This article was originally published in the Globe and Mail on December 22nd 2011. To view the original article as well as related articles on the globe and mail website, please click here.
Finance Minister Jim Flaherty says Canada will not move ahead with its proposed Securities Act in light of the Supreme Court of Canada’s decision to declare it unconstitutional.
“We have the decision and we will respect it. It is clear we cannot proceed with this legislation,” said Mr. Flaherty in a brief statement circulated by his office. “We will review the decision carefully and act in accordance with it.”
The Supreme Court unanimously declared the proposed Act unconstitutional, siding with provinces that insisted the day-to-day regulation of securities markets does not belong in federal hands.
Mr. Flaherty had asked for the court’s opinion on the constitutionality of the proposed law, arguing that the lack of a uniform national body to regulate securities trading was a glaring weakness in Canada’s financial system.
Ontario, where the majority of Canada’s securities trading takes place, was the only province to side with Ottawa’s approach.
Several other provinces argued that the existing system – in which individual regulators work together to ensure common national standards – is enough to protect investors and the Canadian economy.
In its opinion – which is not a judgment because it was simply asked by Ottawa to clear up the question of constitutionality – the Supreme Court notes that it is not weighing in on whether a national security regulator would be a better option in terms of public policy.
“The courts do not have the power to declare legislation constitutional simply because they conclude that it may be the best option in terms of public policy,” the court states.
The Supreme Court’s decision marks the third time courts have ruled against Ottawa in this case. Appeals courts in Quebec and Alberta previously came to the same conclusion.
Canada’s argument that – in light of lessons learned from the 2008 economic crisis – a national regulator is needed to prevent systemic risk to the financial system appears to have found some sympathy among the judges, but not enough to sway the final decision.
“Aspects of the [proposed federal Securities Act], for example those aimed at management of systemic risk and at national data collection, appear to be directly related to the larger national goals which the Act proclaims are its raison d’être. However, important as these elements are, they do not, on the record before us, justify a complete takeover of provincial regulation,” the court states.
Ottawa had argued that the federal Constitutional power over trade and commerce trumped the provincial constitutional authority over the regulation of securities markets. Provinces outside of Ontario successfully argued that securities regulation falls under their constitutional authority over the regulation of property and civil rights.
Still, the court suggests there may still be room for a federal law that recognizes these provincial powers over securities regulation – but also the need to address some aspects nationally.
“It is not for the Court to suggest to 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,” the court states, noting that other federations are able to resolve such governance questions via “co-operative solutions.”
“Co-operation is the animating force. The federalism principle upon which Canada’s constitutional framework rests demands nothing less.”
Several groups that argued in favour of the proposed Securities Act – such as the Canadian Bankers Association and the Investment Industry Association of Canada – insisted the ruling was positive because it confirmed Ottawa has at least some role to play in securities regulation.
They pointed to the court’s language around systemic risk and data collection as examples of areas where Ottawa could still pursue a national regulator that incorporates the provincial authority to regulate day-to-day transactions.
“What this does is set the constitutional platform for us to move forward and actually build a national regulator for Canada, which is essential for our capital markets,” said Ian Russell, President and CEO of the Investment Industry Association of Canada.
The seniors advocacy group CARP issued a statement expressing disappointment with the ruling, noting that its members were looking forward to improved investor protection via stronger investigative powers under the proposed national body.
“Now the provinces, especially those that opposed the national body, must step up and demonstrate how they would replace that vital investor protection,” said Susan Eng, CARP’s vice-president for advocacy.
Quebec’s business leaders were quick to applaud the decision. (Read more on Quebec’s reaction here)
A coalition of Quebec companies and business leaders headed by the provincial government said the decision was a major victory “across the board” for the existing decentralized system of harmonized regulation among the provinces and territories.
The province is now urging Ontario to embrace the court decision and join the other provinces to reinforcing the current system.
“It sends a signal to Ontario that it should join the existing provincial system,” said the coalition’s spokesperson Françoise Bertrand, who is president of the Quebec Federation of Chambers of Commerce.
