Today the Supreme Court of Canada (the Supreme Court) released its much-anticipated decision on the reference regarding the proposed Canadian Cooperative Capital Markets Regulatory System, finding that the proposed national regulatory system is constitutional.
Previous Attempts to Create National Securities Regulator
It has been suggested by the a number of governments, academic commentators and others that a national securities system in Canada would protect investors, foster fair, efficient and competitive capital markets, and contribute to the integrity and stability of Canada’s financial system. As a result, various attempts have been made to centralize the regulation of securities in Canada with limited success. While certain interprovincial initiatives aimed at coordinating regulatory functions have succeeded – such as the adoption by some provincial securities commissions of various national and multilateral instruments, and the implementation of the “passport regime” – attempts to create a national securities regulator have failed.
The last major attempt to create a national securities regulator was in 2009, when the Federal government developed the Proposed Canadian Securities Act. The system was designed to function on an opt-in basis such that each province retained its right to choose to participate or to keep its existing regulatory framework.
The constitutionality of the Proposed Canadian Securities Act was considered by the Supreme Court in 2011 in Reference re Securities Act, in which the federal government sought the Supreme Court’s opinion as to whether the proposed legislation would constitute a valid exercise of Parliament’s power over trade and commerce pursuant to s. 91(2) of the Constitution Act, 1867 (the Constitution). The Supreme Court held that the proposed legislation would not be a valid exercise of Parliament’s power as it would be outside its sphere of legislative authority. However, the Supreme Court acknowledged that certain aspects of the proposed legislation may be constitutional as falling within the federal sphere. In particular, although the Supreme Court found the Proposed Canadian Securities Act to be unconstitutional, it recognized that a scheme based on a cooperative approach to regulating securities in Canada might be constitutional, if it allowed provinces to address issues falling within their powers over property and civil rights and matters of local nature, while leaving room for Parliament to address genuinely national concerns.
After the Supreme Court’s decision on the 2011 reference, the Federal government and the governments of Ontario, BC, Saskatchewan, New Brunswick, PEI and Yukon developed a proposed national cooperative system for the regulation of capital markets in Canada, the Cooperative Capital Markets Regulatory System (the Cooperative System). The Cooperative System’s framework is set out in an agreement between the federal government and participating territorial and provincial governments (the Memorandum).
Included in the Cooperative System are:
- The Model Provincial Act , which deals with day-to-day aspects of securities trade. Section 5.5 of the Memorandum provides that any proposals to amend the Model Provincial Act are subject to a vote and must be approved by at least 50% of the members of the Council of Ministers (discussed below) and by the members representing the Major Capital Markets Jurisdictions (presently Ontario and BC).
- The Draft Federal Act (DFA), which prevents and manages systemic risk and establishes criminal offences relating to financial markets. This would complement uniform provincial and territorial securities legislation.
- A National Securities Regulator (the Authority), which would be a single operationally independent capital markets regulatory authority to which the federal government and the participating provinces would delegate certain regulatory powers. The Authority would have the power to make regulations but any regulations proposed by the Authority must be approved by the Council of Ministers before coming into force.
- The Council of Ministers, which would comprise ministers responsible for capital markets regulation in each participating province and the federal Minister of Finance.
The Decision of the Quebec Court of Appeal
The Government of Quebec referred two questions pertaining to the Cooperative System to the Quebec Court of Appeal:
1. Does the Constitution of Canada authorize the implementation of pan-Canadian securities regulation under the authority of a single regulator, according to the model established by the most recent publication of the “Memorandum of Agreement regarding the Cooperative Capital Markets Regulatory System”?
The majority of the Court of Appeal answered this question in the negative and held that the Cooperative System would be unconstitutional. The Court of Appeal held that the process for amending the Model Provincial Act, and the requirement for any amendments to be approved by the Council of Ministers (Memorandum, s. 5.5) effectively fettered the sovereignty of the participating provinces’ and territories’ respective legislatures. The process for making federal regulations set out in the DFA and Memorandum was deemed inconsistent with the principle of federalism, given that it allowed certain provinces to veto the adoption of a federal regulation.
