Earlier today the Supreme Court of Canada issued a unanimous decision that the proposed federal Canadian Securities Act, as currently drafted, is unconstitutional as it is not a valid exercise of the Federal Government's power to regulate trade and commerce under s. 91(2) of the Constitution Act, 1867. Davies represented the Canadian Coalition for Good Governance in the proceedings before the Supreme Court of Canada.
In May 2010, the Federal Government initiated a reference to the Supreme Court of Canada. A single question was asked: does the Federal Government of Canada have legislative authority to enact the proposed Canadian Securities Act (the "Act"). The Act would have created a single national securities regulator ultimately overseeing a unified national securities regulation system for Canada.
The Canadian securities industry evolved provincially and has since remained regulated by the provinces. This is not to suggest the regime has been without controversy. Dating back to the 1935 Royal Commission on Price Spreads, many federally and provincially-appointed commissions have called for consolidation under a national regulator. Most recently, both the 2002 Wise Persons Committee and the 2009 Hockin panel issued reports endorsing a single national regulator. The federal government responded by forming the Canadian Securities Transition Office, charged with establishing a Canadian securities regulator within three years.
On April 13, 2011, arguments were heard at the Supreme Court concerning the proposed Act. Advocating in favour of a national regulator were the federal government, together with the government of Ontario and a group of industry organizations including the Canadian Coalition for Good Governance, the Canadian Bankers Association and the Canadian Foundation for Advancement of Investor Rights. Their principal argument was that the securities markets have undergone significant transformation in recent decades, evolving from local markets to markets that are now nationally and internationally defined and resulting in systemic risks that can only be dealt with on the national level. The evolving national character of securities markets brings those markets within the general trade and commerce power.
The other provinces disputed that the securities markets had evolved to become a matter of national concern. They argued that Canadians are adequately served by the existing framework of provincial legislation. More importantly, however, these provinces perceive the nationalization of securities regulation as a threat to the balance of federalism. They believe it would allow the Federal Government to enact legislation that would unilaterally define the scope of its power, thereby usurping the provincial powers over matters of a local or private nature.
The Opinion of the Supreme Court
The Court held that the main thrust of the proposed Act is to regulate, on an exclusive basis, all aspects of securities trading in Canada. In doing so it would duplicate and displace the existing provincial and territorial securities regimes. While the Court agreed that the preservation of capital markets is a matter that goes beyond a specific industry and engages trade as a whole, it found that the proposed Act is chiefly concerned with the day-to-day regulation of all aspects of contracts for securities which falls within the provinces' authority over property and civil rights under the Constitution.
The Court expressly noted that there were specific aspects of the Act aimed at addressing matters of genuine national importance going to trade as a whole. These included management of systemic risk and national data collection. With respect to these aspects of the Act, the provinces, acting alone or in concert, lack the constitutional capacity to sustain a viable national scheme and the federal government would have been justified in acting. However, the Court concluded that, viewed as a whole, the Act is not chiefly aimed at genuine federal concerns. It is principally directed at the day-to-day regulation of all aspects of securities.
The Court concluded that the proposed Act overreaches genuine national concerns. While the economic importance and pervasive character of the securities market may, in principle, support federal intervention that is qualitatively different from what the provinces can do, they do not justify a wholesale takeover of the regulation of the securities industry, which is the ultimate consequence of the proposed federal legislation.
The Court noted that "the policy question of whether a single national securities scheme is preferable to multiple provincial regimes is not one for the Court to decide."
The Way Forward
Ultimately, the Court appears to have left it open to legislators to introduce narrower legislation which is specifically targeted at matters of national concern such as the regulation of systemic risk and national data collection. Alternatively the Court noted that the provinces and federal authorities could cooperate to design a regulatory scheme that recognizes the essentially provincial nature of securities regulation while allowing Parliament to deal with genuinely national concerns.
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