On March 31, 2011, the Quebec Court of Appeal released a 4-1 decision finding that the proposed Canadian Securities Act (the "CSA") is unconstitutional.1 The majority decision echoes the recent decision of the Alberta Court of Appeal, which also found the CSA to be beyond federal jurisdiction.2 However, Justice Dalphond of the Quebec Court of Appeal dissented, finding that the CSA is constitutional. Neither of these decisions is the final word on the matter: the Supreme Court of Canada is scheduled to hear arguments on the CSA on April 13th and 14th, 2011, and will ultimately determine its constitutionality. It remains to be seen whether it will adopt the position of the Alberta Court of Appeal and the majority of the Quebec Court of Appeal in finding the CSA unconstitutional, or whether it will agree with the views of Justice Dalphond and conclude that the CSA is within federal authority.
In May 2010, the Government of Canada released the proposed CSA, which provides for the harmonization of the existing provincial and territorial legislation into a single federal statute and creates a national securities regulator. At the same time as releasing the CSA, the federal government referred the question of its constitutionality to the Supreme Court. Shortly after, both the Alberta and Quebec governments submitted similar reference questions to their respective appeal courts, and both courts have found the CSA to be unconstitutional. Three separate judgments were issued by the Quebec Court of Appeal: one from Chief Justice Robert, one from Justices Forget, Bich and Bouchard, and the dissent from Justice Dalphond.
The Constitution Act, 1867, divides certain powers between the provincial and federal governments. The legal issue in all of the references is whether the CSA falls under a provincial or a federal head of power. The provinces have traditionally had jurisdiction over the regulation of the securities industry under their "property and civil rights" head of power. But the federal government argued that it had jurisdiction based on its "trade and commerce" head of power.
The Majority Decision
The majority of the Quebec Court of Appeal first characterized the "pith and substance" of the CSA: Chief Justice Robert defined it as the regulation of trading in securities, and the remaining three Justices found it to be the regulation of the participants in securities markets and the regulation of information in those markets.3 The majority found that, in pith and substance, the CSA could not be meaningfully distinguished from the provincial securities legislation. The federal government argued that certain factors characterized the CSA as federal. For example, the securities market has become interprovincial and international in nature, and securities trading has now become dematerialized. However, the majority found that these factors do not change the pith and substance of the legislation.
Having determined the pith and substance, the majority considered whether the CSA fell under the federal general "trade and commerce" head of power. In prior decisions,4 the Supreme Court of Canada set out five factors that are indicative of legislation validly enacted under the trade and commerce head of power:
- the legislation is part of a general regulatory scheme;
- the scheme is monitored by the continuing oversight of a regulatory agency;
- the legislation is concerned with trade as a whole rather than with a particular industry;
- the legislation is of a nature that the provinces, jointly or severally, would be constitutionally incapable of enacting; and
- the failure to include one or more provinces in a legislative scheme would jeopardize the successful operation of the scheme in other parts of the country.
Like the Alberta Court of Appeal, the majority found that the CSA did not meet the last three factors. First, the majority found that even if the CSA seeks to protect and promote the access of all Canadians and Canadian companies to the capital markets, it does not regulate trade and commerce in general but rather only a particular branch of trade (i.e., securities). Second, the majority found that it was clear the provinces were constitutionally empowered to enact the scheme and had been regulating the industry effectively for decades. Finally, the majority found that there was an inherent contradiction in the CSA: the failure to include a province in the scheme could not jeopardize it because the CSA itself provides for an "opt-in" provision (provinces must opt-in to the national regime).
Justices Forget, Bich and Bouchard also considered the double aspect doctrine, which recognizes that overlapping federal and provincial legislation may both be constitutional. In such a situation, the federal legislation would prevail based on the doctrine of paramountcy. However, they found that the double aspect doctrine could not apply, as both the provincial legislation and the CSA attempt to regulate the same securities market and the same participants in that market in the same manner. The double aspect doctrine was not applicable in this situation, and would be akin to creating a new concurrent field of jurisdiction, which is not consistent with the Constitution Act, 1867. The Alberta Court of Appeal reached a similar conclusion.
