On December 22, 2011, the Supreme Court of Canada released its long-awaited decision regarding the federal government's proposed Securities Act (the "Proposed Act"), which sought to create a federal regime for securities regulation in Canada. In a unanimous and often blunt decision, the Supreme Court ruled that the Proposed Act was beyond the federal government's powers and therefore unconstitutional. This ruling, although encouraging in certain ways for potential cooperation between the federal and provincial governments regarding securities regulation, has likely ended the Harper government's pursuit of a national securities regulatory regime on the government's desired schedule.
A long standing dispute has raged in Canada as to whether the current system of 13 provincial and territorial securities regulators should be maintained. Fuelling this debate further, Federal Finance Minister Jim Flaherty released the Proposed Act on May 26, 2010. This was to be expected, given the consistent advocacy for federal securities regulation that has come from the Harper government.
The Harper government's rationale for a federal securities regulator was based in part on the new emphasis in certain financial and political circles on a perceived need for a national securities regulatory regime, to ensure that Canada can effectively respond to worldwide events that pose a systemic risk to its financial markets. Interestingly, the Proposed Act was released at a time when Canada remains one of the few nations to have emerged from the global economic downturn relatively unharmed.
Additional background and details regarding this debate can be found in our previous bulletin: Harper Government Draws Battle Lines With Provinces Over Proposed National Securities Regulator.
Provincial opposition to the Harper government's plan was strong and widespread. As part of that opposition, the provincial governments of both Alberta and Québec submitted references to their respective Courts of Appeal as to the constitutionality of the legislation. Both Courts of Appeal ruled in favour of the provinces, declaring the proposed legislation to be outside the federal government's constitutional power to regulate "trade and commerce". Further support for this provincial opposition was found in British Columbia, Saskatchewan, Manitoba and New Brunswick. Ontario was the only province to support the Proposed Act.
Supreme Court Reference
The jurisdictional dispute led to a Supreme Court reference held in April 2011 on the constitutionality of the proposed federal legislation, which asked the Court to consider if the federal government indeed had the jurisdiction to enter the field of securities regulation with the Proposed Act.
The reference asked whether the Proposed Act was within the legislative and constitutional authority of the Parliament of Canada. During the Supreme Court hearing, the federal government, those provincial governments involved in the debate, and a number of interested interveners were all given an opportunity to state their positions.
The constitutional issues faced by the Supreme Court contemplated the breadth of the federal trade and commerce power contained in s. 91(2) of the Constitution Act, 1867, as well as the fundamental nature of securities regulation.
Opponents argued that any recognition of federal jurisdiction in the area of securities regulation overstepped the federal trade and commerce power and would simply contribute to an ongoing erosion of provincial powers. They feared this would serve only to upset the balance of federalism in Canada.
Supporters of the proposed legislation claimed that the federal level was the only place where effective securities regulation could be ensured. They also argued that changing and expanding global economic trends had inherently broadened the nature of securities regulation. With the modern complexities of securities markets, they believed that securities regulation was now too broad to be dealt with at the provincial level. The provincial opponents however maintained that securities regulation, as noted in the lower court decisions from Alberta and Québec, was simply a series of contracts for "trading in securities", thereby remaining within the provincial jurisdiction to regulate "property and civil rights".
Supreme Court Judgment
In what must have been a jolt to the Harper government, the Supreme Court decision unanimously declared the Proposed Act to be unconstitutional. The Supreme Court agreed with those opposed to the proposed legislation and commented that the day-to-day regulation of securities belongs in provincial hands. The judgment concluded that the federal government had not crafted legislation that placed securities regulation squarely within the confines of the existing federal trade and commerce power.
The Supreme Court was careful to state that its judgment was not an attempt to opine on the best system for securities regulation in Canada, nor was it an opinion on how the federal government could best regulate securities. It was a simple and forceful statement on the unconstitutionality of the Proposed Act.
The Supreme Court conceded that while there are indeed aspects of securities regulation that require federal input and control, such as those that impact Canada's wider economy, the practical effects of the proposed legislation would reach too far into provincial domain. Oversight of the investment and securities industries, the Supreme Court stated, fits squarely within the property and civil rights power assigned to provinces by the Constitution, and is therefore outside the power of the federal government to legislate.
The federal government has maintained that economic development makes securities regulation a national concern, affecting Canada and the national economy as a whole. This argument however was rejected by the Supreme Court, which ruled that despite Parliament's principled rationale, "the proposed Act is chiefly directed at protecting investors and ensuring the fairness of capital markets through the day-to-day regulation of issuers and other participants in the securities market." In the Court's view, the potential effects of the legislation overpowered its stated goals.
Importantly, responding to the federal government's warning that a volatile economy requires standardized measures to regulate securities, and illustrating the potential constitutional repercussions, the Supreme Court compared the Proposed Act to other commercial legislation under the federal government's trade and commerce power. The Court stated that "the proposed Act reflects an attempt that goes well beyond these matters of undoubted national interest and concern and reaches down into the detailed regulation of all aspects of securities."
In concluding its decision, the Supreme Court declared, in a striking tone, that "as important as the preservation of capital markets and the maintenance of Canada's financial stability are, 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 Supreme Court did however note that there remains the opportunity for compromise, and 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."
The Supreme Court decision has probably put the concept of a national securities regulator to bed for the foreseeable future, and Finance Minister Flaherty has conceded that, "It is clear we cannot proceed with this legislation." While other parties in favour of the proposed regime, such as the Canadian Bankers Association, have still maintained hope for a national securities regulator in public comments, this resounding rejection of the Harper government's approach leaves questions as to whether there is in fact much room or appetite left for negotiations between the two levels of government in this area.
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