On May 26, 2010, the Government of Canada officially released a proposed Canadian Securities Act (Proposed Act), which seeks to establish a national securities regulator. The proposed regime would allow provinces and territories to voluntarily opt in. Concurrent with its release, the Government of Canada referred the Proposed Act to the Supreme Court of Canada for its opinion as to the legislative authority of the Parliament of Canada to pass the Proposed Act.
The Proposed Act is now opposed by the provinces of Alberta, British Columbia, Manitoba, New Brunswick, Quebec and Saskatchewan. Alberta and Quebec, both strongly opposed to a national regulator, referred the Proposed Act to their respective courts of appeal. Opponents argue that local regulators, compared with a centralized regulator in Toronto, are more familiar with the nuances of local industries—for example, the energy industry in Alberta.
While the Supreme Court will not hear the matter until April 13 and 14, 2011, both the Alberta and Quebec Courts of Appeal have already heard arguments regarding the constitutionality of the Proposed Act. The Alberta Court of Appeal was the first to release its decision on March 8, 2011.
The Securities Act Reference was heard on January 24, 2011 by a five-member panel of the Alberta Court of Appeal. The Government of Alberta appeared as the appellant; while, the Government of Canada appeared as the respondent. The interveners were the Attorney General of Quebec, arguing against the Proposed Act, and the Canadian Bankers Association, arguing in favour of the Proposed Act.
Broadly, the Court was asked to consider whether Parliament, under the Constitution Act, 1867, has the authority to: (1) pass legislation to regulate the securities industry in Canada, and (2) pass legislation to exclude the application of the Securities Act (Alberta).
In a unanimous decision, the Court held the Proposed Act to be contrary to the division of powers in the Constitution Act, 1867, and therefore, unconstitutional. The Court concluded:
[T]he proposed federal securities legislation would enter an area of regulation long occupied by the provinces, and long considered to be clearly within provincial jurisdiction. The proposed legislation does not meet the traditional tests for inclusion in the "trade and commerce" power, nor is it consistent with the guidelines that have been suggested from time to time for defining the scope of that power. It is inconsistent with numerous prior decisions of the highest courts delineating the division of power over specific industries. The proposed legislation would, if enacted, be unconstitutional.
Consequently, in response to one of the questions put to it, the Court answered that Parliament does not have legislative authority to pass legislation identical to or similar to the Proposed Act.
Arguments and Analysis
The securities industry has historically been regulated by the provinces using their jurisdiction over "Property and Civil Rights within the Province", granted by s. 92(13) of the Constitution Act, 1867. Alberta conceded that small, isolated portions of the proposed legislation were a valid exercise of federal criminal power pursuant to s. 91(27) of the Constitution Act, 1867. However, central to the outcome of the appeal was whether Parliament could legislate with respect to the securities industry under the federal head of power over "The Regulation of Trade and Commerce", granted by s. 91(2) of the Constitution Act, 1867.
The Court found the Proposed Act to be in substance similar to provincial securities legislation in addressing the integrity of market participants, protecting the investing public, and ensuring ethical practices in the capital markets. While Canada asserted that the securities industry had changed with more varied, complex and sophisticated products, the Court held that this does not change the nature of the division of powers under the Constitution Act, 1867, nor does it change the fundamental character of securities products as matters of property and contractual rights. The Court dismissed Canada's assertion that the proposed legislation would address systemic risk within the securities industry, on the basis that as with provincial legislation, the proposed federal legislation would do nothing to assess the merit of any particular investment. Moreover, the proposed legislation was found not to be "crisis legislation" bringing it within the scope of Parliament's legislative powers.
The Court held the regulation of the securities industry to be a matter falling under provincial power over property and civil rights for the following reasons:
- securities legislation licenses and regulates participants in the industry and is a form of professional regulation which has traditionally related to civil rights in the province;
- securities are property that are traded according to contractual and property arrangements, which do not involve cross-border movement of property; and
- the regulation of the raising of capital, the requirements of continuous disclosure, and the regulation of extraordinary transactions by reporting issuers are matters of property and civil rights.
Canada did not dispute that the provinces have jurisdiction over the regulation of the security industry under the property and civil rights head of power, but argued that Parliament has concurrent jurisdiction to legislate with respect to securities regulation. Canada grounded the constitutionality of the Proposed Act on the "general" branch of the trade and commerce power. The trade and commerce power encompasses international or interprovincial trade, and also "general" legislative authority to legislate trade and commerce.
The indicia of legislation validly enacted under the general trade and commerce power, endorsed by the Supreme Court of Canada in General Motors v. City National Leasing ("General Motors"), are that:
- the impugned legislation must be part of a general regulatory scheme;
- the scheme must be monitored by the continuing oversight of a regulatory agency;
- the legislation must be concerned with trade as a whole rather than with a particular industry;
- the legislation should be of a nature that the provinces jointly or severally would be constitutionally incapable of enacting; and
- the failure to include one or more provinces or localities in a legislative scheme would jeopardize the successful operation of the scheme in other parts of the country.
The Court concluded that the proposed securities legislation failed to meet the last three criteria having found that (1) the Proposed Act concerned regulation of the securities industry rather than trade in general; (2) the provinces had been regulating the securities industry for decades already; and (3) a lack of participation by all provinces would not jeopardize the operation of the Proposed Act in other parts of the country (in fact, the opt-in nature of the Proposed Act contemplates that it would operate in only some parts of Canada).
Moreover, the Court could not ignore that the proposed legislation attempts to displace a whole body of existing valid provincial legislation, making a comparison with previous failed attempts by the federal government to assume the regulation of the insurance industry. In the Canadian tradition of constitutionalism, the federal trade and commerce power has not been allowed to subsume provincial power over property and civil rights. The Court strongly stated that "[t]he present Reference in reality involves an attempt to overturn all those earlier cases, and to rewrite Canadian constitutional history in a way that would disrupt the predictability required in constitutional law".
In mid-April, the Supreme Court will hear the Government of Canada's reference question - "Is the…proposed Canadian Securities Act within the legislative authority of the Parliament of Canada?". While the Alberta Court of Appeal's decision in the Securities Act Reference may be compelling (as may be the Quebec Court of Appeal's decision once released), it will not be binding on the Supreme Court, which is the ultimate judicial authority.
As in the Securities Act Reference, the Government of Canada is unlikely to argue that the Proposed Act is in pith and substance a matter distinct from the regulation of the security industry, which falls within provincial jurisdiction. Therefore, the federal government must continue to assert that the Proposed Act falls under the general arm of the federal power to regulate trade and commerce. Despite the decision in the Securities Act Reference, there is still room for such an argument. As the Supreme Court stated in General Motors, the five factors are only indicia and are not a test for the valid application of the general trade and commerce power, and the five factors "merely represent a principled way to begin the difficult task of distinguishing between matters relating to trade and commerce and those of a more local nature".
We will report to our readers on the outcomes in the Quebec Court of Appeal and the Supreme Court when those decisions are released.