Canada: Supreme Court Of Canada Rules That Proposed Canadian Cooperative Capital Markets Regulatory System Is Constitutional

Last Updated: November 15 2018
Article by Jeremy Devereux and Justine Smith

Most Read Contributor in Canada, November 2018

Today the Supreme Court of Canada (the Supreme Court) released its much-anticipated decision on the reference regarding the proposed Canadian Cooperative Capital Markets Regulatory System, finding that the proposed national regulatory system is constitutional.

Previous Attempts to Create National Securities Regulator

It has been suggested by the a number of governments, academic commentators and others that a national securities system in Canada would protect investors, foster fair, efficient and competitive capital markets, and contribute to the integrity and stability of Canada's financial system. As a result, various attempts have been made to centralize the regulation of securities in Canada with limited success. While certain interprovincial initiatives aimed at coordinating regulatory functions have succeeded – such as the adoption by some provincial securities commissions of various national and multilateral instruments, and the implementation of the "passport regime" – attempts to create a national securities regulator have failed.

The last major attempt to create a national securities regulator was in 2009, when the Federal government developed the Proposed Canadian Securities Act. The system was designed to function on an opt-in basis such that each province retained its right to choose to participate or to keep its existing regulatory framework.

The constitutionality of the Proposed Canadian Securities Act was considered by the Supreme Court in 2011 in Reference re Securities Act, in which the federal government sought the Supreme Court's opinion as to whether the proposed legislation would constitute a valid exercise of Parliament's power over trade and commerce pursuant to s. 91(2) of the Constitution Act, 1867 (the Constitution). The Supreme Court held that the proposed legislation would not be a valid exercise of Parliament's power as it would be outside its sphere of legislative authority. However, the Supreme Court acknowledged that certain aspects of the proposed legislation may be constitutional as falling within the federal sphere. In particular, although the Supreme Court found the Proposed Canadian Securities Act to be unconstitutional, it recognized that a scheme based on a cooperative approach to regulating securities in Canada might be constitutional, if it allowed provinces to address issues falling within their powers over property and civil rights and matters of local nature, while leaving room for Parliament to address genuinely national concerns.

Background

After the Supreme Court's decision on the 2011 reference, the Federal government and the governments of Ontario, BC, Saskatchewan, New Brunswick, PEI and Yukon developed a proposed national cooperative system for the regulation of capital markets in Canada, the Cooperative Capital Markets Regulatory System (the Cooperative System). The Cooperative System's framework is set out in an agreement between the federal government and participating territorial and provincial governments (the Memorandum).

Included in the Cooperative System are:

  • The Model Provincial Act , which deals with day-to-day aspects of securities trade. Section 5.5 of the Memorandum provides that any proposals to amend the Model Provincial Act are subject to a vote and must be approved by at least 50% of the members of the Council of Ministers (discussed below) and by the members representing the Major Capital Markets Jurisdictions (presently Ontario and BC).
  • The Draft Federal Act (DFA), which prevents and manages systemic risk and establishes criminal offences relating to financial markets. This would complement uniform provincial and territorial securities legislation.
  • A National Securities Regulator (the Authority), which would be a single operationally independent capital markets regulatory authority to which the federal government and the participating provinces would delegate certain regulatory powers. The Authority would have the power to make regulations but any regulations proposed by the Authority must be approved by the Council of Ministers before coming into force.
  • The Council of Ministers, which would comprise ministers responsible for capital markets regulation in each participating province and the federal Minister of Finance.

The Decision of the Quebec Court of Appeal

The Government of Quebec referred two questions pertaining to the Cooperative System to the Quebec Court of Appeal:

1. Does the Constitution of Canada authorize the implementation of pan-Canadian securities regulation under the authority of a single regulator, according to the model established by the most recent publication of the "Memorandum of Agreement regarding the Cooperative Capital Markets Regulatory System"?

The majority of the Court of Appeal answered this question in the negative and held that the Cooperative System would be unconstitutional. The Court of Appeal held that the process for amending the Model Provincial Act, and the requirement for any amendments to be approved by the Council of Ministers (Memorandum, s. 5.5) effectively fettered the sovereignty of the participating provinces' and territories' respective legislatures. The process for making federal regulations set out in the DFA and Memorandum was deemed inconsistent with the principle of federalism, given that it allowed certain provinces to veto the adoption of a federal regulation.

