Earlier this month, the Alberta Court of Appeal rejected the federal government's proposed national securities legislation as unconstitutional.1 The Quebec Court of Appeal's decision on the same issue is expected shortly. Though the Alberta decision is strongly worded, the final decision rests with the Supreme Court of Canada, which will hear arguments on April 13 and 14, 2011. It remains to be seen whether the Alberta decision foreshadows the Supreme Court's reasons, or becomes the voice of dissent on this issue.
In May 2010, the Government of Canada released the proposed Canadian Securities Act (CSA), which provides for the harmonization of the existing provincial and territorial legislation into a single federal statute and creates a national securities regulator. The CSA is similar to provincial securities legislation, but still contains significant changes from the current regime. At the same time as releasing the CSA, the federal government referred the question of its constitutionality to the Supreme Court. Shortly after, both the Alberta and Quebec governments submitted similar reference questions to their respective appeal courts.
The Constitution Act, 1867 divides certain powers between the provincial and federal governments. The legal issue in all of the references is whether the CSA falls under a provincial or a federal head of power. The provinces have traditionally had jurisdiction over the regulation of the securities industry under their "property and civil rights" head of power. But the federal government argued that it had concurrent jurisdiction based on the general branch of the federal "trade and commerce" power. If there is concurrent jurisdiction, the federal legislation prevails over the provincial legislation under the paramountcy doctrine.
The Court of Appeal first considered the "pith and substance" of the CSA, which the parties ultimately agreed to be "the regulation of the participants in the public capital markets in Canada, and transactions relating to the raising of capital." However, the federal government argued for a characterization of the pith and substance as comprehensive national securities regulation (and necessarily beyond the authority of the provinces). The Court rejected this argument: "merely because something is of general interest throughout Canada is not enough to create federal jurisdiction."
The federal government also argued that the securities industry has changed in the last decade, becoming more complex and international in nature, and the CSA was necessary to address systemic risk. The Court rejected these arguments as well, finding that a more complex and global securities market does not change the pith and substance of the legislation and there is nothing concrete in the CSA about systemic risk. While a small portion of the CSA could be supported based on the federal government's criminal power, the Court found that, as a whole, the CSA is not criminal law.
In an earlier decision,2 the Supreme Court set out five non-definitive factors that demonstrate when legislation may be validly enacted under the general trade and commerce power:
1. the legislation is part of a general regulatory scheme;
2. the scheme is monitored by the continuing oversight of a regulatory agency;
3. the legislation must be concerned with trade as a whole rather than with a particular industry;
4. the legislation is of a nature that the provinces jointly or severally would be constitutionally incapable of enacting; and
5. the failure to include one or more provinces in a legislative scheme would jeopardize the successful operation of the scheme in other parts of the country.
The Court found that the CSA did not meet the last three of these criteria. First, the CSA does not concern trade as a whole; it is only concerned with a particular industry which is only a segment of the economy. Second, the provinces are not incapable of regulating the securities industry, as they have been doing it for decades. Third, the exclusion of some provinces from the regime would not undermine its operation in other provinces, which was demonstrated by the CSA's "opt in" provision. Provinces would voluntarily opt in to the national securities regulator, meaning that the failure to include a province would not jeopardize the scheme. The Court analogized the securities industry to the insurance industry, which the federal government had unsuccessfully tried to regulate for years. In the Court's view, the federal government was essentially attempting to overturn those cases "and to rewrite Canadian constitutional history in a way that would disrupt the predictability required in constitutional law".
The Court of Appeal did recognize the "double aspect doctrine" may be applicable. It contemplates that similar provincial and federal legislation may both be constitutional when they fall within both a provincial and federal head of power. In that case, the federal legislation becomes paramount. As the Court found that the CSA did not fall within a federal head of power, the double aspect doctrine does not apply. Furthermore, the doctrine has not been applied where the federal and provincial legislation were wholesale duplications of one another. In the Court's view, it would be wrong to apply the doctrine when both sets of legislation were pursuing the same purpose by similar means. The Court of Appeal's concluding remarks rejected the federal government's approach, stating that "the way to accomplish this [the national securities regime] is through negotiation with the provinces, not by asking the courts to reallocate the powers under the Constitution Act through a radical expansion of the trade and commerce power."
Though this decision is not binding on the Supreme Court, it does provide a framework for analysis. The federal government will have to consider how to best frame its oral submissions to deal with the concerns raised by the Alberta Court of Appeal and persuade a majority of the Supreme Court that the CSA is within federal authority. Notably, the Alberta and Quebec governments are opposing the CSA in the Supreme Court, and will undoubtedly be relying heavily on these reasons.
1. Reference re Securities Act (Canada), 2011 ABCA 77.
2. General Motors v. City National Leasing,  1 S.C.R. 641.
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