On Thursday, September 19, the Canadian government announced a new plan for national securities regulation. So far, it has the support of just two provincial governments, Ontario and British Columbia, but the plan invites all other provinces and territories to sign on. Quebec's government opposes the idea and said it would interfere in provincial jurisdiction. Alberta's government said it "will need time to review" the proposal. Quebec and Alberta defeated the last federal attempt to create a national regulator, which the Supreme Court deemed unconstitutional in the Securities Reference (2011 SCC 66, online). But the new plan differs in two important ways. First, there will be no federal law regulating the securities industry in general. Instead, that will be regulated by uniform provincial laws to be adopted by participating provinces. Second, the federal law will deal with criminal provisions, national data collection, and systemic risk in the financial sector, areas the Securities Reference either did not contest or specifically viewed as proper candidates for federal legislation.
A checkered past
Canada has explored options for federal securities regulation since 1935. The Securities Reference was the most recent chapter, when the Supreme Court rejected the federal government's Proposed Canadian Securities Act, which would have largely duplicated existing provincial legislation. But the court's decision referred to seven earlier proposals supporting some form of federal regulation, including two Royal Commissions, three provincial initiatives, and two federal initiatives.
It is remarkable that these efforts have survived so long because, legally speaking, Canada's existing system of securities regulation is so firmly established in provincial jurisdiction. The reasons may be traced to Confederation, when the Constitution Act, 1867 gave jurisdiction over property and civil rights to the provinces and jurisdiction over trade and commerce to the federal government.
Courts deciding constitutional questions have read the first power very broadly, while the second gets a very narrow interpretation. As the Securities Reference explained, this reflects the judiciary's abiding concern with preserving provincial independence from excessive federal interference.
As early as 1932, courts have justified provincial authority over securities regulation under the property and civil rights power. Before the Securities Reference, the Supreme Court confirmed this jurisdiction as recently as 2000. So the Securities Reference was the latest in a long line of rulings supporting the status quo. The provinces built a comprehensive regulatory system on this legal foundation. As the Supreme Court wrote: "we cannot ignore that the provinces have been deeply engaged in the regulation of this market over the course of many years".
Yet despite these legal and historical realities, national securities regulation stayed on the agenda. One reason may be that Canada is the only state in the G-7 without a national regulator. Another, as the federal government argued before the Supreme Court, is that capital markets are increasingly integrating and necessitating coordinated oversight. The greatest concern is "systemic risk": the danger of a cascading capital markets failure where the default of a single market participant can spread to others and disrupt an entire financial system.
An uncertain future
On September 19, 2013, the governments of Canada, Ontario, and British Columbia reached an "Agreement in Principle to Move Towards a Cooperative Capital Markets Regulatory System" (online). This "Cooperative System" has six main features:
- A single "capital markets regulator" for all jurisdictions who join, to administer and enforce the enabling provincial and federal legislation, propose regulations, and adjudicate proceedings through an independent tribunal;
- Uniform provincial statutes adopted by participating provinces to regulate the securities industry in general, which the Securities Reference reaffirmed as an area of provincial jurisdiction;
- A targeted federal statute to focus on policy areas the Securities Reference suggested were within federal jurisdiction, namely criminal provisions, national data collection, and systemic risk;
- A Council of Ministers from participating jurisdictions to supervise the new regulator and approve its proposed regulations;
- A head office in Toronto with branch offices in participating provinces; and
- A self-funded fee structure, but with support payments from the federal government to provinces who would lose revenue from giving up their local systems of securities regulation to join the Cooperative System.
The Agreement in Principle included a "best efforts" timeline that set January 31, 2014 as the deadline for concluding a Memorandum of Agreement between participating jurisdictions and drafting enabling legislation. The target for enacting the legislation is December 31, 2014, and the timeline envisions the regulator to be up and running by July 1, 2015, just under four months from the next scheduled federal election.
Legally, the Cooperative System would have advantages over the defunct Proposed Canadian Securities Act. It directly answers the Supreme Court's call for a collaborative solution to capital markets regulation, articulated in the Securities Reference, which denied the federal attempt to take over a longstanding area of provincial jurisdiction. It also proposes federal law specifically directed at areas the Securities Reference considered jurisdictionally appropriate.
Politically, the Cooperative System has struggles ahead. The governments of Quebec and Alberta have opposed federal regulation so strongly that they both had their highest provincial appeal courts pre-emptively declare the Proposed Canadian Securities Act unconstitutional before the Supreme Court's decision. Quebec's immediate opposition to the new plan does not bode well. Even if Alberta and the other provinces can be convinced, Quebec may be content to go it alone. If so, the saga of a truly national securities regulator may be far from over.
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