2. Does the most recent version of the draft of the federal “Capital Markets Stability Act” exceed the authority of the Parliament of Canada over the general branch of the trade and commerce power under subsection 91(2) of the Constitution Act, 1867?
The Court of Appeal answered this question in the negative. The Court of Appeal recognized that although the DFA was within Parliament’s jurisdiction under the general trade and commerce power, the provisions setting out the role of Council of Ministers in making the federal regulations (ss. 76-79) were not constitutional and, unless removed, would render the entire DFA unconstitutional.
(For more details on the decision of the Quebec Court of Appeal, please see our previous blog post here.)
The Decision of the Supreme Court of Canada
The Attorneys General of Canada, Quebec and British Columbia appealed to the Supreme Court of Canada. The Supreme Court analyzed the two questions referred to the Quebec Court of Appeal and held that that proposed national scheme was constitutional.
A unanimous Supreme Court determined that the proposed pan-Canadian securities regulation is constitutional. In large part, this was based on the Court’s view that the Quebec Court of Appeal had misread or misunderstood the proposed scheme. The Supreme Court found that the proposed scheme would not improperly fetter the legislatures’ sovereignty nor would it entail an impermissible delegation of law-making authority.
Parliamentary sovereignty and the fettering of provincial legislative authority
The Supreme Court held that the terms of the Memorandum do not and cannot fetter the provincial legislatures’ primary law-making authority. The Council of Ministers’ role is limited to proposals for amendments to the Model Provincial Act and the Council is not contemplated to have any formal involvement in the amendment of legislation already enacted by provinces. Further, the Memorandum does not imply that the legislatures of participating provinces are required to implement the amendments to the Model Provincial Act approved by the Council, nor that they are precluded from making any other amendments to their securities laws. These legislatures are free to reject proposed statutes (as amended) if they choose. The definition of the Council cannot be understood as incorporating the voting rules of s. 5.5 into the statutory scheme. The Supreme Court rejected the proposition that the Cooperative System purports to fetter law-making powers of participating provinces’ legislatures.
More broadly, the Supreme Court recognized that the executive is incapable of interfering with the provincial legislatures’ powers to enact, amend and repeal legislation. Parliamentary sovereignty means that Parliament and the provincial legislature are supreme with respect only to matters that fall within their respective spheres of jurisdiction. While the majority of the Quebec Court of Appeal took issue with the Memorandum because it believed that the combined effect of these sections would fetter the sovereignty of the participating provinces’ legislatures, the Supreme Court found that this reflected a misunderstanding of the Memorandum and rests on a flawed premise that the executive signatories are actually capable of binding the legislatures of their respective jurisdictions to implement any amendments as dictated by the Council, and precluding those legislatures from amending their own securities law without Council approval.
The principle of parliamentary sovereignty preserves the provincial legislatures’ right to enact, amend, and repeal their securities legislation independently of the Council’s approval. The Supreme Court found that even if the Memorandum actually purports to fetter this legislative power, it would be ineffective in this regard, rather than constitutionally invalid, given that it cannot bind the legislature.
The Supreme Court did draw attention to the fact that the Memorandum will have political effects distinct from its legal effects. To achieve uniformity, the legislatures of participating provinces would need to enact a statute that mirrors the Model Provincial Act, as amended from time to time. The Council then plays an important political role in the area of securities regulation. According to the Supreme Court, the majority of the Quebec Court of Appeal went a step too far: it rejected the proposition that the Memorandum is merely a political undertaking that is not legally enforceable, instead finding it necessary to assume the Memorandum’s mechanisms will have their intended effect. The Supreme Court held that such an assumption cannot be relied upon.
Delegation of law-making powers
The Attorney General of Quebec argued that the Cooperative System is unconstitutional because of limits on the legislature’s authority to delegate law-making powers to some separate person or body. The Attorney General submitted that the Memorandum obliged the legislature of participating provinces to enact the provisions of the Model Provincial Act into law and to implement any amendments approved by the Council, and that the Memorandum otherwise prohibited participating provincial legislatures from amending that legislation.
The Supreme Court disagreed and held that, while Parliament or provincial legislatures may delegate regulatory authority to make subordinate laws in respect of matters over which it has jurisdiction to another person or body, a government is barred from transferring its primary legislative authority (to enact, amend and repeal statutes) with respect to a particular matter over which it has exclusive constitutional jurisdiction.
