Is the End in Sight?

On November 9, 2018, the Supreme Court of Canada (SCC) unanimously ruled that a proposed pan-Canadian securities regulator is constitutionally acceptable. The decision, Reference re Pan-Canadian Securities Regulation, was highly-anticipated and now paves the way for the Cooperative Capital Markets Regulatory System (CCMRS).

Background

Unique among major economies, Canada does not have a national securities regulator. While the provinces have established some forms of cooperation (through the use of national and multilateral instruments and, more recently, the "passport" system) since at least the 1970s, there have been recurring discussions and efforts to more formally and definitively address this issue. Most recently, in a 2011 ruling, the SCC determined that a proposed national regulatory system was unconstitutional, concluding that under the Constitution Act, 1867 (the "Constitution"), the provinces and territories hold jurisdiction over most aspects related to the regulation of securities. Nonetheless, the SCC left the door open in that decision to the creation of a system involving a cooperative approach among the provinces and territories.

Following the SCC's 2011 decision, the CCMRS was developed under which the governments of Ontario, British Columbia, Saskatchewan, New Brunswick, Prince Edward Island, Yukon and the federal government announced in 2014 that they had signed a memorandum of agreement (the "MOA") pursuant to which the terms of the CCMRS were formalized. The main components of the CCMRS include: (i) a model provincial and territorial statute called the Capital Markets Act (the "Model Provincial Act") that primarily deals with the day-to-day aspects of the securities trade; (ii) a draft federal act called the Capital Markets Stability Act (the "Draft Federal Act") that is to regulate the prevention and management of systemic risks, and equally establishes criminal offences related to financial markets; (c) a council of ministers (the "Council") comprised of the federal minister of finance and the minister responsible for capital markets regulation from each participating jurisdiction, to provide oversight over the national securities regulator; and (d) a national securities regulator that is to operate under the purview of the Council and who is charged with administering the securities regime.

The constitutional validity of the CCMRS was referred to the Québec Court of Appeal in July 2015, with that Court finding that the CCMRS was unconstitutional. Specifically, the Québec Court of Appeal had to consider two questions, those being: (i) whether the Constitution authorizes the implementation of a pan-Canadian securities regulation under the authority of a single regulator, according to the model established by the MOA regarding the CCMRS; and (ii) whether the most recent version of the Draft Federal Act exceeds the authority of the Parliament of Canada over the general branch of the trade and commerce power under subsection 91(2) of the Constitution. On the first question, the Québec Court of Appeal determined that, in essence, the Model Provincial Act fettered the sovereignty of the provinces’ legislatures and found the process for making federal regulations inconsistent with the principles of federalism in Canada. On the second question, the Court ruled that the pith and substance of the Draft Federal Act fell within the federal government's jurisdiction over trade and commerce under the Constitution; however, the Court took issue with certain provisions of the Draft Federal Act, rendering it ultimately unconstitutional.

The Attorney General of Canada appealed both questions, with the Attorney General of British Columbia appealing on the first question and the Attorney General of Québec appealing on the second question, leading to the SCC's decision of November 9, 2018.

The Decision

In reaching its decision, the SCC revisited the same two questions that the Québec Court of Appeal had to consider upon referral from the Government of Québec.

In response to the first question, the SCC held that the implementation of pan-Canadian securities regulation under the authority of a single regulator in accordance with the terms set out in the MOA was constitutional. In reaching this ruling, the SCC determined that, in contrast with the Québec Court of Appeal's decision, the MOA did not entail an impermissible delegation of law-making authority and that the process for amending the Model Provincial Act by the Council did not have the effect of fettering the sovereignty of the participating provinces' and territories respective legislatures. The SCC held that the terms of the MOA did not imply that the legislatures of the participating provinces and territories would be required to implement the amendments made to the Model Provincial Act, nor would the participating provinces and territories be precluded from making any other amendments to their respective provincial or territorial securities law. The SCC ruled that even if the terms of the MOA fettered the sovereignty of the legislatures, it would be ineffective in view of the principle of parliamentary sovereignty, as the executive is incapable of interfering with the legislature's power to enact, amend and repeal legislation.

On the second question, the SCC ruled that the Draft Federal Act fell within Parliament's trade and commerce powers under section 91(2) of the Constitution. The pith and substance of the Draft Federal Act is to control systemic risk having the potential to create material adverse effects on the Canadian economy and therefore addresses a matter of genuine national importance. In contrast with the Québec Court of Appeal, the SCC did not find that certain provisions of the Draft Federal Act dealing with the Council rendered the legislation unconstitutional.

Next Steps

If, when and how the legislation implementing a new securities regulatory regime will be introduced is still unknown. The SCC indicated that its decision was an advisory one and that it is up to the individual provinces and/or territories to determine whether participation is in that province or territory’s best interest. The SCC emphasized that the decision to relinquish a degree of autonomy over the regulation of securities is entirely a matter of political choice and it is unclear what actions those provinces that oppose a national securities regulator will take or are available to them in response to the SCC's decision.