March 21st, 2011
Advocates for a national securities regulator in Canada will be disappointed with the Alberta Court of Appeal’s decision in favour of the provincial opponents in the Reference re Securities Act (Canada), 2011 ABCA 77. The Court of Appeal found that the federal government does not have the constitutional authority to regulate securities under the proposed Securities Act and that the statute as written is unconstitutional. TheCourt.ca first covered this topic in a two-post series last summer. These posts provide an in-depth background on how the scheme would work and operate, and can be found here and here.
Supporters of a federally-regulated securities market have argued that Canada’s existing system (which includes separate legislation and rules for each province) is characterized by (PDF link) inefficient overlap, fragmentation, and duplication in securities markets and generally hurts the country and its investors in the global capital markets.
In response to this, the federal government proposed to create a national securities regulator and published a version of the federal Securities Act in May 2010.
Shortly after, and rather predictably, Alberta and Quebec declared their opposition and directed a reference to the provincial appellate courts regarding the proposed Act’s constitutionality. This decision comes out of Alberta while the Quebec decision is expected in the coming weeks.
The Constitutional Framework
While the purpose of this post is to examine the decision of the Alberta Court of Appeal rather than to reproduce this blog’s previous post on the constitutionality of the Securities Act, it will be helpful to provide a brief overview of the constitutional framework. Courts have traditionally held that the regulation of securities comes under provincial jurisdiction by way of s. 92(13) of the Constitution Act, 1867 (please refer to Multiple Access Ltd. v. McCutcheon,  2 S.C.R. 161). This section explicitly grants provinces with jurisdiction to regulate property and civil rights. However, a federal power also exists under s. 91(2) allowing the federal government to regulate on matters related to the regulation of trade and commerce. Typically, these two powers are often pitted against one another. With the proposed national regulator, the federal government is arguing that securities regulations also has concurrent jurisdiction in the area of federal trade and commerce.
The general 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.
Additionally, to convince the Court that securities regulation is (or isn’t) a federal responsibility, the case of General Motors of Canada Ltd. v. City National Leasing , 1 SCR 641 sets out five tests important in deciding if federal trade and commerce powers should apply to a particular sector so as to permit federal regulation of the industry.
Selected Problems With The Constitutional Analysis
Problem #1: The notion that securities regulation will only ever be a provincial power
The Court of Appeal adopted an extremely strict interpretation of the Constitution (as was expected) to justify upholding provincial jurisdiction as having sole jurisdiction over securities, despite convincing arguments to the contrary.
In its submission, the federal Government cited the Reference re Anti-Inflation Act (Canada),  2 SCR 373 as authority for the proposition that the federal government only needs to demonstrate a “rational connection” between the proposed legislation and a federal head of power. On the other side, the province cited jurisprudence supporting securities as being unique and historically under provincial jurisdiction, without addressing the numerous changes that have occurred to the nature and scope of capital markets in a more globalized world.
For example, paragraph 20 of the decision states that “Canadian companies at Confederation, and since, have always relied upon access to international capital markets …at the end of the day the (existing) regime still regulates individual contractual and property rights as sophisticated, complex and fast they may be.”
Unfortunately, this method of thinking misses the point. While securities trading has indeed become more complex and speedy, the nature of the entire industry has also fundamentally changed by becoming more international. Rather than being an issue of the speed or complexity of the markets, it’s an issue of scope – which evidence shows is now more international than ever and thus more naturally of federal concern.
Problem #2: Employing a non-contextual approach
“It is neither appropriate nor necessary for this Court to try and determine whether it is “better” for Canada to have a national, as compared to a provincial, system of securities regulation.” (Paragraph 20)
This telling quote from the decision indicates the Court’s unwillingness to adopt the widely accepted principle that the Constitution Act can be subject to a contextual analysis, with regard to developments in the way business is conducted.
While the Court accepted the contextual approach generally, the reasons go on to state, “there are limits to how far the courts should go in reallocating the constitutional powers divided up in ss. 91 and 92.” (Para. 10). Unfortunately, the Court of Appeal appears to have taken an extremely rigid view of these limits by finding that historical treatment is the only, or at least, the preeminent consideration in this regard.
As I see it, the main problem with this decision is that the Court decided to answer the question of “Can the federal government take away provincial rights (to regulate securities)?,” rather than the more appropriate inquiry of “Does the federal government have the authority to enact a federal Securities Act?
At this point, the regime proposed is on a voluntary basis, with an opt-out for any provinces not wanting to be a part of the scheme. In view of this, it seems all provinces ought to view this as an addition to federal jurisdiction, rather than an outright loss of a current right.
The decision, while unsatisfactory, is far from the end of the road. The true finale will take place at the SCC next month, and the decision that emerges from those proceedings will trump both this and the upcoming Quebec decision. Scholars are already hotly debating the likely outcome. Professor Monahan of our own Osgoode Hall believes that Canada’s top court has become more flexible over the past decades when determining what falls under the federal trade and commerce powers. As he wrote, “It recognizes that the economy is an interconnected whole and you can’t divide up the economy into certain transactions within borders and other transactions that are completed within a province …you have to look at more of a functional approach.”
I can only hope the SCC agrees.[filed: Uncategorized]