On December 23, 2011, the Supreme Court of Canada (the “Supreme Court”) issued its decision to reject the federal government’s attempt to create a central body to regulate securities across Canada. Recommendations for national securities regulation in Canada are not new, but this was Canada’s first attempt at implementing a national scheme. Here we provide some background on proposed legislation and the reason the Supreme Court held it was unconstitutional.
The Proposed Legislation
Securities have always been regulated by the provinces, in accordance with the Constitution Act, 1867. It is well established that the provinces, and not the federal government, have the power to regulate securities within their borders.
The federal government proposed a comprehensive national regime of securities regulation that would have governed all aspects of securities. The legislation’s stated purposes were to provide investor protection, to foster fair, efficient and competitive capital markets, and to contribute to the integrity and stability of Canada’s financial system. The proposed scheme, which mirrors existing provincial legislation, would have applied only to provinces which opt-in to it. The hope was that eventually all or most provinces would opt-in. The ultimate goal was to harmonize existing provincial legislation by creating a single securities statute to reflect both domestic and international best practises.
The legislation, had it been finalised, would have regulated all aspects of securities including the registration and conduct of dealers, prospectus and disclosure requirements, take-over bids and issuer bids, insider trading and self-dealing, investigations, enforcement, and civil liability for both primary and secondary market disclosure. The scheme would have created a national commission responsible for the administration of Canadian securities law and an independent adjudicative tribunal.
The proposal to regulate securities at a national level, a marked departure from the status quo, was not universally well received. While Ontario supported the proposed legislation, Alberta, Québec, Manitoba, New Brunswick, British Columbia, and Saskatchewan opposed it. Alberta, Québec, Manitoba, and New Brunswick felt the proposed legislation trenched on provincial jurisdiction to regulate contracts, property, and professions. British Columbia and Saskatchewan supported the idea of a national securities regulator if it could be achieved in a manner that respected the division of powers between the federal and provincial governments.
The Legal Challenges to the Proposed Legislation
In what is called a “Reference”, both Québec and Alberta, the two provinces most opposed to the scheme, referred the legislation to their respective Courts of Appeal and asked the courts to provide an opinion on the constitutionality of the proposed scheme. Both Courts of Appeal found that the legislation was unconstitutional.
The federal government launched its own Reference, asking the Supreme Court of Canada to determine whether Parliament had the authority to enact the proposed legislation. A Reference directly to the Supreme Court is a more efficient method of ultimately determining the constitutionality of federal legislation since References from provincial Courts of Appeal are subject to a final appeal to the Supreme Court in any event. The federal government, seven provinces, and eight interest groups all made submissions to the Supreme Court at a hearing in April, 2011.
The question referred to the Supreme Court was narrowly framed. The federal government asked the Supreme Court to determine whether it has the ability to regulate securities as part of its jurisdiction over “trade and commerce” under section 91(2) of the Constitution Act, 1867.
The Decision by the Supreme Court
The Supreme Court held that the federal government could not comprehensively regulate securities on a national level under its power to regulate trade and commerce. Specifically, the Supreme Court stated that the proposed legislation, as drafted, would not be valid under s. 91(2) of the Constitution Act, 1867. The proposed act overreaches federal jurisdiction because it attempts to regulate all aspects of securities on an exclusive basis.
The Supreme Court expressly stated that it would not determine whether a single federal regulator was preferable to multiple provincial schemes. Efficaciousness and policy considerations are not relevant to the constitutionality of legislation and were not considered by the Supreme Court. The legal challenge thus turned solely on the interpretation of the Constitution Act, 1867.
The validity of the legislation came down to the breadth of the federal government’s ability to regulate trade and commerce. The federal government’s primary argument in support of the legislation was that economic activity has become so interprovincial and international in nature that it now falls entirely under federal power. The fact that the proposed legislation largely replicated existing provincial schemes, however, suggested that the securities market has not transformed. The legislation was ultimately found to be unconstitutional because it would descend into industry-specific regulation and displace provincial legislation entirely. For example, registration requirements applicable to securities dealers in Saskatchewan or Québec are not relevant to the national interest in competitive capital markets, and do not fall within the federal government’s general powers to regulate trade and commerce.
Portions of the act would fall under federal jurisdiction and would otherwise be valid, such as the regulation of systemic risks that threaten the marketplace as a whole. These include provisions relating to derivatives, short-selling, credit ratings, urgent regulations, and on data collection and sharing. The Supreme Court held, however, that the validity of the proposed legislation should be judged as a whole. The Supreme Court would not approve some portions of the proposed legislation and not others.
The Supreme Court held that, while the proposed act was unconstitutional, a more cooperative approach remains available: one that recognises the provincial nature of securities regulation (i.e. licensing traders) while allowing Parliament to deal with genuinely national concerns (i.e. systemic risks). It remains to be seen whether the federal government will pursue a less comprehensive federal securities regime to address systemic risks.