A legislative proposal to create a single federal Canadian securities regulator is unconstitutional, the country’s highest court has ruled. In a December 22, 2011 opinion (here), the Supreme Court of Canada ruled unanimously in an advisory opinion that the Act to create a single, unified securities regulator “as presently drafted” is not a valid exercise of the federal power to regulate trade and commerce. However, the Court expressly left the door open to a unified approach to securities regulation based on federal/provincial cooperation.


In 2010, following decades of review and study, the Canadian federal government prepared a draft act implementing proposals to create a single federal Canadian securities regulator. The Act itself contains a basic securities regulation framework, including registration requirements for securities dealers, prospectus filing requirements, disclosure requirements, specific duties for market participants, a framework for the regulation of derivatives, civil remedies and regulatory and criminal penalties pertaining to securities. Interestingly, the Act does not, according to the Supreme Court, “seek to impose a unified system of securities regulation on the whole of Canada.” Instead, “it permits provinces to opt in, if and when they choose to do so.”


On May 26, 2010, the Governor General in Council referred the draft Act to the Supreme Court for an advisory opinion on its validity under the Constitution Act of 1867. Canada and the provincial government of Ontario argued that “securities markets have undergone significant transformations in recent decades,” including changes that give rise to “systemic risks and other concerns that can only be dealt with on the national level.”


However, Alberta, Quebec, Manitoba, New Brunswick and other provinces opposed the Act, arguing that the scheme that the Act sets up falls under the provincial power over property and civil rights. The did not dispute that the financial markets have changed, but they argued that the Act goes beyond the regulation of a specific industry and extends to “all aspects of public protection and professional competences” – matters that, the provinces argued, remain “essentially provincial concerns.”


British Columbia and Saskatchewan also opposed the Act, but adopted what the Supreme Court called “a more nuanced approach,” contending that the goals the Act seeks to accomplish are “best achieved through an exercise of federal-provincial cooperation, similar to the cooperation” that has been adopted in other aspects of commercial activity.


In its December 22 opinion, the Supreme Court concluded on the basis of existing case law standards that the Act “cannot be classified as falling within the general trade and commerce power” of the Constitutional Act. The Act, the Court concluded, “overreaches genuine national concerns.” Though some characteristics of the securities marketplace “may in principle, support federal intervention that is qualitatively different from what the provinces can do,” these characteristics “do not justify a wholesale takeover of the regulation of the securities industry.” The “field of activity” that the Act “would sweep into the federal sphere simply cannot be described as a matter that is truly national in importance.” The basic nature of securities regulation “remains primarily focused on local concerns of protecting investors and ensuring fairness of the markets through regulation of the participants.”  


The Court stressed that in its ruling, it was not expressing an opinion on what would be the optimal form of securities regulation; it was merely addressing the question of whether the proposed Act represents an appropriate exercise of trade and commerce.


The Court went on to observe that while the Act is outside of Parliament’s general trade and commerce power, “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 “animating force’ of a “scheme” is “cooperation,” as “the federalism principle upon which Canada’s constitutional framework rests demands nothing less.”


As a mere south of the border observer, I necessarily must leave any analysis of the Court’s constitutional reasoning to those better informed about Canadian constitutional law. However, based solely on my acquaintance with the securities marketplace, it is difficult for me to see how the matters that Act would regulate are primarily a matter of local concern. There would certainly seem to be compelling reason to conclude that the types of systemic risk we have so recently witnessed warrant a unified national system of regulation. Of course, those observations are based on a policy bias, not on the jurisdictional framework that Canada’s federal system requires.


All of that said, the Court’s opinion did not close the door conclusively on some form of federal regulation of securities. The Court’s suggestion that a cooperative federal/provincial system might pass constitutional muster arguably shows the way for supporters of federal securities regulation to move forward. The challenge will be coming up with an approach that appropriately balances provincial concerns that at the same time addresses the concerns that warrant a unified national approach.


A December 22, 2011 Bloomberg BusinessWeek article discussing the decision can be found here. A Toronto Star article quoting remarks about the decision from a variety of Canadian commentators can be found here.


Special thanks to a loyal reader for forwarding a copy of the Court’s opinion.


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