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Advocates for a national securities regulator in Canada will be disappointed with the Alberta Court of Appeal’s decision in favour of the provincial opponents in the Reference re Securities Act (Canada), 2011 ABCA 77. The Court of Appeal found that the federal government does not have the constitutional authority to regulate securities under the proposed Securities Act and that the statute as written is unconstitutional. TheCourt.ca first covered this topic in a two-post series last summer. These posts provide an in-depth background on how the scheme would work and operate, and can be found here and here.
Supporters of a federally-regulated securities market have argued that Canada’s existing system (which includes separate legislation and rules for each province) is characterized by (PDF link) inefficient overlap, fragmentation, and duplication in securities markets and generally hurts the country and its investors in the global capital markets.
In response to this, the federal government proposed to create a national securities regulator and published a version of the federal Securities Act in May 2010.
Shortly after, and rather predictably, Alberta and Quebec declared their opposition and directed a reference to the provincial appellate courts regarding the proposed Act’s constitutionality. This decision comes out of Alberta while the Quebec decision is expected in the coming weeks.
The Constitutional Framework
While the purpose of this post is to examine the decision of the Alberta Court of Appeal rather than to reproduce this blog's previous post on the constitutionality of the Securities Act, it will be helpful to provide a brief overview of the constitutional framework. Courts have traditionally held that the regulation of securities comes under provincial jurisdiction by way of s. 92(13) of the Constitution Act, 1867 (please refer to Multiple Access Ltd. v. McCutcheon, [1982] 2 S.C.R. 161). This section explicitly grants provinces with jurisdiction to regulate property and civil rights. However, a federal power also exists under s. 91(2) allowing the federal government to regulate on matters related to the regulation of trade and commerce. Typically, these two powers are often pitted against one another. With the proposed national regulator, the federal government is arguing that securities regulations also has concurrent jurisdiction in the area of federal trade and commerce.
The general framework for analyzing the validity of federal legislation is:
- What is the pith and substance of the legislation?
- Does the legislation encroach on a provincial head of power in s. 92? If yes, a minimally intrusive encroachment will be permissible. It will become more problematic if the legislation expands the scope of a federal head of power.
- Is the pith and substance of the legislation a recognized federal power in s. 91? If yes, the paramountcy and the double aspect doctrines will apply.
Additionally, to convince the Court that securities regulation is (or isn’t) a federal responsibility, the case of General Motors of Canada Ltd. v. City National Leasing [1989], 1 SCR 641 sets out five tests important in deciding if federal trade and commerce powers should apply to a particular sector so as to permit federal regulation of the industry.
Selected Problems With The Constitutional Analysis
Problem #1: The notion that securities regulation will only ever be a provincial power
The Court of Appeal adopted an extremely strict interpretation of the Constitution (as was expected) to justify upholding provincial jurisdiction as having sole jurisdiction over securities, despite convincing arguments to the contrary.
In its submission, the federal Government cited the Reference re Anti-Inflation Act (Canada), [1976] 2 SCR 373 as authority for the proposition that the federal government only needs to demonstrate a “rational connection” between the proposed legislation and a federal head of power. On the other side, the province cited jurisprudence supporting securities as being unique and historically under provincial jurisdiction, without addressing the numerous changes that have occurred to the nature and scope of capital markets in a more globalized world.
For example, paragraph 20 of the decision states that “Canadian companies at Confederation, and since, have always relied upon access to international capital markets …at the end of the day the (existing) regime still regulates individual contractual and property rights as sophisticated, complex and fast they may be.”
Unfortunately, this method of thinking misses the point. While securities trading has indeed become more complex and speedy, the nature of the entire industry has also fundamentally changed by becoming more international. Rather than being an issue of the speed or complexity of the markets, it’s an issue of scope – which evidence shows is now more international than ever and thus more naturally of federal concern.
Problem #2: Employing a non-contextual approach
“It is neither appropriate nor necessary for this Court to try and determine whether it is “better” for Canada to have a national, as compared to a provincial, system of securities regulation.” (Paragraph 20)
This telling quote from the decision indicates the Court’s unwillingness to adopt the widely accepted principle that the Constitution Act can be subject to a contextual analysis, with regard to developments in the way business is conducted.