The Supreme Court found that the Cooperative System does not allow the Council to bypass provincial legislatures. The Memorandum does not create an unprecedented legislative body through the Council whose establishment goes against the Constitution. The Model Provincial Act will only have force of law if and when its provisions are properly enacted by legislature of a participating province. As such, the Council is and remains subordinate to the sovereign will of the legislatures.
The unanimous Supreme Court agreed that the DFA falls within the general branch of Parliament’s trade and commerce power pursuant to s. 91(2) of the Constitution Act, 1867. The provisions setting out the role of the Council of Ministers in making the federal regulations (ss. 76-79) were not unconstitutional and thus cannot render the DFA unconstitutional.
The Classification of the Draft Federal Act
The Supreme Court found that the pith and substance of the DFA is to control systemic risks having the potential to create material adverse effects on the Canadian economy. It does not relate to the regulation of trade in securities generally. It promotes and protects the stability of Canada’s financial system and protects capital markets, investors and others from financial crimes. The DFA is less broad than the proposed legislation at issue in Reference re Securities Act, limiting the federal government’s role in regulating capital markets to detection, prevention and management of risk to the stability of the Canadian economy and the protection against financial crimes. The intention of the DFA is not to displace provincial and territorial securities legislation, but to complement these statues by addressing economic objects that are considered to be national in character.
The Supreme Court further held that some aspects of securities regulation are actually national in character. Accordingly, Parliament is competent to enact legislation that pursues genuine national goals, including the management of systemic risk. The concept of systemic risk can differentiate matters that are genuinely national in scope from those of local concern.
Using the framework from the decision General Motors of Canada Ltd. v. City National Leasing,  1 S.C.R. 641, the Supreme Court decided that the DFA addresses a matter of genuine national importance and scope that relates to trade as a whole. The federal government’s foray into securities regulation under the DFA is limited to achieving these objectives and this supports the validity of the proposed statute. The Supreme Court determined that the legislation is therefore within parliament’s power over trade and commerce pursuant to s. 91(2) of the Constitution.
Regulations under the Draft Federal Act: ss. 76-79
The Council’s role in making regulations is set out in ss. 76-79 of the DFA. Council’s approval is necessary before a regulation can be made. The mechanism applicable to the approval or rejection of regulations by Council is set out in s. 5.2 of the Memorandum. The majority of the Quebec Court of Appeal held that this, in combination with ss. 76-79, conferred a veto right over proposed federal regulations, which undermines the constitutional foundation of the DFA.
The Supreme Court found nothing problematic about the way in which the DFA delegates power to make regulations to the Authority under the supervision of the Council. The DFA sets out a broad framework for the regulation of systemic risk in capital markets, but delegates extensive administrative powers, including the power to make regulations to the Authority. This delegation is entirely consistent with parliamentary sovereignty since the delegated authority can always be revoked and its scope remains limited and subject to the terms of the governing statute.
The Supreme Court further held that the manner in which the DFA delegates regulation-making powers to the Authority under the oversight of the Council is not problematic from the perspective of federalism or the constitutional division of powers. The delegation of administrative powers in a manner which solicits provincial input is not incompatible with federalism, provided that the delegating legislature has the constitutional authority to legislate in respect of the applicable subject matter.
Finally, the Supreme Court held that the fact that some regulations might never be adopted because of provincial opposition does not change the reality that the regulations that are adopted must be respected by all the provinces if the objectives of the DFA are to be achieved. The fact that the Council is populated with minsters of provincial governments does not invalidate the delegation. Parliament can chose to structure the internal mechanics and approval process of the regulatory body in such a manner as deemed appropriate.
For nearly a century, calls for a Canadian national securities regulator have invariably been squashed by constitutional concerns. While it remains to be seen what will come of the Supreme Court’s most recent decision, this may mark a turning point for Canadian securities law. As the Supreme Court wrote in its conclusion: “It is up to the provinces to determine whether participation is in their best interests. This advisory opinion does not take into consideration many of the political and practical complexities relating to this Cooperative System.”