Revisiting the federal trade and commerce power: Will the federal Securities Act be held constitutional at the SCC?
Editor’s Note: This is the first of a two-post series on the proposed Canadian Securities Act. The federal government recently referred the proposed legislation to the SCC. The first post focuses on the constitutionality of the proposed legislation, while the second post will compare the merits of federal and provincial regulation, and discuss the effect the proposed legislation may have on capital markets.
Canadian investors may soon enjoy Canada-wide securities legislation if the SCC finds that the proposed Canadian Securities Act (“Act”) is constitutional. The government referred the proposed Act to the SCC and posed following question: Is the proposed Canadian Securities Act within the legislative authority of the Parliament of Canada? This development in Canadian securities regulation provokes two questions. First, will the SCC find the Act to be constitutionally valid? Second, what are the potential effects of the Act?
Canadian capital markets are currently overseen by provincially-established and run regulatory agencies. No regulator at the federal level exists. The provincial securities commissions work together via the Canadian Securities Administrators (“CSA”) to coordinate their regulation of securities markets. The CSA is the closest thing the country has to a federal regulator, which is a bit of an overstatement. It arose out of a joint initiative of the provincial and territorial agencies, not the federal government. By cooperating through the CSA, provincial commissions are able to develop similar rules and regulations that create some level of consistency between the different provincial regimes. Perhaps the most significant accomplishment of the CSA was its development of a “passport system” that allows investors to easily access all Canadian markets through compliance with the rules and procedures of their home province.
The Canadian system has been frequently criticized for breeding operational inefficiencies. Critics most often cite the lack of federal regulation as the main problem with the existing regulatory system for securities markets. Many criticisms are founded on comparisons to other countries’ federal systems of regulation. The US system of joint federal-state jurisdiction is often the commonly cited model of efficient regulation. Eight federal statutes govern the general trade and administration of capital markets in the US, while individual states also have anti-fraud laws called “blue sky laws.” The federal regulator, the Securities and Exchange Commission (“SEC”), applies the Securities Act of 1933. The latter regulates the interstate sales of securities. Simply put, this system achieves what the CSA passport system intends to do – govern the legality of inter-territorial exchange of securities.
Two main problems plague the current system in place. First, regulatory responses to incidents are delayed. For example, the CSA was unable to respond with a solution to the asset-backed commercial paper (ABCP) market crisis in 2007. The quarterly convening of the CSA members meant that a quick solution was not developed for that time sensitive matter. If a national agency existed, the markets would no longer be impeded by the limits of the CSA.
Second, provincial approaches to securities regulation are inconsistent. The proposed Act would differentiate between traditional securities and derivatives, as well as the markets associated with them. It is proposed that categories of derivatives and treatments established are contingent on the classification of a derivative. According to the Government of Canada (PDF link), the Act would have the effect of “expanding the core purposes of securities regulation to include enhancing the integrity and stability of the financial system, as well as the existing investor protection and market efficiency mandates.”
A “Voluntary” Regime
Notably, provincial participation in the Act is on a volunteer basis. Provinces can opt to participate in the Act. If the objectives of the federal legislation are consistency and harmonization, then it is difficult to see how a voluntary regime will achieve these objectives. The comments of the National Post are apt. According to the newspaper, “Presumably the national securities regulatory system will be more voluntary than Finance Minister Jim Flaherty’s recently established code of conduct for banks: It’s voluntary unless banks decide not to join – then it will become mandatory.” The federal government may be forced to develop a plan that governs all of the provinces if the regime is to achieve maximum efficiency. This topic will be discussed further in the second post of this series.
The Act Has the Potential to be Found Constitutional
The SCC’s decision will likely become a landmark ruling on the scope of the federal government’s trade and commerce power. Provincial jurisdiction over the regulation of securities has been judicially recognized as falling within the scope of s. 92(13) of the Constitution Act, 1867 (refer to Multiple Access Ltd. v. McCutcheon,  2 S.C.R. 161).
The 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.
Pith and Substance
The analysis will first determine what the purpose and effects (pith and substance) of the Act are. The latter is summarized in the following excerpt of the Act’s Preamble:
6. the integrity and stability of Canada’s financial system would be enhanced by the presence of a single Canadian securities regulatory as part of the Canadian financial regulatory framework;
7. Parliament intends to create a single Canadian securities regulator, supported by a comprehensive statutory and regulatory regime that applies across Canada;
The Act would concentrate power within the federal government through the proposed Canadian Securities Regulatory Authority, which would be headed by the chief Regulator. Theoretically, the Act would have the effect of harmonizing the thirteen existing provincial systems into one. Most importantly, those provinces that elect to opt-in would find their provincial commissions powerless and required to abide by a single set of rules and regulations.
Encroachment on Provincial Jurisdiction
Determining whether a federal regulator would encroach upon provincial jurisdiction is the crux of the constitutional reference. Section 92(13) of the Constitution Act, 1867 gives the provinces jurisdiction over “Property and Civil Rights in the Province.” This potentially expansive section has been interpreted to give the provinces the ability to regulate with respect to intra-provincial trade. Section 92(13) is balanced against the federal government’s general regulation of trade and commerce authority under s. 91(2) of the Constitution Act, 1867. As determined in Citizen’s Insurance Co. v. Parsons,  4. S.C.R. 215, the federal government is able to legislate on matters that concern (a) international and interprovincial matters, and (b) the “general regulation of trade affecting the Dominion as a whole.” In today’s interconnected and globalized business environment, the federal government may not have much difficulty in demonstrating that federal securities regulation falls within either head of power.
Nevertheless, the federal government does have its work cut out for it. The provinces’ constitutionalized jurisdiction over property and civil rights, as well as over local matters, will have some traction with the SCC. The several different ways to frame the issue make it difficult to precisely say whether the federal government will succeed in its proposition.
On one hand, the decision of Global Securities Corp. v. British Columbia (Securities Commission),  1 S.C.R. 494 will likely be considered. In Global Securities, Iacobucci J., writing for the majority, suggested that the regulation of domestic (not provincial) securities has been repeatedly recognized as a provincial power.
Section 141(1)(b)’s dominant purpose is the effective regulation of domestic securities, a task that has long been recognized to fall within provincial authority: see Multiple Access Ltd. v. McCutcheon,  2 S.C.R. 161 … Moreover, it is well established that the provinces’ authority over securities regulation is not limited to purely intraprovincial matters.
As recent as 2000, the SCC has categorized domestic securities regulation as a recognized provincial power.
On the other hand, in Multiple Access, the SCC found federal legislation, which contained insider trading provisions, to be valid under the federal trade and commerce head of power. This decision exemplifies the SCC’s recognition of the evolution of securities markets into a federal and internationally-based trade. Although securities regulation has historically been recognized as a provincial head of power, the globalization of capital markets has altered the way securities regulation is viewed.
Recognized Federal Power
Section 91(2) allows the federal government to regulate trade and commerce. As per the above discussion, the SCC may very well determine that securities regulation is now a national matter relating to trade and commerce.
Paramountcy & Mutual Modification
If the Act is found valid, two situations may arise regarding the relationship between the provincial commissions and a federal agency.
First, if conflict arises, the paramountcy doctrine would apply. The federal paramountcy doctrine states that in a case where both the federal government and a provincial government claim jurisdiction, the federal legislation will be given precedence over the provincial legislation in the case of a conflict.
Secondly, if no conflict arose, the double aspect doctrine (first established in Hodge v. The Queen,  9 App. Cas. 117) would undoubtedly be relevant. The doctrine allows for the co-existence of both provincial and federal legislation on the same matter so long as no direct conflict exists.
It will be some time before a decision on constitutionality is made. In the meanwhile, the Canadian business community will be eagerly awaiting the SCC’s decision. It is the best interests of the Canadian economy that the Act is declared constitutional in order to reconcile provincial inconsistencies and inefficiencies.
The Court encourages readers to read the second post of this series, which will be posted next Wednesday. The post will delve further into the actual effects on capital markets that will arise if the Act comes into force.