Copyright 2011, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Litigation & Dispute Resolution, December 2011
The Supreme Court of Canada has rendered a unanimous decision that the proposed Canada Securities Act (the Proposed Act) is not constitutional. In doing so, the Court has defeated the federal government's initiative to establish a single national securities regulator.
The decision comes in response to a reference directed by the Government of Canada on the question of whether the Proposed Act was constitutional. Arguments on the reference were heard earlier this year, as were two similar references directed by the provinces of Quebec and Alberta to their respective appellate courts. Previous Blakes Bulletins on those proceedings can be found here and here, while a bulletin on the Proposed Act itself can be found here.
Key Issues Before the Court
The reference turned on whether the federal government was authorized to regulate securities pursuant to its power over matters of "trade and commerce". This question raised two overarching issues. First, did the "nature" of trading in securities bring it within the scope of the "trade and commerce" power? And second, what would be the constitutional implications of recognizing such a federal power?
Nature of "Trading in Securities"
A series of Supreme Court precedents has established that the test for whether a given matter will fall within the federal "trade and commerce" power will depend, in essence, on whether that matter is of a "general" nature, such that it cannot be adequately regulated at the provincial level – regulation of competition is one example of such a matter. Accordingly, the first major issue before the Supreme Court in the reference on the Proposed Act was whether the regulation of securities involves simply the regulation of a series of purchase and sale contracts pertaining to property – in which case, it would fall solely within the provincial power over "property and civil rights" – or whether it also has a broader aspect that properly brings it within the concurrent jurisdiction of the federal government.
Constitutional Precedent Created
Over the course of the reference hearings, it became clear that the justices of the Supreme Court were also very mindful of the broader constitutional precedent they would be creating by recognizing federal power over securities.
On the one hand, as pointed out by proponents of the Proposed Act, recognizing a concurrent federal jurisdiction over the regulation of securities would have no immediate impact on the long-recognized provincial power over securities regulation, nor over the legitimacy of the provincial Securities Acts. This point was underscored by the fact that the Proposed Act expressly contemplates a voluntary opt-in scheme by which provinces would be given the choice of whether to opt-in to the proposed federal regulator or to retain their provincial regimes.
However, once recognized, a federal power over securities regulation could apply to empower the federal government not only with respect to the Proposed Act but with respect to future legislation as well, including any future legislation compelling the provinces to comply with a federal regime at the expense of their provincial legislation. As such, by recognizing a concurrent federal jurisdiction, the Supreme Court would be potentially opening the door to significant reorientation of the division of powers. It was these concerns that led to sharp opposition to the federal government's reference on the part of some of the provinces.
The Supreme Court's unanimous decision was premised on its finding that the "main thrust" of the Proposed Act, which it found to be the "day-to-day" regulation of securities, was not qualitatively different from the regulation already undertaken at the provincial level. On that basis, the Court found that the Proposed Act did not contemplate a distinct matter of genuinely national or general scope as would be required for it to fall within the ambit of the "trade and commerce" power. Echoing the concerns expressed by many of the justices at the reference hearings, the Court found that interpreting "trade and commerce" so broadly as to encompass matters of day-to-day regulation of securities contracts would deny the provinces their proper authority over "property and civil rights", and as such, would upset the balance of federalism.
Notably, the Supreme Court did recognize that certain aspects of securities regulation would likely fall within federal jurisdiction. In particular, the federal government would likely have the authority to regulate aspects of securities bearing upon systemic risk and the preservation of capital markets stability. However, the Court found that regulating these aspects did not require also regulating the "day-to-day" aspects of securities regulation that was the focus of the Proposed Act. Therefore, the Proposed Act could not be saved by the aspects of securities regulation falling within federal jurisdiction.
Where do we go from here?
The Supreme Court's decision, and the lack of any dissent or disagreement amongst the Court, constitutes a serious, if not fatal, blow to the prospect of comprehensive federal regulation of securities in Canada.
That said, while the Supreme Court's decision likely spells the end of the federal government's current effort to create a comprehensive national regulatory regime, it is possible that a more targeted federal effort could yet be successful, and the national Transition Office established by the federal government as part of its initiative will no doubt be reviewing the Court's decision closely. As noted, the Court has indicated that the federal government has authority over some of the more systemic aspects of securities regulation, and it may be possible that a narrower federal initiative to regulate those aspects, possibly premised on the consent and co-operation of some or all of the provinces, could yet be pursued. Notably, the Court made a point of stating in its decision that such a co-operative effort would be constitutionally legitimate.
Nonetheless, taken overall, it appears more certain than ever that Canada's patchwork of provincial securities regulations is here to stay.
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