Securities

Scope

States regulate securities. Each state regulates its own securities law.  Securities laws have converged substantially due to a variety of factors in the last thirty years.

Securities are shares, rights, tradable debt or other investment interest in enterprises or other assets.  They may represent a debt, such as in the case of a bond or debt security or equity interest in the case of shares.

An security may come in a variety of formats.  A certificated security is a negotiable instrument.  It is represented by a document in writing which is freely transferrable in accordance with principles of negotiability. The security has a named owner, it is registered, and the name is entered in a register of the names of owners.

If it is a bearer security, possession of the certificated security proves ownership.  No register is kept in this case.

Types

Most states permit registered and bearer security.  Some require registration in all cases.  Bearer securities may have strips or coupons attached to them which allow them to be detached and be presented to collect interest.

Registered securities are generally transferred by endorsement and delivery of the certificate and/or by the execution of an instrument of transfer.  The endorsed share certificate or share certificate plus instrument of transfer is sent for registration to the company/corporate registrar.  In some states, a bona fide purchaser of a bearer or security acquires title even if the transferor did not have title.

An uncertificated security is one recorded in the books of the relevant corporation.  Most states permits this facility.  In some states, certificated securities are not permitted unless the company is quoted on an exchange and traded publically.

Generally, share certificates set a minimum power or nominal value.  In the United States, a share may be issued with no par value.

Securities Regulation

In most countries, trading in securities is tightly regulated. U.S. securities laws purport to apply internationally.

Persons who do so for reward must be regulated.  Generally brokers and dealers must be licensed either by a state authority or by the membership of a regulated exchange.  There are restrictions on providing advice in relation to securities in most states.

Brokers and dealers in securities may group to form a stock exchange.  These are marketplaces in which shares and securities are purchased and sold on behalf of investors.

The largest stock exchange in the world is the London Stock Exchange, New York Stock Exchange, NASDAQ, Tokyo Stock Exchange, Frankfurt Stock Exchange, Paris Stock Exchange.  They dominate and account for about 90 percent of all global securities transactions.

Issues of Securities

States invariably regulate the issue of securities.  Before securities may be issued to the public, a prospectus is usually required.  There may be various exceptions. The prospectus must set out full disclosure of all material facts relating to the security and the company which has issued it.

Prospectus rules have been harmonized within the European Union.  Typically a prospectus requires the history and details of the organisation, a description of the business, financial statements, details of profits, losses, cash flow, et cetera.

Generally, the officers of the corporation and certain advisers must take responsibility for the truth and accuracy and completeness of the facts that are in the prospectus.  In most cases, the prospectus must be filed or registered with a central authority.

There is a period after filing before stocks/securities may be issued.  During this period, there is, at most, a limited permitted distribution of shares. After the listing authority approves the prospectus, sales of security transactions take place.

Most states exempt smaller certain classes of security issues from requirements for registration.  The exemptions may apply to issues by governmental and quasi-governmental authorities.  They may include limited offerings to a relatively small number of persons or issues to certain persons or below certain thresholds within a certain period.

The securities may be offered on foreign exchanges.  They would generally need to be registered on the foreign exchange.  Securities may be dual quoted on two exchanges.

The European Union Directive and Regulation on prospectuses seeks to provide for a single set of common EU-wide rules in relation to disclosure requirements on prospectuses.  See the separate chapter in that regard.

Intermediaries

The bodies holding or undertaking clearance of security transactions may be regulated.  Clearance is the process of exchange of purchase monies for security.  In the U.S. a national security clearing corporation deals with the clearance of securities created on U.S. exchanges.  The depositary or  trust company holds certificates for public traded companies and settlement is done by debiting the account of the seller and crediting that of the buyer in clearer’s books.

In other states, the buyer and seller may conduct an actual trade.  It is generally settled within a handful of days in developed countries and a number of weeks in developing countries.

There are two international clearing houses which handle the clearance and settlement of securities internationally.  Euroclear and Clearstream. Euroclear is based in Brussels and handles over 100,000 securities in some 80 and more countries.

Holding Securities

Clearstream provides settlement and clearance for a range of euro bonds, domestic bonds and equities.  It also provides registry and administration services.

Depository receipts are instruments negotiated by a bank.  They may represent international companies’  shares.  They may be traded on a local exchange.

The receipt is created by a broker purchasing company shares and depositing them at a custodian bank in that state in the name of the depository bank in another.  It instructs the depository bank to issue a receipt.

Where the depositary bank is a U.S. bank, the instruments are American Depository Receipts (ADR).  European depository receipts are issued by euro banks, and Global depository received by other banks.  Numerous companies have securities held through the depository receipt.

The advantage of depository receipts is that the shares remain in the home state.  The stock remains registered in the name of the depository bank.

Insider Trading

Most states have laws to prevent market manipulation and insider trading.  Some states however view insider trading as normal practice.

U.S. and European Union laws prohibit insider trading.  This comprises using non-public information in purchasing shares on behalf of oneself or on behalf of one’s account through a connected person.

It’s generally an offence or restricted activity to tip off and give sensitive information which has not been made public. There are EU-wide rules on market manipulation.

Violation of securities transactions may be a regulatory or criminal offence.  It may make the transaction void.  It may lead to an award of damages.

Movement of Capital

In 1961 the Organisation for Economic and Cooperation and Development adopted a code for the liberalization of capital movement.

States regulate takeovers to prevent abuse by those in charge and also the unfair treatment of shareholders. The offeror must generally disclose information about the takeover and make the offer to all shareholders.

Sufficient time must be given. There are restrictions on actions which may be taken by the company’s management in this period. They are not permitted to deal in the company’s shares.

The European Union enacted a number of key directives on securities in the mid-2000. Market manipulation, transparency, and prospectus directives and regulations are the cornerstone European-wide rules.  See the separate sections in this work on those matters.

Settlement or clearance refers to the process of mastering, registering and guaranteeing trades and calculating obligations.

Holding of Securities

In some jurisdictions, certificated securities have been abolished so that all securities are handled electronically.  Securities may be entered electronically in the register of holdings maintained by an intermediary such as banks and broker-dealer.

The Hague Convention on the law applicable to rates with respect to securities with intermediaries deals with laws applicable to key issues.  These include issues related to the shares themselves, the nature of the rights and security.

It applies to cases involving a choice of whether a choice of laws is applicable to the above issues . Generally is a law agreed upon by the parties.  There are constraints on the freedom of choice.  An insolvency court must respect the application of the law determined by the convention.

Settlement

The EU community settlement finality directive is assigned to ensure efficiency and stability in dealing with multiple participants and to reduce risks.  It applies to systems governed by the law of a member state and applies to all participants in the system and collateral security provided in connection with participation in a system.

The directive seeks to secure the finality of settlements in relation to transfer orders and netting.  It seeks to reduce risks under insolvency law.  The directive provides the determination of the law of the state which applies.

The EU collateral directive complements the settlement finality directive.  It addresses certain risks involved in security given by financial instruments.  It covers securities held directly and indirectly.

States are obliged, despite certain insolvency laws, to achieve the necessary protection for the security/ collateral taker.  The directive provides that the law of the state in which the account is maintained applies to the priority realization of property effects and perfection of collateral security.