While the Court accepted the contextual approach generally, the reasons go on to state, “there are limits to how far the courts should go in reallocating the constitutional powers divided up in ss. 91 and 92.” (Para. 10). Unfortunately, the Court of Appeal appears to have taken an extremely rigid view of these limits by finding that historical treatment is the only, or at least, the preeminent consideration in this regard.
As I see it, the main problem with this decision is that the Court decided to answer the question of “Can the federal government take away provincial rights (to regulate securities)?,” rather than the more appropriate inquiry of “Does the federal government have the authority to enact a federal Securities Act?
At this point, the regime proposed is on a voluntary basis, with an opt-out for any provinces not wanting to be a part of the scheme. In view of this, it seems all provinces ought to view this as an addition to federal jurisdiction, rather than an outright loss of a current right.
Conclusion
The decision, while unsatisfactory, is far from the end of the road. The true finale will take place at the SCC next month, and the decision that emerges from those proceedings will trump both this and the upcoming Quebec decision. Scholars are already hotly debating the likely outcome. Professor Monahan of our own Osgoode Hall believes that Canada’s top court has become more flexible over the past decades when determining what falls under the federal trade and commerce powers. As he wrote, “It recognizes that the economy is an interconnected whole and you can’t divide up the economy into certain transactions within borders and other transactions that are completed within a province …you have to look at more of a functional approach.”
I can only hope the SCC agrees.
8 Comments
I haven't read the decision, and this is obviously a subject on which reasonable people can and do disagree. However, I have trouble with your objection to paragraph 20. Courts have always insisted that the constitutionality of legislation is separate from its wisdom. Those in the realist tradition have disbelieved them, but they keep saying it. Whatever the SCC does, I very much doubt they are going to say, "We think securities regulation is better done at the federal level, so we're upholding the law."
I fail to see how the economy being an "interconnected whole" justifies a more "functional approach" or says much of anything.
Bluntly, the world has always been an "interconnected whole" and the fact that more elements are becoming more interconnected means we are likely to have to take a less functional approach. If we are trying to assign things that are interconnected to federal government, we'll eventually assign everything to them, which clearly doesn't reconcile with any reading of a document that divides up powers.
Further, even if we accept a "functional approach", it doesn't necessarily follow making securities regulation increasingly abstract accomplishes the goal of a well regulated security market.
The last financial crisis was in part lacks regulation, but that lack of regulation had more to do with large investment houses in New York than the substance of the securities themselves. The problem was that large investment houses were able to invest in securities that everyone locally involved had realized were unsustainable. The products were so abstract and complex and devoid of any local character by the time they were packaged that a normal person could figure out what was going on. That isn't to say it was impossible (Goldman Sachs seem to figure it out), but it was not a problem with local securities.
It is a bit shocking that parties that were the most opposed to Canada's financial system (the Conservatives, Banks and Ontario investment banks) have taken credit for the foresight in its success.
Broad regulation and abstraction only encourage people to view all types of investments as the same. The best way to prevent crisis in any financial system is to ensure people know what they are investing in.
Basically, I'm in agreement with Gareth on the point that any interpretation of the division of powers needs something more than an "it works better here" approach.
The rule of law requires judges to have their discretion bound by something other than their own private opinion, and simply adopting the opinion of experts doesn't cut it. (Especially when the purported experts have a vested interest and nearly unanimously failed to predict the last financial crisis.)
Further, anyone who believes that a federal securities regulator will add to consumer choice, should look to what happens to main street when a Wal-Mart moves into town.
What is the purpose for enacting this legislation? The existing "provincial" securities framework is already harmonized under the auspices of the CSA and the passport system. While each province has enacted its own securities act, the regulations that make up 99.9% of securities laws are agreed upon at the CSA level and are enacted under each provincal act as regulations, subject to the odd (read rare) carve out with respect to local considerations. The system is well known, efficient, and in no way sghape or form a deterrent to anyone wanting to participate in our capital markets.
The entire notion that creating a "national" securities regulator will somehow impact the efficiency of Canada's already hyper efficient and incredibly robust securities market is wihout basis or merit. Aside form the perception of a benefit as a talking point at a G20 meeting, what is the purpose of this legislation? What wrong will be righted by it? Why raise a hornets nest of constitutional problems for no practical value or reason, or even a worthy principle?
Last point, I find it both typically hypocritical and two faced that the largely Ontario based advocates of a national regulator were the first in line to argue against the proposed TMX-LSE merger. Food for thought.
