General Motors v City National Leasing: A Primer to the National Securities Regulator Reference
Last April, the Supreme Court of Canada heard arguments regarding the constitutionality of the proposed national securities regulator. Broadly, the issue was whether the proposed Canada Securities Act [Act] was a valid exercise of the federal government’s trade and commerce power under s. 91(2) of the Constitution Act, 1867. With the Legal Post reporting that the release of a decision is imminent, it is high time for a refresher on the substantive issues.
My goal here is to provide a useful background for anyone trying to understand the reference when it is handed down. In crafting this post, I have reviewed the most important factums, as well as the webcast of the hearings to get a general sense of the main points of conflict in the case. I will not doggedly rehash the will test from General Motors of Canada Ltd v City National Leasing,  1 SCR 641 [General Motors], as wiser persons than I have already done so.
The crux of the matter
The securities reference is the latest in a long line of cases that attempt to resolve the tension between the provincial power to regulate property and civil rights under s. 92(13), on the one hand, and the federal power to regulate trade and commerce, on the other. The concern has been that the federal power to regulate trade and commerce, normally understood, will always involve the regulation of contracts. If so construed, the federal power would swallow the provincial power whole, rendering it meaningless. This is the base concern which animates the position of Quebec and Alberta, and poses a hurdle for the justices in delineating a balance in our federation.
While the General Motors test purports to balance these concerns, the application of the test is far from clear. The next few points will address reasons why the test does not lend itself to a clear jurisdictional answer.
Law and policy
All parties have been adamant in asserting that the Court should not ask whether the federal government should create a national securities regulator, or whether it would be more efficient to have a national regulator. Rather, they assert that the Court should restrict itself to answering whether the federal government is constitutionally capable of establishing a national securities legislator. Despite this agreement, both sides proffered volumes of evidence which seemed to go toward whether a national or regional regulator would be better, leaving the judges wondering what the relevance of this evidence was for the constitutional arguments.
After some prodding by Abella J, Canada said evidence of legitimate policy aims is relevant to the third criterion in the General Motors test. Specifically, such evidence is relevant to establishing a rational basis for Parliament to conclude that the proposed regulation concerns trade as a whole. Much was said about how the national securities regulator is a proposal that matches “the scope of the problem with the authority of the regulator”—I expect this phrase to be trod out again in the judgment.
That regulation should be rationally connected to its object is a test which Canada imported from the Court’s peace, order and good governance (“POGG”) jurisprudence (see Re Anti-Inflation Act,  2 SCR 373, 421) and was endorsed by Dalphond JA in dissent at the Quebec Court of Appeal (see Reference Re Power of Parliament to Regulate Securities, 2011 QCCA 691, para 487). Those parties opposing the regulator, however, suggest a higher threshold, like substantially connected. On either standard, the Court must delve into the realm of assessing Parliament’s policy objectives. I suspect that the Court will not want to be perceived as usurping the role of Parliament, and will limit any inquiry into policy. This criteria should highlight one of the ways the General Motors test itself has the potential to overextend the institutional role of the judiciary.
Defining constitutional incapacity
The fourth hallmark of legislation which qualifies the general trade and commerce power is that it should be a regime which the provinces would be constitutionally incapable of enacting. The meaning of constitutionally incapacity will certainly receive some attention in the decisions, as it was a contested point in the hearing.
Axiomatically, a province acting by itself can never act to create a national securities regulator, so the mere assertion of federal jurisdiction through the creation of a national securities regulator cannot satisfy this criterion.
Opponents of the regime say that the provinces are currently regulating the markets, so it cannot be said that they are constitutionally incapable of enacting securities regulation. While Canada concedes that provinces are able to regulate securities markets, it says that that fact is immaterial. Rather, the Court should focus on whether the provinces are capable of enacting comprehensive securities regulation. The use of the word “comprehensive” in the federal government’s characterization is important because it is meant to capture aspects of the proposed securities regime which the provinces are not capable of enacting. For example, there are constitutional limitations to the power of the provinces acting in combination—a province cannot make a cease trade order against a company and expect that order to apply extra-provincially. Comprehensiveness may also incorporate a concern for systemic risk that the provinces cannot constitutionally regulate.
In response, Quebec and Alberta say that nothing in the Act is qualitatively different from what the provinces are currently doing—in fact most of the sections are lifted directly from provincial securities statutes. Thus, they say it is not of the “genre of legislation” that cannot practically be enacted by the provinces, and there would be no legislative lacuna in denying the federal government this power (see General Motors, para 66). Furthermore, the opponents deny that provinces are incapable of acting in combination, as shown by the success of the passport system. Finally, they say that the Act does not deal with the kind of systemic risk securities regulators are concerned with in a manner different from provincial regulators.
To this, the federal government responds that the constitutional validity of federal legislation must be determined without heed to provincial legislation. To add to the confusion, both sides find support for their arguments in General Motors, showing potential contradictions in the decision.
To be clear, I am not going to attempt to conclusively resolve these debates here; I only mean to point out what the Court will have to address in its decision.
The opt-in feature
The Act would extend a national regulator over those provinces who opt-in to the scheme, thus raising the possibility that certain provinces would holdout and potentially never opt-in. Given this possibility, Abella J raised concerns about whether the failure of provinces to opt-in would jeopardize the operation of the scheme elsewhere. If failure to opt-in does not jeopardize the regime’s operation, then we are left wondering whether the Act deals with a truly national concern and thus whether it is should be considered an exercise of the general trade and commerce power. The very existence of the opt-in would seem to undermine the fifth criterion in General Motors.
While Canada concedes that the effectiveness of the national regulator would be compromised if a province chose not to opt-in, it submitted that the Court should defer to Parliament’s judgment on the means chosen to implement its policy. The question of whether provinces can opt-in, and what kind of arrangements can be made to facilitate opting-in, is not a matter which a Court can make a decision. Furthermore, the choice to implement policy via an opt-in mechanism should not undermine the Act’s constitutionality because the Act could be unconstitutional even if every province chooses to opt-in.
While there are good reasons to defer to Parliament on the opt-in feature, we must also remember that the General Motors criteria are not meant to be a test, but rather indicia—i.e. it may be possible not to meet all the criteria and still pass the test. The attempt at collaborative federalism through this opt-in feature might be a good reason not to rely too strongly on this particular criterion.
The elephant in the room
During oral argument, both Deschamps J and McLachlin CJ seemed to be wary of what would follow if they accept that the proposed national securities regulator in pith and substance relates to the trade and commerce power. The Court seemed to have in mind that once you accept this conclusion, it would be open to Parliament to get rid of the opt-in feature, and potentially use the doctrine of Paramountcy to establish a mandatory federal securities regulation. The result is that the provincial power to regulate securities would be completely eviscerated, which concerns people who think that this process should facilitate a balance in our federalist state. The Chief Justice, during the submissions of the Canadian Banker’s Association, mused that this question might require a “Securities Reference No. 2”. While the Act does not contemplate the use of Paramountcy, I am sure the Court will have this point in mind in formulating its reasons.
While this post has pointed out some concerns about the constitutional arguments in favour of a national securities regulator, I would still be surprised if the Court did not find it to be a valid exercise of the federal government’s powers. It will be interesting to see how the court tailors the General Motors test to address the concern, most strongly raised by LeBel J. at the hearing, that a generous reading of the trade and commerce power will ultimately create a unitary state in respect of economic matters. Whatever the outcome, this reference gives the Court the opportunity to study the balance of federalism in detail, and I look forward to reading the Court’s ruling with interest.