On December 22, 2011, the Supreme Court of Canada released its much anticipated decision on the constitutionality of the proposed Canadian Securities Act (CSA). To the surprise of many, the Supreme Court unanimously found the CSA to be unconstitutional and outside the authority of Parliament, much like the Alberta Court of Appeal and Quebec Court of Appeal did earlier last year. But the Supreme Court did not rule that the concept of a national securities regulator is necessarily unconstitutional. As such, the federal government is forced back to the drawing board.
In May 2010, the federal government released the CSA, which provides for the harmonization of the existing provincial and territorial legislation into a single federal statute and creates a national securities regulator. 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 five-judge panels of their respective appeal courts. Both provincial appeal courts found the CSA to be unconstitutional (with only one Quebec judge dissenting).
The Canadian constitution divides certain powers between the provincial and federal governments. The legal issue before the courts was whether the CSA falls under a provincial or federal head of power.
The federal government, supported by the province of Ontario, argued that the CSA falls within the federal government's general trade and commerce power. It conceded that certain aspects of securities regulation fall under provincial power, and acknowledged the oft-affirmed power of the provinces to regulate securities. But the federal government took the position that the securities market has evolved from a provincial matter to a national matter, affecting the country as a whole. This significant transformation, argued the federal government, has given rise to systemic risks and other concerns that can only be dealt with on a national level.
The Provinces' Argument
The provinces of Alberta, Quebec, Manitoba and New Brunswick opposed the constitutionality of the CSA. The provinces argued that the CSA falls under the provincial property and civil rights head of power. They also argued that the CSA trenches on the provincial power over matters of a merely local or private nature, namely the regulation of contracts, property and professions. The provinces heavily relied on the fact that provincial governments have regulated the securities market since Confederation.
The Supreme Court's Decision
To determine the constitutionality of the CSA, the Supreme Court engaged in a two-step analysis. First, what is the "pith and substance" of the legislation? In other words, what is the main thrust of the law based on a review of its purpose and effects? The CSA's stated purpose is to implement a comprehensive Canadian regime for the regulation of securities. The effects of the CSA are to duplicate and displace existing provincial regimes and replace them with a new federal regulatory scheme. Based on the stated purpose of the CSA, its provisions and other evidence, the Court concluded that the pith and substance of the legislation "is to regulate, on an exclusive basis, all aspects of securities trading in Canada, including the trades and occupations related to securities in each of the provinces."
Second, does the legislation as characterized fall within the federal trade and commerce power or the provincial property and civil rights power? On its face, the general trade and commerce power is broad, having the ability to subsume other federal heads of power, and duplicate (and perhaps displace) provincial powers. In order to constrain this seemingly limitless power, it has been confined to matters that are genuinely national in scope. There are five indicia of federal competence under the general trade and commerce power:
- Is the law part of a general regulatory scheme?
- Is the scheme under the oversight of a regulatory agency?
- Is the law concerned with trade as a whole rather than a particular industry?
- Is the scheme of such a nature that provinces, acting alone or together, would be constitutionally incapable of enacting it?
- Would failure to include one or more provinces jeopardize its successful operation in other parts of the country?
These indicia are not exhaustive, and do not need to be present in every case. The first two indicia identify the required structure of the legislation. The latter three consider whether the matter is one of genuine national importance distinct from provincial concerns.
The Court accepted that goals of the CSA, in particular, the preservation of capital markets to fuel Canada's economy and maintain financial stability, go beyond a particular industry and engage "trade as a whole" (making the CSA part of a general regulatory scheme and under oversight of a regulatory agency). But the Court also found that the CSA descends into the day-to-day regulation of all aspects of securities trading within the provinces, which has long since been regulated provincially. The federal government argued that the securities market has transformed into a national concern but the Court rejected this view. The fact that the structure and terms of the CSA "largely replicate the existing provincial schemes belies the suggestion that the securities market has been wholly transformed over the years."
The Court also found that the provinces lack the constitutional capacity to sustain a viable national scheme aimed at genuine national goals, such as managing systemic risk. But the CSA goes beyond matters of national interest and reaches down into the detailed regulation of all aspects of securities, meaning that the provinces are not "constitutionally incapable" of responding to those matters.
The national goals of the CSA, such as managing systemic risk, would be rendered ineffective if a province absented itself from the CSA. But, because the main thrust of the CSA is the day-to-day regulation of securities, the Court stated that the CSA would not give way if a province declined to participate. Significantly, the CSA contains an opt-in feature, whereby provinces would opt-in to the federal scheme. This feature of the CSA contemplates that not all provinces will participate, which weighed against the federal government's argument that the success of the CSA requires the participation of all provinces.
In conclusion, while the Supreme Court noted that certain aspects of the CSA may be of genuine national concern (and realities such as systemic risk could justify federal regulation), the CSA as a whole cannot be sustained under the general trade and commerce power. The main thrust of the legislation–the day-to-day regulation of securities–cannot be described as a matter that is truly national in importance and scope. Systemic risk, however concerning, cannot justify a complete federal takeover.
Final Comments from the Court
The Supreme Court was careful to confine its decision to the constitutionality of the proposed CSA. Its decision was focused on legislative competence, not policy.
The Supreme Court made clear that "courts do not have the power to declare legislation constitutional simply because they conclude that it may be the best option from the point of view of policy". This statement leaves the door open for alternative strategies for regulating Canada's securities markets.
The Court highlighted the potential for a cooperative approach with both levels of government working in collaboration on securities regulation. The Court appears to suggest that since the matter possesses both central and local aspects, the federal government should pursue an approach that permits a scheme recognizing the essentially provincial nature of securities regulation, while still allowing Parliament to deal with genuinely national concerns.
The Supreme Court also noted, on several occasions, that the federal government grounded its position that the CSA was constitutional entirely on the general trade and commerce power, and that the Court had not been asked to opine on Parliament's authority over securities regulation under other federal heads of power. If the CSA is redrafted, the federal government may contemplate a different constitutional position.
The Supreme Court's decision arguably provides a map to a new securities regime. It characterizes many aspects of provincial and federal jurisdiction with respect to securities, and suggests where the federal government may be able to regulate (such as with respect to systemic risk). The Court also essentially proposes a cooperative approach between the federal and provincial governments, envisioning roles for both national and provincial regulators.
The federal government has not announced what, if any, steps it will take next. The Supreme Court's decision makes it clear that, absent a constitutional amendment, a single national regulator, without provincial involvement, will not succeed. It remains to be seen whether both levels of government can cooperate on a national securities regime that deals with some of the national concerns raised by the federal government. For now, the only thing that remains certain is that a national securities regulator will not be in place any time soon.
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