Canada: MarketCaps @ Gowlings - December 23, 2011 - Volume 7, Number 10

In this issue:

  • Supreme Court Releases Decision on Proposed Securities Act - Details

Supreme Court Releases Decision on Proposed Securities Act - Details

By: Kelley McKinnon and Brent Arnold

In a unanimous decision released on December 22, 2011, the Supreme Court of Canada held that the Federal government's proposed Canadian Securities Act (the "Proposed Act") as presently drafted is not valid under the general branch of the Federal power to regulate trade and commerce under section 91(2) of the Constitution Act, 1867. The Proposed Act would have established a national securities regulatory regime to replace the existing legislation and regulators of participating provinces and territories. Kelley McKinnon and Brent Arnold of Gowlings represented Teachers Pension Plan Board in the proceedings before the Supreme Court of Canada.

The Issue before the Court

The narrow issue before the Court was whether the Proposed Act was constitutional under the general Federal trade and commerce power. The Federal government and interveners appearing in support argued that the Proposed Act fell under the Federal government's general power to regulate trade and commerce under section 91(2) of the Constitution Act, 1867.  The governments of Alberta and Québec, supported by several other provinces and by Québec-based interest groups, argued that securities regulation properly falls within the provincial jurisdiction over property and civil rights within provincial boundaries under section 92(13).

The Constitutional Test

To decide whether the Proposed Act fell under the general trade and commerce power, the Court considered the five indicia set out in the General Motors case.1 The proper application of the General Motors test precluded the Court from considering whether the proposed law and regime would be more effective than the existing aggregation of provincial and territorial regulators.

The Court concluded the first two indicia were "clearly met" as the Proposed Act would have instituted a national regulatory regime across the country under the oversight of a Federal regulator.

In considering the third indicia, the Court was not convinced that the "day-to-day" regulation of trading in securities was a "matter of national concern", and commented that "[t]he wholesale displacement of provincial regulation [the Proposed Act] would effect is not justified by the national concerns that Canada raises."

As for the fourth indicia, the Court accepted Canada's argument that the provinces lack the capacity to enact a "national scheme aimed at genuine national goals such as management of systemic risk or Canada-wide data collection", but expressed concern that the Proposed Act "goes well beyond these matters of undoubted national interest and concern and reaches down into the detailed regulation of all aspects of securities." 

The Court agreed with Canada, in considering the fifth indicia, that the absence of a province from participation in the Federal scheme would prevent it from operating effectively in pursuit of "genuine national goals, related to fair, efficient and competitive markets and the integrity and stability of Canada's financial system, including national data collection and prevention of and response to systemic risks". However, the Court went on to reiterate that because the main thrust of the Proposed Act is the day-to-day regulation of securities, the Proposed Act would not be impaired by the non-participation of any particular province.

Moving Forward

While the Court concluded that the Proposed Act as drafted is ultra vires (or beyond the powers of) the Federal government's authority, it also encouraged seeking cooperative solutions. The Court stated:

While the proposed Act must be found ultra vires Parliament's general trade and commerce power, a cooperative approach that permits a scheme that recognizes the essentially provincial nature of securities regulation while allowing Parliament to deal with genuinely national concerns remains available. 

The Court recognized several aspects of Canadian capital markets that are clearly of national concern, including management of systemic risk and data collection, and which are therefore within Federal jurisdiction. In light of the complexity of capital markets and the Court's recognition of both federal AND provincial jurisdiction over aspects of securities regulation, it will take time, whatever path the Federal government chooses to pursue, to address the impact of this decision.

For further commentary on the decision, please see Kelley McKinnon's December 22 interview with BNN in the following clip: National Security Regulator Ruling.

Footnotes

1. The General Motors indicia were summarized by the Court as follows:

1. Is the law part of a general regulatory scheme?

2. Is the scheme under the oversight of a regulatory agency?

3. Is the law concerned with trade as a whole rather than with a particular industry?

4. Is the scheme of such a nature that the provinces, acting alone or in concert, would be constitutionally incapable of enacting it?

5. Would failure to include one or more provinces or localities in the scheme jeopardize its successful operation in other parts of the country?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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