In support of some of the comments above:
Thus far, the legislation has allowed for separate spheres of influence for the provinces (Contractual, Property and Civil Rights) and the Federal gov't (Trade vs. Commerce).
Under the current system both have enjoyed a wide latitude of implied powers, delegated powers and legislated powers. I have viewed this functional approach of the separation of powers, under the Constitutional Act, as a case in favor of Co-operative Federalism. The current question before the SCC is whether or not the Federal Government should have exclusive power over "the movement of people and things." Is it possible that Canada's current system, without a national regulator, is actually a good thing? It would be great if the G20 national regulators operated as the "first line defence against market instability in the globalized economy" but without establishing a level playing field how can this ever be achieved? This is where political issues (power and persuasion) could usurp substantive regulations both locally and globally. A context which I hope the SCC will not ignore in their deliberations. Could, would, should the Federal Gov't then equalize competitive advantages under interprovincial T and C legislation? I understand the need to "stream-line" regulation and address regulatory deficiencies but could a national regulator impede the free circulation of people and capital without providing better investor protection or contribute to more stability in the functioning of markets? How effective has the national regulators been in the other G20 countries in restoring market stability?
What is really needed is legislation which supports better sharing of information across different industry sectors (banking, securities, and insurance regulators), more funding for investor education and enforcement-related information, more advanced technology directed at prevention and control of Financial Crime and more vigorous prosecution and harsher sentences for white-collar criminal offences in this country. I look forward to seeing the SCC balance sheet after all the adding and subtracting has been finalized.
My limited research has suggested that Canada has the best chance among the G20 to re-establish the co-operative federalism model eliminated by P. Trudeau gov't. In theory, this involves retaining the current federal-provincial framework while legislating greater co-operation and mutual accountability between all agency regulators. This shared approach has the potential to enhance cooperation with the competitive benefits of a more centralized model while expotentially increasing federal-provincial cooperation among all the regulatory agencies. While other G20 countries may hope to achieve this level of cooperation, through national regulators, I firmly believe Canada can actually do it without one.
The recent free-fall of the global stock markets (trillions) has resulted from a meltdown resulting from politcal manuevering, influences and postering as the responsible debt-driven economies struggle to figue out how to pay back what they borrowed.
Why didn't the G20 national regulators (oversight authorities) prevent this market tumble from happening? What are the national regulators doing to try and stablize the situation and prevent further investor losses?
The current division of powers (provincial and federal), as outlined under our Constitution, provides an essential checks and balances (functional approach) which still speaks, in this 21 Century, to the nature and operation of Canada's Federal System. In these economic times, Canada does not need new legislation which creates a patchword ("opt-in") approach to re-affirm provincial jurisdiction. The potential for polarization of provinces opposed to joining the harmonization, under the Federal Government, could lead to repressive and divisive political and economic strategies which fail to create the remedies and reliefs that are currently being sought for our financial markets in this uncertain global economic climate.
If co-operative federalism (in support of more dialogue not less) and harmonization (streamlining and collaboration across all industry sectors) is to benefit all Canadians then I hope, if the SCC is split, the deciding vote re-affirms provincial jurisdiction.
The recent free-fall of the global stock markets (trillions) and meltdown is a result of politcal manuevering, influences and postering as the responsible debt-driven economies struggle to figure out how to pay back what they borrowed.
Why didn't the G20 national regulators (oversight authorities) prevent this market tumble from happening? What are the national regulators doing to try and stablize the situation and prevent further investor losses?
The current division of powers (provincial and federal), as outlined under our Constitution, provides an essential checks and balances (functional approach) which still speaks, in this 21 Century, to the nature and operation of Canada's Federal System. In these economic times, Canada does not need new legislation which creates a patchword ("opt-in") approach to re-affirm provincial jurisdiction. The potential for polarization of provinces opposed to joining the harmonization, under the Federal Government, could lead to repressive and divisive political and economic strategies which fail to create the remedies and reliefs that are currently being sought for our financial markets in this uncertain global economic climate.
If co-operative federalism (in support of more dialogue not less) and harmonization (streamlining and collaboration across all industry sectors) is to benefit all Canadians then I hope, if the SCC is split, the deciding vote re-affirms provincial jurisdiction.