In a strongly-worded judgment1 released on March 8, the Alberta Court of Appeal (Alberta Court) declared the proposed new Canadian Securities Act (Federal Act)2 unconstitutional. This is the first of three concurrent references to our appellate courts to determine the constitutionality of the Federal Act. In January, 2011, the Québec Court of Appeal (Québec Court) heard a parallel constitutional reference, but the Québec Court has not yet released its reasons. Later next month,3 the Supreme Court of Canada (Supreme Court) will hear the ultimate constitutional reference that will finally decide the fate of the Federal Act. In doing so, the Supreme Court will have to weigh the reasons of the Alberta and Québec Courts.
Historically, securities legislation has always been treated as a matter of essentially exclusive provincial jurisdiction. Provincial jurisdiction is based on its power to legislate in relation to “Property and Civil Rights in the Province” enshrined in s. 92.13 of the Constitution Act, 1867.4 The central debate has been whether there is a head of jurisdiction in s. 91 that gives the federal government a constitutionally valid basis for legislating in the field of securities regulation generally (albeit latent or unused until implementation of the Federal Act).
The federal argument turns entirely on federal power over the “Regulation of Trade and Commerce” set out in s. 91.2 of the Constitution Act. As pointed out by the Alberta Court, the federal trade and commerce power has always been read more narrowly in Canadian constitutional law than appears on its face and more narrowly than an equivalent grant of federal power has been construed in other countries (such as in the U.S.).
In its decision, the Alberta Court responded in detail to the central federal argument, which is founded on the Supreme Court of Canada ruling in General Motors v. City National Leasing (GM).5 GM sets out the following five indicia for the validity of an enactment based on the s. 91 federal trade and commerce power:
- the impugned legislation must be part of the 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 (provincial incapacity); and
- the failure to include one or more provinces or localities in a legislative scheme would compromise the successful operation of the scheme in other parts of the country (ineffectiveness without universal coverage).
The Alberta Court recognized that the factors listed in GM are only guidelines and that all indicia need not be present in each case in order for federal legislation to be constitutionally valid. Rather, these guidelines are a starting point in a case-by-case analysis. The Alberta Court found that some parts of the Federal Act meet the first two criteria (i.e., a general regulatory scheme and oversight of a regulatory agency) as they apply to the securities industry itself. However, it found that the Federal Act does not attempt to directly manage either systemic risk or capital flows despite those being stated purposes of the legislation. According to the Court, one portion of the Federal Act meets the first two criteria. However, this does mean that all of the Federal Act meets the first two criteria.
The Alberta Court was much less equivocal in finding that the Federal Act did not meet the last three criteria set out in GM (i.e., trade as a whole, provincial incapacity and ineffectiveness without all provinces aboard). According to the Alberta Court, the Federal Act is concerned with a particular industry, viz., the securities industry which raises money from the general public. The Court made an extensive comparison to regulation of the insurance industry and drew from the long line of constitutional jurisprudence holding that federal regulation of the insurance industry (except unemployment insurance which is specifically enumerated in s. 91.2A of the Constitution Act) is invalid.
The Alberta Court found that the Federal Act does not concern trade as a whole. Further, the provinces are not incapable of regulating the securities industry. The securities industry can be successfully regulated at the provincial level. Indeed, collectively, the provinces have been doing exactly that for decades. Finally, and perhaps most tellingly, exclusion of some provinces from the Federal Act (which is expressly contemplated as a result of the provincial opt-in in s. 250) does not undermine its operation in other provinces. The Court found that regulation of the securities industry is not like regulating competition or inflation (something that can only be effectively regulated nationally). In this respect, the opt-in nature of the Federal Act (made necessary for political reasons) may prove to be its Achilles’ heel. The Court found that the opt-in provision shows that the Federal Act need not be Canada-wide to be effective. The Federal Act can operate successfully without the inclusion of all of the provinces.
The Court finished its judgment with the following ringing tones:
In conclusion, the proposed federal securities legislation represents the intrusion of the federal government into an area long occupied by the provincial governments. Regulation of the professions, regulation of specific industries, regulation of particular types of contacts, and regulation of forms of property have always been considered to fall under provincial powers. ... The division of power represents an understanding reached on the nature of Canadian federalism that should not lightly be disrupted by any one level of government or the courts. If the Government of Canada wants a paradigm shift in the power to regulate the securities industry, the way to accomplish that is through negotiation with the provinces, not by asking the courts to reallocate the powers under the Constitution Act through a radical expansion of the trade and commerce power. [Internal citations omitted.]
Of course, the Supreme Court of Canada will have the last word on the constitutionality of the Federal Act. If the Supreme Court is to uphold the constitutionality of the Act, it will have to adopt a much broader characterization of the Act than the largely narrow contract and property rights characterization ascribed to the legislation by the Alberta Court. Alternatively, the Supreme Court will have to apply the GM criteria much more liberally than they were applied by the Alberta Court and will have to hold, in particular, that the fifth criterion in GM is not essential (or need not be met immediately or, perhaps, ever). As demonstrated by the Alberta Court, the abiding challenges are likely to be reconciling the fourth and fifth criteria in GM (viz., provincial incapacity and a scheme that is national in scope) with the historical, political and legislative realities that (1) the provinces have long proven themselves capable of enacting securities legislation without legislation at the national level and (2) the Federal Act has been cast as entirely opt-in.
However, it must be borne in mind that the Alberta and Québec Courts are constrained in applying the GM criteria and the other binding precedents on the scope of the federal trade and commerce power. Only the Supreme Court is free to alter or adjust its own doctrine. We will not have long to wait before seeing how the Supreme Court applies the trade and commerce power in the context of the proposed national securities regulator.