12 November 2018By Michael Bookman
Canada is one of the only industrialized countries in the world to lack a national securities regulator. That may be about to change after the Supreme Court of Canada (“SCC”) concluded in Reference re Pan Canadian Securities Regulation1 that a proposed national cooperative for the regulation of the capital markets was indeed constitutional. The SCC has given the green light to a cooperative capital markets regulatory system fashioned collectively among some of the provinces and territories and the federal government.
This decision follows on the heels of previous unsuccessful attempts by the federal government to legislate a national securities regulator, including in Reference re Securities Act.2
In this Reference, the SCC examined the constitutionality of a recent proposal by the federal government and the governments of Ontario, British Columbia, Saskatchewan, New Brunswick, Prince Edward Island and Yukon to implement a national cooperative capital markets regulatory system (the “Cooperative System”).
As proposed, the structure of the Cooperative System was to include model provincial and territorial statutes to be adopted that regulated the day-to-day aspects of the securities trade, a draft federal statute that would be aimed at managing systemic risk and which would establish criminal offences relating to financial markets, and a national securities regulator that would be overseen by the federal Minister of Finance and the ministers responsible for capital markets regulation in the participating provinces.
The Reference to the Quebec Court of Appeal: The Quebec Court of Appeal below was split. The majority concluded that the Cooperative System was unconstitutional because the process for amending the model provincial statute interfered with the provincial legislative powers. The majority also took issue with certain provisions pertaining to the making of federal regulations under the draft federal statute.
The SCC Found the Cooperative System to be Constitutional: The unanimous decision authored by the entire SCC per curiam held that the Cooperative System does not improperly interfere with provincial authority to legislate in relation to property and civil rights (s.92(13)) and matters of a local nature (s. 92(16)). Further, the SCC held that the subject matter of the draft federal statute fell within Parliament’s trade and commerce power pursuant to s. 91(2) of the Constitution Act, 1867.
A key difference was identified in this proposed model as compared to that proposed by the federal government in the 2011 Reference re Securities Act. Unlike the proposed legislation in the 2011 Reference, the draft federal statute in the Cooperative System does not purport “to regulate, on an exclusive basis, all aspects of securities trading in Canada”.3 It does not legislate or regulate all of the day-to-day aspects of securities trading, the requirements for the registration of dealers, prospectus filing, or disclosure obligations. The Court held that the intention of the draft federal statute is not to replace or displace provincial and territorial securities legislation. It was instead designed to complement these statutes by addressing economic objectives that are considered to be national in character.
As the SCC held, “[t]he regulation of such matters, which are irreducible to individual transactions, specific industries or local markets, will necessarily transcend local concerns and must therefore, by their very nature, ‘be regulated federally, or not at all’.4
The Takeaway: There are still open questions that arise from this decision regarding when or whether various jurisdictions will join or reject the Cooperative System. But this decision will likely be seen as a victory for the capital markets in light of the potential for increased efficiency and harmonization of securities legislation and regulation and for further cooperative ventures between the federal, provincial, and territorial legislative bodies in securities law.
1 2018 SCC 48, [Reference re Pan-Canadian].
2 2011 SCC 66, [Reference re Securities Act].
3 See Reference re Pan-Canadian, at para. 95; Reference re Securities Act, at para. 106.
4 Reference re Pan-Canadian, at para. 101 (citations omitted).