In a unanimous opinion released yesterday,1 the Supreme Court of Canada (Court) sank the federal government's attempt to create a national securities regulator. The Court ruled that the proposed Canadian Securities Act (Act),2 "as presently drafted", is ultra vires the federal government.
The eagerly anticipated decision follows a two-day hearing in April which pitted the federal government and the province of Ontario against the strong objections of other provinces (in particular, Québec and Alberta) in a battle over the constitutionality of the Act. The controversial legislation was unveiled in May 2010 and referred to the Court for an advisory opinion regarding its constitutional validity. The federal Act has since weathered interim drubbings by the Courts of Appeal in Alberta and Québec, each of which held the Act to be unconstitutional in separate references heard earlier this year.3
The Supreme Court's decision reflects an application of established division-of-powers doctrine, ultimately determining that the Act does not fall within the federal government's general power to regulate trade and commerce under s. 91(2) of the Constitution Act, 18674 (the Constitution Act) and instead overreaches into the jurisdiction of the provinces to legislate in relation to "property and civil rights".
Before setting out an overview of the Court's reasoning, we
note two (related) points:
The Court emphasized that its opinion does not rule on the public policy merits of a federal securities regime, stating that "the policy question of whether a single national securities scheme is preferable to multiple provincial regimes is not one for the courts to decide."5
- While to all intents and purposes the current federal proposal is now dead in the water, the Court's decision does not rule out the possibility that an alternative legislative proposal to establish a federal role in the area of securities regulation could pass constitutional muster, noting that "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."6 To the extent that the perceived policy merits of a federal role in securities regulation could be agreed upon, any future attempt at establishing an alternative proposal would have to follow a collaborative effort between the federal and provincial governments. The Supreme Court notes "the growing practice of resolving the complex governance problems that arise in federations... by seeking cooperative solutions that meet the needs of the country as a whole as well as its constituent parts."7
The Court applied the two-step approach to determining the validity of legislation under the division of powers.
The first step requires a characterization of the impugned legislation, i.e., a determination of the "pith and substance" or "main thrust" of the law. Here, the analysis looks at the purpose and effects of the law to ascertain its main thrust viewed as a single, comprehensive scheme.
In this case, taking into account the preamble to the Act and its immediate object (viz., to create a single Canadian securities regulator, the effects of the Act (which will be to subsume existing provincial and territorial securities legislation under the federal Act) and the detailed provisions of the Act), the Court found that the main thrust of the Act is to regulate, on an exclusive basis, all aspects of securities trading in Canada, including trades and occupations related to securities in each of the provinces.
The second (in this case more critical) step in the analysis is to determine whether the legislation as so characterized falls under a head of constitutional power that can support it. Here, the federal government and the other proponents of the federal Act relied exclusively on the general trade and commerce power enshrined in s. 91(2) of the Constitution Act. However, the Court affirmed that the essence of the general branch of trade and commerce power is its national focus. Federal legislation that relies on this branch of the trade and commerce power must be genuinely national in scope and qualitatively distinct from that falling under provincial heads of power under s. 92 of the Constitution Act - in particular, ss. 92(13) (property and civil rights) and 92(16) (matters of merely a local or private nature).
In determining whether the federal Act, as so characterized, falls under the general trade and commerce power, the Court applied the five indicia articulated by the Court in its 1989 decision in General Motors v. City National Leasing.8
The Court found that the first two indicia of General Motors (viz., that the Act (1) creates general regulatory scheme (2) under the oversight of a regulatory agency) were clearly met.
The more challenging legs of the journey consisted of the remaining three indicia from General Motors, viz.: (3) trade as a whole rather than industry-specific; (4) constitutional incapacity of the provinces, acting alone or in concert, to enact a comparable scheme; and (5) whether the federal scheme is likely to operate successfully if one or more provinces were not included (i.e., universality).
The Court did find that aspects of the Act appear to be related to trade as a whole. It cited management of systemic risk and national data collection as examples. However, these elements did not justify a complete takeover of existing provincial regulation. Viewing the Act as a whole, the Court concluded that the Act overreaches the proper scope of the general branch of the trade and commerce power. The Act descends well into industry-specific regulation.
Some of the most interesting analysis is the Court's application of the fourth indicia from General Motors: provincial constitutional incapacity. The Court found that indeed the provinces, acting in concert, lack the constitutional capacity to sustain a viable national scheme aimed at genuine national goals such as controlling systemic risk and Canada-wide data collection. However, the Act attempts to go well beyond these matters of undoubted national interest and reach down into the detailed regulation of all aspects of securities.
