Towards a National Security Regulator

I had always presumed, erroneously, that all those entering the legal field would have some modicum of interest in public policy, equity issues, and promoting the rule of law. A significant chunk of the profession certainly do share those concerns, even while differing in the positions they may take.

But I was bewildered by those I encountered early in my legal education who simply were indifferent towards politics or any legal topic that did not directly impact their professional pursuits. I could only assume that such an existence was a by-product of a lifestyle and existence that was not threatened or challenged in any way.

For these few specimens with singular pursuits there was one topic that did appear to peak their interest – the possibility of a national securities regulator. The creation of a single securities regulator would presumably create efficiency, expediency, and simplicity, and would likely make the jobs of any lawyers working in this area much easier. It was only in this context that the normally tepid and tedious would come to life over something so inane as the Margarine Reference.

Proposals for a national security exchange are not new in Canada. The Royal Commission on Price Spreads proposed the creation of an investment securities board in 1935, and several proposals were considered throughout the 1960s. The Department of Consumer and Corporate Affairs released a study in 1979, the Proposals for a Securities Market Law for Canada, that provided several mechanisms through which this could e achieved.

However, a 1985 Royal Commission on the Economic Union and Development Prospects for Canada resisted any changes to the regulation of stock markets by the provinces, even while the premiers in Atlantic provinces called for a federal regulator in 1994. Further proposals in 2003 and 2006 culminated in a 2009 report that led the federal government to introduce a proposed regime through the Budget Implementation Act, 2009, S.C. 2009, c. 2 that would implement a national securities regulator.

The Alberta Court of Appeal thoroughly rejected the proposal as unconstitutional in 2011, stating at para 48 that it was an intrusion of the federal government into an area long occupied by the provincial governments. The appropriate approach towards doing so according to the court would be through negotiations with the provinces.

A similar decision by the Quebec Court of Appeal also found the proposal to be unconstitutional, while making exceptions for the criminal offences elements and interprovincial regulation of securities.

Ultimately the matter was referred to the Supreme Court of Canada in 2011 in the Reference re Securities Act, where the Court held that the draft Act was not valid under the general branch of federal powers to regulate trade and commerce. However, the federal government had only invoked the general trade and commerce power under s. 91(2) of the Constitution Act, 1867, and not the interprovincial commerce branch of this power.

Citing General Motors of Canada Ltd. v. City National Leasing, the Court held that the general branch of this power must sufficiently engage the national interest in a manner that is distinct and different from the provincial concerns. The area of securities law, despite becoming increasingly important over the years, has not changed so much as to be completely transformed, even when considering the preservation of capital markets for the Canadian economy.

The Court did not however shut the door completely on this idea, stating,

[130] While the proposed Act must be found ultra vires Parliament’s general trade and commerce power, a cooperative approach that permits a scheme that recognizes the essentially provincial nature of securities regulation while allowing Parliament to deal with genuinely national concerns remains available.

[131] The various proposals advanced over the years to develop a new model for regulating securities in Canada suggest that this matter possesses both central and local aspects. The same insight can be gleaned from the experience of other federations, even if each country has its own constitutional history and imperatives. The common ground that emerges is that each level of government has jurisdiction over some aspects of the regulation of securities and each can work in collaboration with the other to carry out its responsibilities.

[132] It is not for the Court to suggest to the governments of Canada and the provinces the way forward by, in effect, conferring in advance an opinion on the constitutionality on this or that alternative scheme. Yet we may appropriately note the growing practice of resolving the complex governance problems that arise in federations, not by the bare logic of either/or, but by seeking cooperative solutions that meet the needs of the country as a whole as well as its constituent parts.

[133] Such an approach is supported by the Canadian constitutional principles and by the practice adopted by the federal and provincial governments in other fields of activities. The backbone of these schemes is the respect that each level of government has for each other’s own sphere of jurisdiction. Cooperation is the animating force. The federalism principle upon which Canada’s constitutional framework rests demands nothing less.

Following this reference, David Johnston, Kathleen Rockwell & Cristie Ford note in the Allard Research Commons that the provinces were likely to continue to increase their cooperation, as each recognize that they share many of the fundamental regulatory goals of fair and efficient capital markets, and promoting proper protection for investors. They also suggested that the federal government could attempt to use another head of power, or create a new scheme that cooperates and coordinates with the province to minimize intrusion on day-to-day aspects of securities regulation which are clearly within the provincial jurisdiction.

To keep engaged those most dispassionate students of the law, the government did indeed make further attempts to create a constitutionally valid regime, and the solution was indeed politically and legally elegant. Through an agreement between the federal government and some of the provinces and territories (Ontario, British Columbia, Saskatchewan, New Brunswick, Prince Edward Island and Yukon), a Cooperative System for national regulation of capital markets was devised through a Model Provincial Act and Draft Federal Act. The proposed regime was again put to the Supreme Court of Canada, and on Nov. 9, 2018, received unanimous approval of constitutionality in the Reference re Pan‑Canadian Securities.

The manner in which this proposed scheme remained constitutional was to delegate the day-to-day aspects of the securities trade to the Model Provincial Act, while the Draft Federal Act focuses on preventing and managing systemic risks, including criminal offences relating to financial markets. The Draft Federal Act also creates a national securities regulator that would administer the coordinated regime, and would be overseen through joint representatives of each level of government. The constitutionality of the regime was strengthened by the requirement that any regulations created by the national securities regulator would be approved by the Council of Ministers before coming into force. In other words, surmounting the constitutional issues was only possible through a power sharing agreement, and a recognition that cooperation serves the best interests of all of the governments involved.