2. Does the most recent version of the draft of the federal "Capital Markets Stability Act" exceed the authority of the Parliament of Canada over the general branch of the trade and commerce power under subsection 91(2) of the Constitution Act, 1867?

The Court of Appeal answered this question in the negative. The Court of Appeal recognized that although the DFA was within Parliament's jurisdiction under the general trade and commerce power, the provisions setting out the role of Council of Ministers in making the federal regulations (ss. 76-79) were not constitutional and, unless removed, would render the entire DFA unconstitutional.

(For more details on the decision of the Quebec Court of Appeal, please see our previous blog post here.)

The Decision of the Supreme Court of Canada

The Attorneys General of Canada, Quebec and British Columbia appealed to the Supreme Court of Canada. The Supreme Court analyzed the two questions referred to the Quebec Court of Appeal and held that that proposed national scheme was constitutional.

Question 1

A unanimous Supreme Court determined that the proposed pan-Canadian securities regulation is constitutional. In large part, this was based on the Court's view that the Quebec Court of Appeal had misread or misunderstood the proposed scheme. The Supreme Court found that the proposed scheme would not improperly fetter the legislatures' sovereignty nor would it entail an impermissible delegation of law-making authority.

Parliamentary sovereignty and the fettering of provincial legislative authority

The Supreme Court held that the terms of the Memorandum do not and cannot fetter the provincial legislatures' primary law-making authority. The Council of Ministers' role is limited to proposals for amendments to the Model Provincial Act and the Council is not contemplated to have any formal involvement in the amendment of legislation already enacted by provinces. Further, the Memorandum does not imply that the legislatures of participating provinces are required to implement the amendments to the Model Provincial Act approved by the Council, nor that they are precluded from making any other amendments to their securities laws. These legislatures are free to reject proposed statutes (as amended) if they choose. The definition of the Council cannot be understood as incorporating the voting rules of s. 5.5 into the statutory scheme. The Supreme Court rejected the proposition that the Cooperative System purports to fetter law-making powers of participating provinces' legislatures.

More broadly, the Supreme Court recognized that the executive is incapable of interfering with the provincial legislatures' powers to enact, amend and repeal legislation. Parliamentary sovereignty means that Parliament and the provincial legislature are supreme with respect only to matters that fall within their respective spheres of jurisdiction. While the majority of the Quebec Court of Appeal took issue with the Memorandum because it believed that the combined effect of these sections would fetter the sovereignty of the participating provinces' legislatures, the Supreme Court found that this reflected a misunderstanding of the Memorandum and rests on a flawed premise that the executive signatories are actually capable of binding the legislatures of their respective jurisdictions to implement any amendments as dictated by the Council, and precluding those legislatures from amending their own securities law without Council approval.

The principle of parliamentary sovereignty preserves the provincial legislatures' right to enact, amend, and repeal their securities legislation independently of the Council's approval. The Supreme Court found that even if the Memorandum actually purports to fetter this legislative power, it would be ineffective in this regard, rather than constitutionally invalid, given that it cannot bind the legislature.

The Supreme Court did draw attention to the fact that the Memorandum will have political effects distinct from its legal effects. To achieve uniformity, the legislatures of participating provinces would need to enact a statute that mirrors the Model Provincial Act, as amended from time to time. The Council then plays an important political role in the area of securities regulation. According to the Supreme Court, the majority of the Quebec Court of Appeal went a step too far: it rejected the proposition that the Memorandum is merely a political undertaking that is not legally enforceable, instead finding it necessary to assume the Memorandum's mechanisms will have their intended effect. The Supreme Court held that such an assumption cannot be relied upon.

Delegation of law-making powers

The Attorney General of Quebec argued that the Cooperative System is unconstitutional because of limits on the legislature's authority to delegate law-making powers to some separate person or body. The Attorney General submitted that the Memorandum obliged the legislature of participating provinces to enact the provisions of the Model Provincial Act into law and to implement any amendments approved by the Council, and that the Memorandum otherwise prohibited participating provincial legislatures from amending that legislation.

The Supreme Court disagreed and held that, while Parliament or provincial legislatures may delegate regulatory authority to make subordinate laws in respect of matters over which it has jurisdiction to another person or body, a government is barred from transferring its primary legislative authority (to enact, amend and repeal statutes) with respect to a particular matter over which it has exclusive constitutional jurisdiction.

The Supreme Court found that the Cooperative System does not allow the Council to bypass provincial legislatures. The Memorandum does not create an unprecedented legislative body through the Council whose establishment goes against the Constitution. The Model Provincial Act will only have force of law if and when its provisions are properly enacted by legislature of a participating province. As such, the Council is and remains subordinate to the sovereign will of the legislatures.

