The establishment of a single national securities regulator is once again being debated in Canada. The decades-long dialogue among market participants, politicians and academic scholars had its "day in court" in April when the Supreme Court of Canada (SCC) heard arguments in the reference regarding the constitutionality of the proposed federal Securities Act (Canada). These hearings came mere weeks after the release of decisions in similar reference cases before the courts of appeal in Alberta and Québec (in French only) both of which had found that a single federal national regulator would violate provincial jurisdiction.
The SCC’s decision will be the ultimate authority as to whether the Government of Canada can proceed with the proposed Act and, more specifically, the question of who has authority over securities regulation: the federal government, the provincial governments, or a combination of both.
There is no clear consensus as to the appropriateness or the need to establish a single securities regulator, and views vary not only between regions but also among market participants. Proponents of a national regulator believe that a single Canadian securities regulator will streamline regulation, improve investigation and regulatory powers, and act as Canada’s securities representative abroad. Opponents of a single regulator argue that securities regulation is a provincial mandate and that provinces are best suited to react to and address local regulatory concerns. Further, they note that securities law is already largely harmonized across the country, and they believe that nothing is to be gained from having a national securities regulator. Regardless of where anyone stands on the debate, all parties agree that securities regulation is of economic importance and that regulatory stability is essential to the functioning of the capital markets.
Not the regulation, but who makes the regulation
The question before the SCC is not about the content of securities regulation, but about which level of government should control, develop and determine such regulation. In essence, the federal government is asking the SCC to confirm that the federal government has the power to regulate securities under the "trade and commerce" power in the Constitution Act, 1867. The leading case that sets out the criteria to be used when determining whether the federal government can invoke its trade and commerce power under Section 91(2) of the Constitution is General Motors of Canada v. National City Leasing. In this case, the court identified five indicia to consider:
- The 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 a particular industry.
- The legislation should be such a nature that the provinces would be jointly and severally incapable of enacting.
- The failure to include one or more provinces in the legislative scheme would jeopardize the operation of the scheme in other parts of the country.
Arguments on each of the above points were heard before the SCC, but the list is non-exhaustive and the court may consider any factors it considers relevant to its decision.
The aim of the proposed Act is to establish a single national securities regulator that will eventually replace the current network of 13 provincial and territorial securities regulators, in other words, to effect organizational and structural change and not necessarily to change the nature of the regulation. While substantive policy and regulatory changes may eventually follow an SCC decision in favour of federal regulation of securities law, any such changes will not be immediate. Issuers, investors and other capital market participants can likely expect a slow and cautious approach to any regulatory reform.
Ontario was the only province that supported the constitutional argument presented by the federal government before the SCC. The provinces of Alberta, Québec and Manitoba have opposed the proposition from the beginning, and were joined by New Brunswick in opposition before the court. British Columbia’s nuanced position objected to the authority of the federal government and referred the proposed Act as a "Trojan horse" waiting to be brought within the constitutional gates, but did recognize that the establishment of a national securities regulator may be beneficial. Saskatchewan adopted a similar stance before the SCC, objecting to the federal authority but acknowledging the idea of a single regulator. Supporting positions were also made by several industry interveners, including the Canadian Foundation for Advancement of Investor Rights, the Canadian Coalition for Good Governance, the Canadian Bankers Association, the Ontario Teachers’ Pension Plan, and the Investment Industry Association of Canada. Apart from the SCC reference, 10 of the 13 provinces and territories (Alberta, Manitoba and Québec have not been involved) have continued their involvement with the federal government regarding a national securities regulator through the Canadian
Provincial ‘opt-in’ provision
An important aspect of the proposed Act is an "opt-in" clause for provinces to determine whether they will participate. Should the SCC decide that federal regulation in the area of securities law is constitutional, the proposed Act will serve as a starting point for discussing the extent of provincial involvement.
The current "passport" system, which allows market participants to apply to a single securities commission for, among other things, decisions relating to registration, prospectus clearances, disclosure requirements and discretionary relief, is both an argument to maintain the status quo as well as recognition that harmonization of certain securities regulation is beneficial. While Ontario supports a single regulatory with harmonized rules, Ontario has not joined the passport system stating that the system does not go far enough to enhance investor protection, reduce regulatory confusion, or eliminate multiple jurisdictional fees. Provinces that have previously supported harmonization through the passport system may be encouraged to participate in a national regulatory scheme if the constitutional dispute is settled by the SCC in favour of the federal government.
The details of a federal regulatory system
The proposed Act provides a broad overview of how a federal securities regulatory scheme would be structured. As is the case today, most operational details that have a direct impact on market participants are found in legislation or in decisions of the securities commissions. For the most part, these are represented by the national or multilateral instruments adopted by the securities commissions. Similar operational details are not yet available under the proposed Act. Many suggest that the "devil is in the details," and that the details are unavailable to properly evaluate a federal system, but it is widely expected that the existing instruments will be rolled into the federal system with little change.
A new federal system would be governed by the Canadian Securities Regulatory Authority (CSRA). Directors of the CSRA would be appointed by the federal finance minister in consultation with a council of participating provincial counterparts. The CSRA would be divided into two distinct branches in charge of administration and adjudication: the Regulator Division and the Canadian Securities Tribunal. The proposed Act would also establish a regulatory policy forum and investor advisory panel to participate in the ongoing development of the CSRA’s regulations, policies, practices and activities. The extensive regulatory authority of the CSRA would include oversight of clearing houses, trade repositories, exchanges, credit rating agencies, dealers and all derivatives trading.
The CSRA would possess broad investigatory authority with the possibility of criminal penalties under the proposed Act given the federal authority to legislate criminal law. The criminal penalties and certain investigatory powers would apply across all Canadian jurisdictions regardless of whether a province has opted-in to the federal scheme; however, it is anticipated that in most cases investigations would be conducted in cooperation with existing federal, provincial and municipal police authorities.
The decision of the SCC is expected in late 2011 or early 2012. At heart, the reference case is yet another iteration of the uniquely Canadian tension between the federal government and the provinces. This is about who has the power to make the rules, not the rules themselves. And no matter what the SCC decides, provincial and federal discussion and cooperation will remain fundamental to the success of any system of securities regulation.