.[Return]

19. This severance of ownership has existed since CDS created a book-entry clearing and settlement system in Canada. In order for an issue of securities to be deposited in CDS, the securities must be registered in the name of CDS's nominee (CDS & Co.), thereby making CDS the only "owner" of the securities vis-à-vis the issuer. By virtue of the CDS rules, CDS agrees to flow entitlements that are owing to it as owner of the security, through to the book-entry holders of the securities. CDS also agrees in the rules to take certain actions vis-à-vis the issuer on behalf of book-entry holders.[Return]

20. An uncertificated security is one for which no certificate currently exists. In contrast, a dematerialized security is one for which no certificate will ever exist.[Return]

21. Dematerialized securities are issued in Canada by non-corporate entities such as mutual funds. Dematerialization can be done under the Ontario Business Corporations Act with the amendments that came into force January 1, 2007.[Return]

22. Section 91(18) of the Constitution Act, 1867.[Return]

23. A bankers' acceptance is a short-term credit investment created by a non-financial firm and guaranteed by a bank. Acceptances are traded at a discount from face value on the secondary market, i.e., a purchase from another investor rather than an issuing corporation. Bankers' acceptances are very similar to treasury bills (T-bills) and are often used in money market funds.[Return]

24. Short-term debt securities include provincial T-bills, commercial paper, certificates of deposit, bankers' acceptances (commonly referred to as "money-market instruments"). The funds invested are used for short-term loans to various corporations and government bodies.[Return]

25. Commercial paper is an unsecured, short-term-debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. The debt is usually issued at a discount, reflecting prevailing market interest rates.[Return]

26. There are also cooperative centrals that have elected to be regulated under the CCCA, but they are not considered to be associations for the purposes of the CCCA provisions governing security certificates and transfer.[Return]