Question 2

The unanimous Supreme Court agreed that the DFA falls within the general branch of Parliament's trade and commerce power pursuant to s. 91(2) of the Constitution Act, 1867. The provisions setting out the role of the Council of Ministers in making the federal regulations (ss. 76-79) were not unconstitutional and thus cannot render the DFA unconstitutional.

The Classification of the Draft Federal Act

The Supreme Court found that the pith and substance of the DFA is to control systemic risks having the potential to create material adverse effects on the Canadian economy. It does not relate to the regulation of trade in securities generally. It promotes and protects the stability of Canada's financial system and protects capital markets, investors and others from financial crimes. The DFA is less broad than the proposed legislation at issue in Reference re Securities Act, limiting the federal government's role in regulating capital markets to detection, prevention and management of risk to the stability of the Canadian economy and the protection against financial crimes. The intention of the DFA is not to displace provincial and territorial securities legislation, but to complement these statues by addressing economic objects that are considered to be national in character.

The Supreme Court further held that some aspects of securities regulation are actually national in character. Accordingly, Parliament is competent to enact legislation that pursues genuine national goals, including the management of systemic risk. The concept of systemic risk can differentiate matters that are genuinely national in scope from those of local concern.

Using the framework from the decision General Motors of Canada Ltd. v. City National Leasing, [1989] 1 S.C.R. 641, the Supreme Court decided that the DFA addresses a matter of genuine national importance and scope that relates to trade as a whole. The federal government's foray into securities regulation under the DFA is limited to achieving these objectives and this supports the validity of the proposed statute. The Supreme Court determined that the legislation is therefore within parliament's power over trade and commerce pursuant to s. 91(2) of the Constitution.

Regulations under the Draft Federal Act: ss. 76-79

The Council's role in making regulations is set out in ss. 76-79 of the DFA. Council's approval is necessary before a regulation can be made. The mechanism applicable to the approval or rejection of regulations by Council is set out in s. 5.2 of the Memorandum. The majority of the Quebec Court of Appeal held that this, in combination with ss. 76-79, conferred a veto right over proposed federal regulations, which undermines the constitutional foundation of the DFA.

The Supreme Court found nothing problematic about the way in which the DFA delegates power to make regulations to the Authority under the supervision of the Council. The DFA sets out a broad framework for the regulation of systemic risk in capital markets, but delegates extensive administrative powers, including the power to make regulations to the Authority. This delegation is entirely consistent with parliamentary sovereignty since the delegated authority can always be revoked and its scope remains limited and subject to the terms of the governing statute.

The Supreme Court further held that the manner in which the DFA delegates regulation-making powers to the Authority under the oversight of the Council is not problematic from the perspective of federalism or the constitutional division of powers. The delegation of administrative powers in a manner which solicits provincial input is not incompatible with federalism, provided that the delegating legislature has the constitutional authority to legislate in respect of the applicable subject matter.

Finally, the Supreme Court held that the fact that some regulations might never be adopted because of provincial opposition does not change the reality that the regulations that are adopted must be respected by all the provinces if the objectives of the DFA are to be achieved. The fact that the Council is populated with minsters of provincial governments does not invalidate the delegation. Parliament can chose to structure the internal mechanics and approval process of the regulatory body in such a manner as deemed appropriate.

Final Thoughts

For nearly a century, calls for a Canadian national securities regulator have invariably been squashed by constitutional concerns. While it remains to be seen what will come of the Supreme Court's most recent decision, this may mark a turning point for Canadian securities law. As the Supreme Court wrote in its conclusion: "It is up to the provinces to determine whether participation is in their best interests. This advisory opinion does not take into consideration many of the political and practical complexities relating to this Cooperative System."


About Norton Rose Fulbright Canada LLP

Norton Rose Fulbright is a global law firm. We provide the world's preeminent corporations and financial institutions with a full business law service. We have 3800 lawyers and other legal staff based in more than 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia.

Recognized for our industry focus, we are strong across all the key industry sectors: financial institutions; energy; infrastructure, mining and commodities; transport; technology and innovation; and life sciences and healthcare.

Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our offices and to maintain that level of quality at every point of contact.

For more information about Norton Rose Fulbright, see nortonrosefulbright.com/legal-notices.

Law around the world
nortonrosefulbright.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions