National Securities Regulator Unconstitutional

Reference re Securities Act 2011 SCC 66 holds the proposed national securities regulatory is unconstitutional. A summary follows:

Pursuant to s. 53 of the Supreme Court Act, the Governor in Council has sought an advisory opinion from the Court as to whether the proposed Securities Act set out in Order in Council P.C. 2010‑667 falls within the legislative authority of the Parliament of Canada.

The preamble of the proposed Act states that its purpose is to create a single Canadian securities regulator.  More broadly, s. 9 states that the purposes of the Act are to provide investor protection, to foster fair, efficient and competitive capital markets and to contribute to the integrity and stability of Canada's financial system.  The Act includes registration requirements for securities dealers, prospectus filing requirements, disclosure requirements, specific duties for market participants, a framework for the regulation of derivatives, civil remedies and regulatory and criminal offences pertaining to securities.  The Act does not unilaterally impose a unified system, but permits provinces and territories to opt in, with the hope of creating an effective unified national securities regulation system.

Canada, joined by Ontario and several interveners, argues that the Act, viewed in its entirety, falls within the general branch of Parliament's power to regulate trade and commerce under s. 91(2) of the Constitution Act, 1867.  Alberta, Quebec, Manitoba, New Brunswick and other interveners argue that the scheme falls under the provincial power over property and civil rights under s. 92(13) of the Constitution Act, 1867 and trenches on provincial legislative jurisdiction over matters of a merely local or private nature (s. 92(16)), namely the regulation of contracts, property and professions.

To determine the constitutional validity of legislation from a division of powers perspective, the pith and substance analysis requires the courts to look at the purpose and effects of the law.  The inquiry then turns to whether the legislation falls under the head of power said to support it.  If the pith and substance of the legislation is classified as falling under a head of power assigned to the adopting level of government, the legislation is valid.  When a matter possesses both federal and provincial aspects, the double aspect doctrine may allow for the concurrent application of both federal and provincial legislation.

 Parliament's power over the regulation of trade and commerce under s. 91(2) of the Constitution Act, 1867 has two branches — the power over interprovincial commerce and the general trade and commerce power.  Only the general trade and commerce power is invoked by Canada in this reference.  This power, while on its face broad, is necessarily circumscribed.  It cannot be used in a way that denies the provincial legislatures the power to regulate local matters and industries within their boundaries.  Nor can the power of the provinces to regulate property and civil rights within the provinces deprive the federal Parliament of its powers under s. 91(2) to legislate on matters of genuine national importance and scope — matters that transcend the local and concern Canada as a whole.

 As held in General Motors, to fall under the general branch of s. 91(2), legislation must engage the national interest in a manner that is qualitatively different from provincial concerns.  Whether a law is validly adopted under the general trade and commerce power may be ascertained asking (1) whether the law is part of a general regulatory scheme; (2) whether the scheme is under the oversight of a regulatory agency; (3) whether the legislation is concerned with trade as a whole rather than with a particular industry; (4) whether it is of such a nature that provinces, acting alone or in concert, would be constitutionally incapable of enacting it; and (5) whether the legislative scheme is such that the failure to include one or more provinces or localities in the scheme would jeopardize its successful operation in other parts of the country.  These indicia of validity are not exhaustive, nor is it necessary that they be present in every case.

Here, the main thrust of the Act is to regulate, on an exclusive basis, all aspects of securities trading in Canada, including the trades and occupations related to securities in each of the provinces.  The purpose of the Act is to implement a comprehensive Canadian regime to regulate securities with a view to protect investors, to promote fair, efficient and competitive capital markets and to ensure the integrity and stability of the financial system. Its effects would be to duplicate and displace the existing provincial and territorial securities regimes.

Applying the settled case law, the Act, viewed in its entirety, cannot be classified as falling within the general trade and commerce power.  Its main thrust does not address a matter of genuine national importance and scope going to trade as a whole in a way that is distinct and different from provincial concerns.  Canada has not established that the area of securities has been so transformed that it now falls to be regulated under the federal head of power.  The preservation of capital markets to fuel Canada's economy and maintain Canada's financial stability is a matter that goes beyond a specific industry and engages trade as a whole.  However, the Act is chiefly concerned with the day‑to‑day regulation of all aspects of contracts for securities within the provinces, including all aspects of public protection and professional competences.  These matters remain essentially provincial concerns falling within property and civil rights in the provinces and are not related to trade as a whole.  Specific aspects of the Act aimed at addressing matters of genuine national importance and scope going to trade as a whole in a way that is distinct from provincial concerns, including management of systemic risk and national data collection, appear to be related to the general trade and commerce power.  With respect to these aspects of the Act, the provinces, acting alone or in concert, lack the constitutional capacity to sustain a viable national scheme.  Viewed as a whole, however, the Act is not chiefly aimed at genuine federal concerns.  It is principally directed at the day‑to‑day regulation of all aspects of securities and, in this respect, it would not founder if a particular province failed to participate in the federal scheme.

In sum, the proposed Act overreaches genuine national concerns.  While the economic importance and pervasive character of the securities market may, in principle, support federal intervention that is qualitatively different from what the provinces can do, they do not justify a wholesale takeover of the regulation of the securities industry which is the ultimate consequence of the proposed federal legislation.  A cooperative approach that permits a scheme recognizing the essentially provincial nature of securities regulation while allowing Parliament to deal with genuinely national concerns remains available and is supported by Canadian constitutional principles and by the practice adopted by the federal and provincial governments in other fields of activities.