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Wednesday, February 10, 2016
Saskatchewan Justice

The Securities Transfer Act governs the transfer and holding of securities and interests in securities.  It is administered by the Financial and Consumer Affairs Authority (FCAA) - Securities Division.

The FCAA regulates people trading in, or advising about securities and exchange contracts in Saskatchewan.

Securities regulatory law, i.e., The Securities Act, 1988, governs how securities are issued and traded.   The Securities Transfer Act, on the other hand, is commercial property transfer law.  It deals with only one narrow aspect of a securities transaction - the transfer of property that occurs in the settlement of a securities transaction.

Traditionally, securities were held, transferred and pledged in a direct holding system in which the owners of securities had a direct relationship with the issuer of the securities and securities owners typically had share certificates in their possession evidencing their interest in a corporation.  Today, most securities are held through an indirect holding system where the interests of an investor are recorded on the books of an intermediary who, in turn, often has its interests recorded on the books of another intermediary, and so on up the chain of interests until it is recorded in either the securities issuer's register, or in the physical possession of a negotiable security certificate.  At the top of this chain is the Canadian Depository for Securities Limited.

The Securities Transfer Act is based on the Hague Conference on Private International Law, which adopted a multilateral convention on laws applicable to securities held through an intermediary.  All Canadian jurisdictions are adopting uniform provincial and territorial securities transfer legislation consistent with the Hague Convention.

Part 2 of the Act classifies obligations and interests as "securities" or "financial assets", outlines the process for acquisition of financial assets or interests in financial assets in each of the direct and indirect holding systems, and sets out what constitutes notice of an adverse claim or control of a financial asset.  Corporate stock and interest in a business trust constitute a "security", as do mutual funds and partnership interests where traded on an exchange.  Although instruments such as bills of exchange, depository bills and notes and options are not securities, they are "financial assets" if held in a securities account and the indirect holding rules apply to such instruments.

Key provisions require that endorsements, instructions or entitlement orders must be made by an "appropriate person" and must be "effective" according to the rules set out in the Act.  In addition, statutory warranties that apply to securities transactions are outlined along with the potential liability of securities intermediaries.

This Part also provides conflict of laws, seizure and enforceability rules.  The conflict rules are designed to ensure certainty and predictability in an industry where inter-jurisdictional transactions are the norm.  The rules are designed to allow parties to have reference to one body of law in determining their respective duties and obligations.  Provisions relating to the role of clearing agency rules are laid out as well.

Part 3 of the Act sets out the respective rights and obligations of issuers and purchasers of securities in a direct holding system.  A purchaser of a certificated security is entitled to expect that the security bears only those terms noted (or adopted by reference) on the face of the certificate.  Part 3 also outlines the rights of purchasers of securities as against the issuer and other claimants, as well as rules for determining the validity of securities, noting certain exceptions such as forgery and staleness, and the effect of an overissue.  The warranties that flow from authentication of a certificate and rules that restrict the defences that can be raised by issuers are provided.

Part 4 of the Act sets out the rules governing transfers of securities within the direct holding system.  It also makes a clear distinction between delivery of a "security" to a purchaser or agent under the direct holding system, and the transfer of a "security entitlement" through a securities intermediary in the indirect holding system.  This Part also makes it clear that a purchaser takes all of the interest in a security that the transferor has the power to transfer, subject to limited qualifications, and outlines the ability of a "protected purchaser" to obtain a security free of any adverse claims.

Part 4 sets out the rules with respect to endorsements of securities, including rules regarding the delivery of endorsements, incomplete endorsements,  the guarantee of signatures and the obligations of a transferor to a purchaser regarding proof of authority (i.e., proof of the endorsements) to transfer a security.

Part 5 of the Act sets out the registration process for securities dealt with in the direct holding system, including the requirements for registration and the duties and liabilities of issuers with respect to requests to register a transfer of a security.  Rules regarding endorsements and instructions with respect to security certificates are set out, as well as the effect of signature guarantees and the liability undertaken by guarantors or signatures on endorsements and instructions.  A process is also outlined for situations where an issuer receives a demand that it not register a transfer where someone has called the effectiveness of a requested transfer into question (e.g., the request for transfer was received from someone not authorized to do so), and a procedure for the replacement of lost, destroyed or wrongfully taken security certificates is provided.

Part 6 of the Act contains detailed rules for the indirect holding system. Persons who hold securities through brokers or custodians have "security entitlements" that are governed by the provisions of this Part, as opposed to being treated as direct holders of "securities" under the direct holding system.  This Part defines the notion of "security entitlement" within the indirect holding system and sets out the manner in which property interests are determined where a person holds securities through a securities intermediary.  The term "securities account" is central to the operation of these provisions - a person has a security entitlement when a financial asset has been credited to a securities account.  Such an account reflects a contractual relationship between a securities intermediary and a customer to exercise the rights to the financial assets held in the account.  The basic premise upon which the indirect holding system is based is that once a securities intermediary has acknowledged that it is carrying a financial asset for its customer, the intermediary is obligated to treat the customer as entitled to the financial asset.

Part 6 also sets out the rules regarding property rights and interests in the context of the indirect holding system.  The provisions explicitly state that the security held by a securities intermediary is not the property of the intermediary, but is held on behalf of the entitlement holders.  A securities intermediary is required by law to comply with genuine and authorized instructions from entitlement holders.  The property held by the entitlement holders is held in common by all holders who have entitlements to a particular security or other financial asset.  Accordingly, entitlement holders have a pro rata interest in the positions held by the intermediary in a specific financial asset, and the remedies of an entitlement holder are, with few exceptions, as against the intermediary.  However, Part 6 also outlines the limited circumstances in which an entitlement holder's property interest can be asserted against a third person.

In order to protect investors, the Act requires that intermediaries hold financial assets corresponding to the security entitlements of its entitlement holders, and lays out priority rules for situations where a securities intermediary fails.

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