The majority therefore concluded that the CSA did not fall under a federal head of power and was unconstitutional (with the exception of a few provisions that were valid based on the federal government's criminal law power). However, unlike the Alberta Court of Appeal, the Quebec Court of Appeal was not unanimous in this finding; Justice Dalphond dissented.
Justice Dalphond characterized the pith and substance somewhat differently than the majority: the regulation of all the participants in a capital market that has become a single, integrated, pan-Canadian market, characterized by mainly interprovincial and international transactions. While the majority placed emphasis on the fact that the provinces have always regulated the securities industry, Justice Dalphond stated that the validity of the CSA had to be determined without heed to the existing provincial statutes. Justice Dalphond's decision emphasizes that the securities industry is not exclusively provincial; at the time of the Constitution Act, 1867, the securities industry was in its infancy and therefore is not even a substantive subject matter addressed by the Constitution Act, 1867. While the evolution of provincial securities legislation demonstrates the provinces have undertaken the regulation of a number of aspects of the capital markets, Justice Dalphond noted that the federal government has similarly moved in this direction. Through banking and federal corporate law heads of power, the federal government has been increasingly enacting provisions regarding shareholders, the take-over of corporations, the compelled acquisition of shares, and so forth. Justice Dalphond stated that, in essence, the federal government has gradually been developing federal securities regulation and the CSA is the ultimate outcome of this movement.
With this background, and noting that the possibility for the federal government to enact general securities regulation has never been excluded by the Supreme Court, Justice Dalphond found that the five-part general trade and commerce power test was satisfied by the CSA:
- the CSA is not seeking to regulate a local transaction or a particular industry, but rather all the participants in the Canadian capital markets;
- finding that the CSA is not concerned with trade as a whole would be to sterilize the general trade and commerce power;
- the fact the provinces can regulate (and have been regulating) numerous aspects of the securities market is not determinative – the issue is whether the CSA can achieve things that provincial regulation cannot; and
- while the majority found that the existence of the opt-in provision was fatal to the CSA, all of the provinces will likely opt-in or adopt similar provisions to those of the federal statute, resulting in a uniform system of regulation across the entire country.
In contrast to the majority (and the Alberta Court of Appeal), Justice Dalphond found that the CSA is not an attempt to takeover a provincial power, but rather a normal legal consequence of the transformation of the Canadian capital markets, which have become integrated, interprovincial and international in nature. As such, Justice Dalphond would have found the CSA to be constitutional under the federal trade and commerce power.
Round III: The Supreme Court of Canada
This decision and the Alberta Court of Appeal's earlier decision provide a good framework for the reference to the Supreme Court. The main issues appear to be: what is the pith and substance of the CSA?; does the CSA satisfy the legal test for the federal trade and commerce power?; and does the double aspect doctrine apply?
Though the Quebec and Alberta decisions are not binding on the Supreme Court, they are important in that they demonstrate how the CSA can be characterized as being within provincial jurisdiction. The decisions no doubt will be relied on by parties opposing the CSA. However, Justice Dalphond's dissenting reasons provide an alternative perspective. His approach places more emphasis on the pan-Canadian and international nature of securities trading, rather than the narrower approach seen in the other judgments, and the federal government will undoubtedly, in part, rely on this characterization of the legislation. The final round remains with the Supreme Court.
1. 2011 QCCA 591.
2. Reference re Securities Act (Canada), 2011 ABCA 77.
3. The Alberta Court of Appeal found that the pith and substance of the CSA is "the regulation of the participants in the public capital markets in Canada, and transactions relating to the raising of capital."
4. See General Motors v. City National Leasing,  1 S.C.R. 641.
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