Against the backdrop of rulings by the Alberta and Quebec Courts of Appeals that the Government of Canada does not have the constitutional authority to enact a federal securities code for the entire country, the Supreme Court of Canada recently heard arguments for and against a federal securities code. A single national securities regulator for Canada was supported by Ontario, FAIR Canada and the Canadian Coalition for Good Governance, while New Brunswick, Manitoba, British Columbia, and Saskatchewan opposed the proposed federal securities code. The Supreme Court reserved the issue. In the Matter of a Reference by Governor in Council concerning the proposed Canadian Securities Act, as set out in Order in Council P.C. 2010-667.
The Attorney General of Ontario argued that the proposed Canadian Securities Act is within the legislative authority of Parliament to make laws in relation to the regulation of trade and commerce pursuant to s. 91(2) of the Constitution Act of 1867. The proposed Act is authorized by the federal power over general trade and commerce affecting Canada as a whole.
Ontario pointed out that a key benefit of a federal securities regulator would be the resulting ability of the federal government to use both banking and securities regulation to better address regulatory challenges, including systemic risks. Banks are both significant traders as well as significant end-users of derivatives and have a dominant share of Canadian trading in OTC derivatives. Moreover, a single securities regulator is in the best interest of market participants.
In Ontario’s view, efforts at provincial harmonization of securities laws to date have been incomplete. Substantial differences in provincial securities law persist even after years of attempted coordination through the Canadian Securities Administrators. These differences exist even among provinces who are participants in the passport system, where different views about, for instance, the appropriate balance between investor protection and facilitating capital raising by business have resulted in different regulatory responses.
Further, the capacity to assess and react swiftly to unexpected developments in capital markets is a necessary feature of a modern securities regulatory system. Ontario’s preference for a single national regulator is based in part on its belief that improvement is needed in the ability of the current provincial system to deliver a timely response to market innovations and emerging issues.
Ultimately, the issue for the Supreme Court to determine is whether Parliament has a rational basis for concluding that regulation of the capital markets raises an economic concern of genuine national interest. The rational basis test has been adopted by the Court in federalism cases in recognition of the fact that governments are best situated to assess competing economic and social science evidence and to make decisions based on complex policy considerations.
Citing the complex, international and highly integrated nature of contemporary capital markets, Ontario submitted that there is a rational basis for concluding that regulation of the capital markets raises an economic concern of genuine national interest. The need for effective federal regulation is further supported by national and international concern regarding the effective management of systemic risk, the considered analysis undertaken in the many studies and reports that have consistently recommended the creation of a single national regulator, and the international community’s continuing criticism of Canada’s fragmented regulatory approach to securities regulation.
FAIR Canada, which represents retail investors, pointed out in its submission that Canada, alone among advanced industrialized economies, does not have a national securities regulator. In an age when capital markets are national or international, when capital flows freely across borders, and when public companies operate in multiple jurisdictions, this anomaly can present hardships for retail investors. FAIR Canada's position is that the proposed Canadian Securities Act is within the legislative authority of Parliament.
The fact that securities regulation has been largely local to date, noted FAIR Canada, does not preclude the federal government from enacting laws to regulate the national economy when what were once local economic concerns develop into national and international ones. Local regulation of securities is a matter of historic, economic and political happenstance, noted FAIR Canada, not constitutional doctrine. The Court has acknowledged many times that the Canadian Constitution must be read in light of changing contemporary realities, which include the development of Canada's capital markets into an important national economic concern, and not merely a collection of local ones. The current patchwork model of securities regulation is inadequate and demonstrates the inability of the provinces and territories, alone or together, to regulate Canada's capital markets in as comprehensive a manner as the proposed code.
While British Columbia supports a national regulatory scheme in principal, the BC submission noted that there is clearly a provincial aspect to securities market regulation. Thus, British Columbia will support the concept of a single federal securities regulator so long as the federal legislation establishing that the single regulator respects the division of powers under ss. 91 and 92 of the Constitution Act.
British Columbia argued that the proposed Canadian Securities Act entrenches upon provincial constitutional jurisdiction under ss. 92(13), property and civil rights in the province, and 92(16), matters of a merely local and private nature in the province, and so is not constitutionally under the legislative authority of the• Parliament of Canada under the general branch of the trade and commerce power.
Fundamentally, regulating trading in securities constitutes regulating contracts made within the province for the purchase and sale of securities, whether or not that contract is made on or through the facilities of an exchange, whether or not that contract is arranged through or by an agent or other intermediary and whether or not the ultimate performance of that contract is carried out within the province or outside the province.
It follows, said British Columbia, that the general regulation of contracts of a particular business or trade, such as the business of trading in securities, is a matter prima facie within exclusive provincial jurisdiction and not within the federal trade and commerce power.
Similarly, in its submission to the Court, Manitoba argued that the proposed federal securities code is not a constitutionally valid exercise of the general branch of the trade and commerce power. Manitoba’s position is that the proposed code would regulate the securities industry or business, as do the securities statutes currently in force in all ten provinces, and is not concerned with trade as a whole.
Manitoba also contended that the existing securities regime in Canada consists of a decentralized, but sophisticated and interlocking, national scheme involving all ten provinces. Far from being constitutionally incapable of regulating the securities industry, emphasized Manitoba, the provinces have successfully engaged in regulation for several decades and are fully capable of continuing to exercise their jurisdiction into the indefinite future.
Saskatchewan submitted that the comprehensive regulatory regime set out in the proposed federal securities act represents an unprecedented extension of the general branch of the trade and commerce power. Were the Court to endorse such an unrestrained exercise by Parliament of its powers, said the submission, it would seriously erode the scope of various heads of provincial jurisdiction and alter the balance between the two orders of government.