According to the Quebec group, which included business leaders such as media giant Quebecor Inc. the drugstore chain Jean Coutu Inc. and papermaker Cascade Inc. the current system of 13 provincial and territorial regulators offered the best environment for both local businesses and investors.
Ms. Bertrand said the court decision confirms that the existing system works and that provinces have the ability to oversee securities trading while fostering the emergence new businesses.
“We have companies here who issue a small number of shares which were the very foundation of companies such as the Uniprix chain of pharmacies or Couche-Tard convenience stores,” Ms. Bertrand said. “The closer the access is to home the easier it is to exchange views… For businesses that is a valuable asset.”
Ontario is not giving up on the idea of creating a single regulator, said Finance Minister Dwight Duncan, adding that ministry officials are reviewing the Supreme Court decision to assess its full implications for the province.
“The Court has noted that a national regulator can still be attained through joint government action,” Mr. Duncan said in a statement. “Ontario remains committed to working with other governments to find a way to achieve that outcome.”
Later Thursday, Alberta Finance Minister Ron Liepert, who favours the current system, said the province is willing to consider changes to the existing framework, but argued the passport system meets the needs of Canadian businesses.
The passport system allows companies to obtain regulatory approval from their home province or territory, with that approval valid in other jurisdictions participating in the system.
“If someone, whether it is the federal government or other provinces, can identify specific [concerns about the current system], we’re prepared to listen to those concerns,” he told reporters at a Calgary press conference. “If there is any proposed changes… have them come forward with it.”
Alberta, he said, wants the federal government and other provinces to push Ontario to join the passport system.
“We have a very modern securities system that has adapted, has adjusted, and has attempted to be flexible across the country,” he said. “We feel that the system as it stands today is very efficient and is working well for Canadians.”
The Supreme Court’s decision was very clear, Mr. Liepert said. “As far as we’re concerned, securities regulation in Alberta will be no different tomorrow than it was yesterday and probably won’t be any different a year from now.”
Alberta Finance on Wednesday said Mr. Liepert would not speak with reporters and would instead issue a statement after the court delivered its decision. The government changed its mind Thursday morning when the ruling sided with Alberta.
University of Ottawa law professor Errol Mendes, who is editor-in-chief of the National Journal of Constitutional Law, criticized the court for suggesting that somehow a co-operative approach can address risks to Canada’s financial system.
“The Supreme Court does not seem fully aware of the reality of how day to day can give rise to systemic risk,” he wrote in an analysis of the ruling that he provided to the Globe. “The complexity of the financial markets today is dramatically different from the time that the Constitution Act was passed in 1867. Overall, the decision of the Court on the national securities legislation is not a good decision for Canada.”
Philip Anisman, a prominent Toronto securities lawyer who advised the government panel that recommended a national regulator in 2008, said the ruling does not mean the door is closed for good.
Mr. Anisman, who first took on the issue as a summer student working for the government in 1966 and later actually produced draft legislation for Ottawa in 1979, said the Supreme Court’s ruling actually does uphold federal jurisdiction in certain areas, for example, the regulation of “systemic risk.”
And it leaves open the idea that the provinces and Ottawa could co-operatively come up with a new national regulatory regime on their own, he said. Under such a scheme, the provinces would maintain their jurisdiction of securities regulation, but could delegate it to a newly created body.
“The court isn’t saying that the federal government has no jurisdiction,” Mr. Anisman said. “So it doesn’t put an end to it.”
The dean of Toronto’s Osgoode Hall Law School, Lorne Sossin, said the ruling presented a narrow, backward-looking view of federalism and sent a message that the court does not take capital markets seriously.
“I think the Constitution, for the last 80 years or so, we’ve been saying is a living tree. This looks more like a view of the Constitution that’s likely to wither on the vine,” Mr. Sossin said.
He said the court clearly thought it needed to send a message to Ottawa that it should seek to engage in “co-operative federalism” with the provinces, and negotiate a new regulator rather than impose one.
With files from Rhéal Séguin in Quebec City, Carrie Tait in Calgary and Jeff Gray and Karen Howlett in Toronto