The Alberta Court of Appeals has ruled that the Government of Canada does not have the constitutional authority to enact a federal securities code for the entire country. In looking at the Government’s draft Canadian Securities Act , the appeals court said that a federal takeover of the securities industry cannot be justified as being ancillary to the general economic management of the Canadian economy. The two are constitutionally distinct functions. The securities industry has historically been regulated by the provinces using their jurisdiction over “property and civil rights in the province,” said the court, and the involvement of the federal government in the securities industry has historically been
minimal. IN THE MATTER OF a Reference by the Lieutenant Governor in Council to the Court of Appeal of Alberta for hearing and consideration of the questions set out in Order in Council 20/2010, as amended by Order in Council 181/2010, respecting the proposed federal Securities Act, Alberta Court of Appeals, March 8, 2011.
The proposed federal securities legislation represents the intrusion of the federal government into an area long occupied by the provincial governments. The provinces are not incapable of regulating the securities industry, said the court, indeed they have been successfully regulating it for decades.
And the court said that the provinces have proven themselves capable of regulating the securities industry. The various pieces of provincial legislation regulating the securities industry in Canada are very similar due to the efforts of the provincial securities regulators to coordinate them. While provincial regulation of securities is decentralized, it is also harmonized. Plus, the statutes regulating securities and the related regulations are detailed, technical, and complex.
Further, the proposed federal legislation mirrors, from a functional point of view, the existing provincial securities regulation regimes. Occasional different policy choices in the content do not change the nature of the proposed legislation for constitutional purposes.
The court rejected the government’s assertion that the proposed federal securities legislation will address systemic risk to the capital markets. Not being a merit system, the legislation does not address the types of irresponsible investment practices that might create such risks, nor does it limit the types of investments that can be sold. The focus of the proposed federal securities legislation (like the provincial legislation) is the integrity of market participants, protection of public investors, and ensuring ethical practices in the capital markets In any event, to the extent that the proposed code does address systemic risk, it does not do anything that is not already being done in a coordinated way at the provincial level. It is not something that can intrinsically only be done at the national level.
More to the point, there is no indication why this is a matter of general trade and commerce. “Systemic risk” is not a constitutional head of power, said the court. To the extent that the proposed federal legislation addresses systemic risk, merely because it does so at the national level does not make it federal.
Likewise, the proposed federal legislation does not regulate capital flows as suggested by the Government of Canada. No securities legislation manages capital flows, be it the existing provincial acts or the proposed federal act. The proposed federal code is orthodox traditional securities legislation, said the court, it mandates full disclosure, but does not control investing.
The power over “trade and commerce” given to the federal government in the Constitution Act is, on its face, very widely stated. In other countries an equivalent grant of jurisdiction has been used to give the holder of that jurisdiction wide ranging power over every aspect of the economy. But that has not been the Canadian constitutional tradition. In Canadian constitutional law it was recognized early on that too wide an interpretation of the trade and commerce power would render meaningless provincial power over property and civil rights.