January 13th, 2012
In the Supreme Court of Canada’s (“SCC”) recent opinion on the federal government’s proposed Securities Act, the Court held that the proposed Act was not a valid exercise of federal power under the general branch of the trade and commerce power in section 91 of the Constitution Act, 1867 (see Reference Re Securities Act, 2011 SCC 66). Though the Court rejected the federal proposal, it was careful to leave the door open for some form of national securities regulator in the future, holding that “a cooperative approach that permits a scheme recognizing the essentially provincial nature of securities regulation while allowing Parliament to deal with genuinely national concerns remains available.”
While the potential for a national regulator through a cooperative approach seems promising on its face, the decision did little to illuminate the precise contours of such a regime. Moreover, the reference to a cooperative approach stands as somewhat of a tacit admission of the problems with our constitutional jurisprudence generally.
Cooperative Federalism – Generally
At the outset, the SCC explicitly endorsed “flexible” federalism – interpretive acceptance of overlapping jurisdiction – as the “dominant tide” of modern federalism (para 58). This approach, of course, is contrasted from the rigid, “water tight compartments” approach to federalism adopted by the Judicial Committee of the Privy Council (JCPC) in its historic jurisprudence on the division of powers. Nonetheless, the SCC held that the preference for flexible federalism was not so strong as to “sweep designated powers out to sea, nor erode the constitutional balance inherent in the Canadian federal state” (para 62). In other words, the proposed Securities Act so overwhelmed provincial jurisdiction over property and civil rights as to be beyond the acceptable range of overlap inherent to flexible federalism.
Distinct and separate from flexible federalism, the Court referred to the availability of a “cooperative” approach, noting approvingly “the growing practice of resolving complex governance problems that arise in federations, not by the bare logic of either/or, but by seeking cooperative solutions that meet the needs of the country as a whole as well as its constituent parts” (para 132). In contrast to flexible federalism, which refers to the interpretive process, cooperative federalism refers to a political practice whereby the respective branches of government legislate collaboratively, but within their individual spheres of power, to achieve a legislative scheme that, on the whole, has the broad effects neither level could legally achieve on its own.
In support of this approach, the SCC referred to previous federal and provincial cooperation in the field of agricultural products marketing, specifically referencing the Manitoba Egg Reference,  SCR 689. It also noted that British Columbia and Saskatchewan’s positions in the Securities Reference suggested their support for such an approach (para 35). While the SCC made reference to the “constitutional creativity and cooperative flexibility” inherent in Canadian federalism (para 58), it characterized, and, indeed, justified, a cooperative approach in terms of utility (para 9), “properly discharging responsibilities to the public” (para 9), and “meeting the needs of the country as a whole as well as its constituent parts” (para 131).
Cooperative Federalism – Securities
As regards the securities context, the SCC was clear that for a cooperative scheme to be constitutionally valid, it would have to leave the “day-to-day” regulation of the securities industry in the hands of the provinces (paras 112, 116), relegating only matters “genuinely national in scope and qualitatively distinct from those falling under property and civil rights” to the federal government (para 70).
Specifically, the federal government’s role would have to focus primarily on managing systemic risk – “risks that occasion a ‘domino effect’ whereby the risk of default by one market participant will impact the ability of others to fulfill their legal obligations, setting off a chain of negative economic consequences that pervade an entire financial system.” Without explicitly endorsing their constitutionality, the SCC suggested that provisions in the federal bill regarding derivatives regulations (ss.89-90), short-selling (s.126), credit rating (s.73), urgent regulations (s.228(4)(c)), and, especially, data collection and sharing (ss.109, 224) engaged systemic risk (paras 102-103).
Conversely, the provincial role would have to maintain the “day-to-day regulation of all aspects of contracts for securities within provinces, including all aspects of public protection and professional competences.” The regulation of brokers or investment advisors, for example, would seem to fall into this category (para 112).
The SCC was careful to avoid defining too clearly and expansively the securities regulation activities which would constitute “day-to-day regulation” and those which engage “systemic risk,” asserting that “it is not for the Court to suggest to the governments of Canada and the provinces the way forward by, in effect, conferring in advance an opinion on the constitutionality of this or that alternative scheme” (para 132). In part, this represents a commitment by the Court to playing its proper role as legislative arbiter rather than proactive policy maker.
No doubt, however, it likely also reflects the extraordinary challenges associated with determining the contours of a cooperative scheme. Prospectus requirements, continuous disclosure obligations, and takeover rules are examples of crucial subsets of securities law over which the Court did not opine, and which may engage both day-to-day regulation as well as systemic risks simultaneously.
