Canada: Supreme Court Hears Arguments on National Securities Regulator

Copyright 2011, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Litigation & Dispute Resolution, April 2011

On April 13 and 14, 2011, the Supreme Court of Canada heard arguments in the reference on the constitutionality of Canada's proposed national Securities Act (the Proposed Act) (see June 2010 Blakes Bulletin: Canadian Government Releases Proposed Canadian Securities Act for a background to the Proposed Act.). With arguments completed, it is now left to the Supreme Court to render a decision that, one way or the other, will determine the future of securities regulation in Canada. In advance of that forthcoming decision, Blakes has revisited the history of this issue, summarized the events to date, and relayed some impressions from the reference hearing itself.

BACKGROUND – WHAT ALL THE FIGHTING IS ABOUT

The Constitutional Context

The basis of the dispute over the constitutionality of a federal securities regulator primarily stems from the overlap between the provincial power over "property and civil rights" and the federal power over "trade and commerce." Since, in practice, "trade and commerce" is carried out through contracts relating to "property and civil rights," there is a long history of constitutional dispute between the provinces and the federal government concerning the division between these two powers.

For several decades following Confederation, courts resolved these disputes by decisively favouring the provincial power over "property and civil rights" at the expense of "trade and commerce," to the point that by the early 20th century, the federal power had been rendered virtually a nullity. In more recent decisions over the latter half of the century, however, the federal power has been somewhat reinvigorated, and has been recognized as having at least some real substantive content. In particular, the "trade and commerce" power has been recognized as potentially applying to the regulation of matters that, among other features: involve trade as a whole rather than a particular industry, cannot be regulated by the provinces acting individually or together, and cannot be successfully regulated in the event that one or more provinces are not included in the regulatory scheme.

Securities Regulation in Canada

Canadian provinces began enacting securities-related legislation in the late 19th century. In a reflection of the growing role of securities in Canadian society, this legislation has continually evolved to become more comprehensive. Today, the provincial legislation takes its primary form in the various provincial securities acts. Provincial jurisdiction over securities matters has long been recognized as valid under the provincial "property and civil rights" power, and it is now settled law that the provinces possess such a jurisdiction.

On the federal side, on the other hand, prior to the Proposed Act, no attempt has been made to enact comprehensive securities regulatory legislation. Consequently, the question of whether the federal government has the concurrent authority to regulate securities has not yet been conclusively answered. In particular, it is an open question whether the "trade and commerce" power is broad enough to encompass federal securities regulation.

THE BATTLE OVER THE PROPOSED ACT

On May 26, 2010, the Government of Canada published the Proposed Act and directed the reference on its constitutionality to the Supreme Court. Quebec and Alberta, the two provinces most strongly opposed to federal regulation, had previously directed references of their own to their respective courts of appeal, in which they had asked those courts to assess the constitutionality of the federal initiative to regulate securities.

Quebec and Alberta Weigh In

The Quebec and Alberta references were both argued in January 2011. On March 8, 2011, the Alberta Court of Appeal rendered the first reference decision, and unanimously found the Proposed Act unconstitutional. More information on the Alberta decision can be found in the March 2011 Blakes Bulletin: Court Rules Proposed National Securities Legislation Is Unconstitutional. The Alberta Court was not persuaded that either the "pith and substance" ("nature") of securities regulation, or the scope of the federal "trade and commerce" power, were sufficiently broad to give the federal government the right to regulate securities.

The Quebec Court of Appeal released its decision on March 31, 2011, with a majority of the Quebec Court echoing their Alberta counterparts and also finding the Proposed Act unconstitutional. With respect to the question of "pith and substance," the majority interpreted the nature of securities regulation as concerning primarily "trading in securities," rather than adopting a broader view that would have tended to favour federal arguments. In respect of the related question of the breadth of the "trade and commerce" power, the majority declined to find the power broad enough to encompass securities regulation. In doing so, the majority expressed deep concerns that the precedent set by recognizing federal government jurisdiction over securities would lead to a more general erosion of provincial powers and would upset the balance of federalism.

In a dissenting opinion, Justice Dalphond adopted a much broader view of the "pith and substance" of securities regulation, describing it as being the regulation of all participants in a single, integrated, pan-Canadian market. On the constitutional question of the balance of powers, Justice Dalphond downplayed concerns about allowing different levels of government to engage in overlapping regulation. On the basis of this reasoning, Justice Dalphond found the Proposed Act to be a constitutional exercise of the federal "trade and commerce" power.

The Battle Lines Are Drawn

In light of the above context, as the Supreme Court reference approached, it had become clear that the dispute over the Proposed Act would turn on two central issues.

First, the verdict on the Proposed Act would turn in large part on the view taken as to the "pith and substance" of securities regulation. For their part, opponents of the Proposed Act would seek to reiterate the consensus in the lower court decisions that the fundamental "pith and substance" of securities regulation simply concerns a series of contracts for "trading in securities." On the other side, advocates for the Proposed Act would seek to convince the Supreme Court that, as a result of trends ranging from computerization to globalization, the nature of securities and securities regulation has become something inherently broader and more pervasive than just a series of purchase and sale contracts.

Second, the validity of the Proposed Act would turn on the question of the true breadth of the "trade and commerce" power. In tandem with their broad view of the "pith and substance" of securities, advocates for the Proposed Act would make the constitutional argument that truly effective securities regulation can only be undertaken at the federal level and that, as such, "trade and commerce" properly encompasses securities regulation. For their part, the opponents of the Proposed Act would respond by raising concerns about whether the recognition of a federal jurisdiction over securities would trigger an ongoing erosion in provincial powers and risk upsetting the balance of federalism.

The Supreme Court Reference Hearings

The Supreme Court reference was conducted over two days. Day one was split between submissions for the main parties, with representatives of the Department of Justice arguing the federal side and the Attorneys General of Quebec and Alberta making arguments in opposition. Day two was reserved for a series of intervenors, including other provinces and several industry groups.

The comments and questions made by the justices over the course of the hearing may have given some indication of their thinking on the major issues. In particular, on the "pith and substance" question, the justices generally seemed more willing than their Quebec and Alberta counterparts to accept a broad view of the "nature" of securities regulation. For example, several of their comments and questions related to systemic risk, which would suggest a view of securities regulation involving more than simply "trading in securities."

On the other hand, the questions and comments from the bench suggested a high degree of concern that, in recognizing a federal jurisdiction over securities under the "trade and commerce" power, the Supreme Court would create a destabilizing precedent leading to an ongoing erosion in provincial powers. Whatever the Supreme Court's ultimate decision, it is likely that such concerns about creating a constitutional "slippery slope" will be central to the court's reasoning.

The Supreme Court's decision is not likely to be released before the late fall of 2011. Blakes will publish a further bulletin upon the release of the decision.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.