In a recent decision, a majority of the Quebec Court of Appeal held that the latest proposal to create a national securities regulator was unconstitutional.
The Spectre of Federalism
Unlike every other G-20 country, Canada does not have a national securities regulator. There is a long history of attempts to change this. As early as 1935, the Royal Commission on Price Spreads recommended the formation of a national securities board. In 2011 the issue came before the Supreme Court of Canada in the Securities Reference. The Supreme Court held that a draft Canadian Securities Act was outside of federal jurisdiction, but kept the door open to federal regulation by recognizing that the presence of systemic risks may permit federal jurisdiction.
In response, the federal government developed a scheme involving a memorandum of agreement (MOA) voluntarily entered into by provinces and territories. The MOA provides that participating provinces would adopt parallel provincial legislation delegating the authority to regulate the capital markets to a national regulator. The provincial legislation would be accompanied by federal legislation delegating further powers to the same regulator. The national regulator would be overseen by a Council of Ministers comprised of provincial ministers and the Canadian Minister of Finance. Ontario, British Columbia, New Brunswick, Prince Edward Island , Saskatchewan and the Yukon were on board.
Quebec was not and brought a reference before the Quebec Court of Appeal. At issue was: 1) whether the MOA respected the constitutional limits for delegation of provincial authority; and 2) whether the companion federal legislation was within federal jurisdiction. Quebec argued that both the MOA and the federal legislation breached of the division of powers set out in the Constitution.
Four of the five Justices hearing the reference held that the MOA fettered the parliamentary sovereignty of the provinces by requiring participating provinces to adopt decisions made by the Council of Ministers. The MOA required the provinces to enact amendments and regulations proposed by a Council of Ministers and required provinces to provide notice before withdrawing from the MOA. This imposed unconstitutional limits on the parliamentary sovereignty of participating provinces.
The MOA also granted certain provinces an effective veto over decisions of the Council of Ministers. This undermined Canada’s argument that the MOA was grounded in federal jurisdiction over systemic risks of a national scale. In the view of the majority, how could a matter that transcended interests of a purely local and provincial nature, provide for a provincial veto?
The majority also concluded that the federal legislation itself was within federal jurisdiction if the provisions setting out the role and powers conferred to the Council of Ministers were removed.
The Dissenting Opinion
Justice Schrager, J.A., disagreed with the majority and held that both the federal and provincial laws were intra vires. Justice Schrager agreed with the majority that the MOA may constitute illegal delegation, but the Court did not have jurisdiction to review the MOA—which was not a law but an intergovernmental agreement. Regulations passed through the procedures set out in the MOA may be subject to court scrutiny, but the MOA itself was not.
Justice Schrager held that there was no breach of provincial sovereignty if only the legislation was under scrutiny. The provinces could choose to amend or repeal the provincial legislation at any time. This would be contrary to the agreement in the MOA, but the provinces retained the authority to breach it. Since the reference question concerned the MOA, Schrager J.A. declined to answer the question as framed.
Justice Schrager also disagreed with the majority’s finding that the provisions of the federal legislation setting out the role and powers of the Council of Ministers were unconstitutional. Jutsice Schrager held that Parliament has the power to delegate in the manner that it chooses, as long as Parliament retains the sovereignty to resile from the delegation.
The Quebec Court of Appeal has dealt another blow to Canada’s efforts to create a national securities regulator. While the Supreme Court in the 2011 Securities Reference provided some hope that a federal securities regulator may be constitutional, the Quebec Court of Appeal indicated no such openness. According to the majority of the Quebec Court of Appeal, even a voluntary agreement between the provincial and federal governments to enact parallel legislation and delegate authority to the same regulator would violate the division of powers set out in the Constitution. It remains to be seen whether this causes Canada to return yet again to the drawing board or whether further litigation awaits. After nearly a century of attempts to create a national securities regulator, this will not be the end of it.