Whether by explicitly noting that the Act “as presently drafted” is ultra vires Parliament’s power (which is the case for all invalid legislation), or in avoiding significant illumination on what might pass constitutional muster as regards “day-to-day” regulation and “systemic risk,” respectively, the SCC went out of its way to avoid tying its hands in the future. Together with the proposed cooperative approach, this will allow the Court to consider political, as opposed to purely legal, considerations in any legislative sequel. Put another way, by not deciding in advance whether subsets of securities regulation such as those listed above fit properly under federal or provincial jurisdiction, vague requirements regarding “respecting the division of powers” allows the Court to decide a sequel based on political considerations such as whether the provinces are generally in support of the scheme. This is likely attractive to the Court given the main tension running through the case – a divergence between what seems to be the “optimal” solution, and our jurisprudence on the division of powers, addressed below. This is likely also attractive to the Court given its historic disposition in regards to high-profile legislative sequels.
A Tacit Commentary on Securities Regulation
Read contextually, the decision suggests the Court accepts that some degree of centralization or national regulating scheme would be desirable in the securities context. First, the seemingly irrelevant reference to securities regulation frameworks in other federal jurisdictions supports this assertion when one considers that the Court referenced Australia (para 50), where powers were shifted to the Commonwealth after a failed attempt by the states at cross-vesting jurisdiction, and the US (para 51), which allows for overlap, but with Federal supremacy. Second, the Court’s explicit qualification that the “opinion does not address the question of what constitutes the optimal model for regulating the securities market,” when read in light of it’s overall holding, suggests support for some form of centralization. The Court’s contention here reflects a commonly held belief that a national regulator would be preferable from an economic standpoint.
A Tacit Commentary on Our Constitutional Jurisprudence
The fact remains, in light of the decision, that the federal government does not have the authority to unilaterally create a national securities regulator. That, in essence, is all that the Court needed to pass judgment on. And yet, it went further, directing us to a cooperative approach. The question that arises is why? My answer is simple – the Court does not want to be placed in the unenviable position of having to say that Parliament can’t do what it is generally agreed would be “best” (from an economic standpoint) for the country.
The reference to a cooperative approach, however, is somewhat of a cop-out. A cooperative approach represents a political solution. While it is recognized that divorcing the political from the legal is an antiquated and largely arbitrary distinction, in its purest form, the SCC’s authority relates solely to legal matters. The Court justified and endorsed a cooperative approach in terms of utility (para 9), needs (para 132), and responsibilities to the public (para 9), but where in the Constitution does it say that the division of powers corresponds to these considerations?
Likewise, the Court refers to cooperation as the “animating force” of federalism, holding that “the federalism principle on which Canada’s constitutional framework rests demands nothing less” (para 133). Again, where does this obligation come from? Isn’t the point of division of powers precisely that a level of government is free to do as it pleases within its realm of authority? If such considerations are relevant, and such obligations exist, why aren’t they relevant, if not determinative, in our general constitutional interpretation? Surely this would have been pertinent to the Court’s discussion and endorsement of a “flexible” approach federalism, were this the case.
The SCC eloquently disparages the “bare logic of either/or” that has historically characterized division of powers jurisprudence, but the dominance of this mode of thinking stems from the reality that that’s what law is about. Can you, or can’t you? Questions of “should” and “how best” belong to the political sphere, not the courts.
This is not to condemn the practice of cooperative federalism. Indeed, such an approach is plainly laudable. Nor is it to blame the Supreme Court, which is merely playing the cards it has been dealt. The problem lies much deeper, at the heart of our division of powers jurisprudence. The SCC was clear in the Securities Reference that it rejected the “rigid formalism” which characterized the Judicial Committee of the Privy Council’s approach to division of powers interpretation.
The SCC was right to so reject this approach, as it was neither realistic, nor right given Canada’s circumstances. Why not recognize that the substantive demarcations laid down by the JCPC, in this case with regard to the scope of s. 91, hugely circumscribed in Parsons, were equally incorrect? Instead, rather than abandon it, the Court is trying to navigate its remnants in the form of cooperative federalism.
At its base, the Securities Reference encounters a fundamental tension of Canadian constitutionalism – the reality that our jurisprudence doesn’t correspond to considerations of what represents the “optimal” legislative path in a given situation (in this case, a federal scheme that intrudes, to some extent, on day-to-day regulation). A look at the struggles of the great Canadian constitutionalist F.R. Scott shows that this reality is hardly new.
Nonetheless, it remains one of the great ironies of our jurisprudence, which has historically shunned a static approach, that the considerations that determined division of powers in 1867 remain so determinative today. The Securities Reference’s solution – a cooperative approach – attempts to make up for this shortcoming, but in so doing it betrays the proper role of the Supreme Court and masks the real problem that needs repairing.[filed: Constitutional Law Securities Law]