Prior to this decision, however, the Quebec Court of Appeal held that this regime was unconstitutional because it effectively fettered the sovereignty of the participating provinces and territories. Allowing certain provinces to create an effective veto over federal regulations would be inconsistent with the concept of federalism.

The unanimous Court overturned this finding, ruling that the agreement limits the role of the Council of Ministers to amendments to the Model Provincial Act. This Act does not have any legal effect until adopted formally by the provincial legislature, and the provinces would be theoretically be free to reject the proposed statutes or any amendments if they so choose,

[54] Parliamentary sovereignty is a foundational principle of the Westminster model of government, and it is based on a recognition that the legislature’s power to make laws exists without any legal limits or constraints (P. J. Monahan, B. Shaw and P. Ryan, Constitutional Law (5th ed. 2017), at p. 85). In its traditional form, parliamentary sovereignty means that the legislature has the exclusive authority to enact, amend, and repeal any law as it sees fit, and that there is no matter in respect of which it may not make laws. As explained by A.V. Dicey:

The principle of Parliamentary sovereignty means neither more nor less than this, namely that Parliament thus defined has, under the English constitution, the right to make or unmake any law whatever; and, further, that no person or body is recognized by the law of England as having a right to override or set aside the legislation of Parliament. [Emphasis added.]

(A.V. Dicey, Introduction to the Study of the Law of the Constitution, (10th ed. 1959), at pp. 39-40.

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[56] While the principle of parliamentary sovereignty is an equally important feature of Canadian law, various aspects of our written Constitution have qualified the basic Diceyan rule that Parliament has the power “to make or unmake any law whatever”. One such qualification lies in the federal structure of the Canadian state, which restricts the subject matters over which each legislature has jurisdiction. The distribution of legislative power between Parliament and the provincial legislatures is set out in Part VI of the Constitution Act, 1867. Since neither level of government has the power to legislate in respect of matters that fall within the exclusive competence of the other, the sovereignty of Parliament and of the provincial legislatures has been limited in Canada since Confederation…

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[59] An important corollary to parliamentary sovereignty is the rule that the executive cannot unilaterally fetter the legislature’s law-making power. This rule was illustrated in Reference re Anti-Inflation Act, 1976 CanLII 16 (SCC), [1976] 2 S.C.R. 373, in which this Court was called upon to decide, among other things, whether an intergovernmental agreement between the governments of Canada and Ontario that purported to render certain portions of the federal Anti-Inflation Act, S.C. 1974-75-76, c. 75, applicable to that province’s public sector could in fact achieve this end…

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[62] When an action of the executive branch appears to clash with the legislature’s law-making powers, parliamentary sovereignty can be invoked for the purpose of determining the legal effect of the impugned executive action, but not its underlying validity. For example, the executive of one province may act within the confines of its constitutional authority when entering into an intergovernmental agreement with that of another province. If a term in such an agreement purports to bind the province’s legislature, the result is not that the agreement itself is constitutionally invalid; the principle of parliamentary sovereignty simply means that the legislature’s hands cannot be tied, and therefore that the impugned term is ineffective. In other words, because the legislature’s law-making powers are supreme over the executive, the latter cannot bind the former. The result is that any executive agreement that purports to fetter the legislature is not inherently unconstitutional, but will quite simply not have the desired effect.

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[67] In short, the foregoing makes clear that the principle of parliamentary sovereignty is precisely what preserves the provincial legislatures’ right to enact, amend and repeal their securities legislation independently of the Council of Ministers’ approval. Therefore, even if the Memorandum actually purported to fetter this legislative power, it would be merely ineffective in this regard (since it cannot bind the legislature), and not constitutionally invalid.

Although nobody appeared for the intervener on behalf of the Attorney General of Nova Scotia, the intervener from Quebec relied heavily on a case from this province in 1950, dealing with the delegation of federal jurisdiction to the provincial legislature. Although Quebec acknowledged that the powers here were not being delegated to a traditional provincial legislature, they claimed it would effectively exercise legislative powers. Because the legal force and effect still only comes into play with provincial adoption of legislation, the Court held this was not a delegation.

Finally, the Court confirmed the Draft Federal Act to be within the general trade and commerce power, as it does address matters of genuine national importance and scope relating to trade as a whole. They emphasized that the effective management of systemic risk required market-wide regulation, and the double aspect doctrine allows for concurrent legislation between both levels of government.

What makes this decision particularly interesting is that it is more than just salient for its legal insights, and delves into the political realities of Canada as well. The political representatives of the participating provinces only currently consider national uniformity in securities law as a shared and desirable goal. If the political will of the people in these provinces decides differently in the future, it would have a direct impact on the Cooperative System.

The next steps will ultimately be political. Quebec has already indicated that it will not join, citing their need for autonomy and own expertise in securities regulation. The question will be whether the other 6 provinces and territories will join, which may leave Quebec in a precarious financial situation.

It also doesn’t mean that everyone will be satisfied with the proposed scheme. Some are already calling for a federal investor advisory panel, as is already implemented in Ontario, to provide greater consumer protections. Others have suggested that the single regulator model may harm entrepreneurs, small businesses, and businesses generally. The CD Howe Institute expressed reservations over a system that would lack an ability to impose regulatory authority across Canada.

Irrespective of where this notion of a national security regulator goes from here, the Cooperative System is an intriguing and innovative execution of political diplomacy, and unprecedented cooperation between the levels of government in the area of securities law. For that alone, the Reference re Pan‑Canadian Securities will take its place among the other notable constitutional cases of margine and secession.