Finally, the Court applied the universality criterion. Again, viewed as a whole, the Court found that the Act would not founder if a province declined to participate in the federal scheme. The Court also noted that the opt-in feature of the federal Act (likely, a political necessity for the Act to travel as far as it did) weighs against the federal argument that the success of the Act requires the participation of all provinces.
Against this backdrop, the Court gave a negative response to the ultimate question: viewed in its entirety, does the Act address a matter of genuine national importance and scope relating to trade as a whole in a way that is distinct from provincial concerns? Some measures of the Act directed at control of the Canadian securities market as a whole may transcend intra-provincial regulation of property and civil rights. A federal scheme incorporating these measures would be constitutionally supported under the general trade and commerce power. However, the Act chiefly regulates contracts and property rights within each of the provinces and territories. Provisions of the Act that related to federal concerns, although perhaps valid on their own, cannot lend constitutional validity to the whole Act. As important as the preservation of capital markets and the maintenance of Canada's financial stability are, they do not justify the wholesale takeover of the regulation of the Canadian securities industry. In short, the Canadian Securities Act overreaches its legitimate constitutional grasp.
where do we go from here?
While a wholesale takeover of securities regulation by the federal government has been dashed (probably never to resurface), a close reading of the Court's ruling also shows much that can be salvaged from this federal attempt to eviscerate the long-standing jurisdiction of the provinces over securities regulation.
First, the Court repeatedly states that at least two aspects of the Act satisfy the General Motors indicia of a genuine national dimension that the provinces are constitutionally incapable of regulating (on their own or acting jointly). In particular, the Court recognizes that the provisions of the Act that seek to control systemic risks (i.e., a risk that the failure of one market participant will trigger defaults by other market participants, setting off a chain reaction of financial defaults) transcend provincial boundaries and threaten the Canadian securities market as a whole. The Court lists various provisions of the Act that appear to be directed at controlling systemic risk, including the provisions relating to derivatives, short-selling, credit rating, urgent regulations and data collection and sharing. More generally, the broad Canada-wide data-collection powers in the Act can be seen as transcending the boundaries of a specific province and serving the national interest in a way that the provinces cannot replicate.
There is every reason for Parliament to re-enact these provisions in a slimmed-down version of the Act. As well, earlier in the reasons, the Court acknowledged that the federal government has other heads of constitutional power that could be invoked with respect to other aspects of the Act. For example, at paragraph 32, the Court states that the constitutionality of the offence provisions of the Act is not contested. These provisions, too, could be retained in a less intrusive version of the Act.
Second, the Court points out that there is no doubt that the provinces have the constitutional capacity to enact uniform legislation on most of the administrative matters covered by the Act (e.g., registration requirements and regulation of the conduct of market participants). At paragraph 118, the Court states that the provinces (presumably at least the smaller provinces and territories) could delegate provincial regulatory powers to a single pan-Canadian regulatory body by way of administrative delegation. Such federal-provincial cooperation has been forged in other areas of overlapping jurisdiction. As examples, the Court points to our comprehensive federal/provincial schemes for egg and poultry production and marketing.
Clearly, the Court favours resolving jurisdictional wrangles (including allocating the divided jurisdiction over the wide field of securities regulation) through nuanced, cooperative solutions worked out in the country's political forum rather than through the win/lose outcomes that result from courtroom battles.
While the Canadian Securities Act was sunk before it ever saw active service, there is perhaps much that can be salvaged from its remains – including the compelling need for the federal, provincial and territorial governments to join forces on the continuing work-in-progress that is Canadian securities regulation.
1 Reference Re Securities Act, 2011 S.C.C. 66 (S.C.C.)
2 Proposed Canadian Securities Act, Order in Council P.C. 2010-667; Renvoi Concernant la Compétence du Parliament du Canada en Matière de Valuers Mobilières, 2011 Q.C.C.A. 591 (CanLII)
3 Reference Re Securities Act (Canada), 2011 A.B.C.A. 77 (Alta C.A.)
4 30 & 31 Victoria, c. 3 (U.K.)
5 Supra note 1 at para. 10.
6 Supra note 1 at para. 130.
7 Supra note 1 at para. 132.
8  1 S.C.R. 641 ["General Motors"]
The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.
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