This commentary by Prof. Jacob Ziegel was first published in the National Post on July 15, 2011.
On April 12 and 13, the Supreme Court of Canada held a two-day hearing on a Reference from the federal government asking the Court to determine the constitutional validity of the proposed Securities Act published by the federal government in May, 2010. The question all the parties to the hearing must now be asking themselves is how the Court is likely to respond to the Reference.
The need for federal securities legislation has been discussed for at least 30 years, yet successive Liberal and Conservative governments refused to bite the bullet. The Harper administration showed greater mettle and became convinced that a national securities regulator was essential for Canada in light of the financial crisis that gripped North America, and much of the rest of the world, in 2007 and 2008. It was also the solution recommended by three federal task forces that were established between 2003 and 2009.
As Jim Flaherty, Minister of Finance, pointed out in introducing the draft Act, Canada is the only industrialized country in the Western hemisphere - if not among all developed nations - without a national securities regulator and national securities legislation. Instead, Canada depends on 10 provincial securities acts and 10 provincial regulators with all the inefficiencies and duplication that this implies.
Or so it seemed. The Ontario government, the Canadian Bankers' Association and other influential business organizations supported the federal initiative, but most of the other provinces, led by Alberta and Quebec, were strongly opposed. They argued that the provincial legislation was essentially uniform and was kept abreast of market developments through the adoption of uniform policy statements by the provincial administrators, and that an efficient and competitive market in securities prevailed in Canada thanks to a passport system adopted by all the provinces entitling securities registered in one province to recognition and freedom to trade in all the other provinces.
Alberta and Quebec also countered the federal initiative by severally asking the Alberta and Quebec courts of appeal to consider the validity of the proposed federal Act. Those hearings were held earlier this year and in both cases a five member court found the federal bill to be unconstitutional -in Alberta's case, the decision was unanimous; in Quebec's case there was a single dissenting judgment.
The Supreme Court of Canada therefore has the invidious task of determining whether the two appellate courts, and their nine judges, were wrong in their interpretation of the constitutional position. The basic question at issue is whether the federal government has the power to enact national securities legislation under the trade and commerce clause in Section 91(2) of the Canadian constitution.
Most non-lawyers would have little hesitation in answering the question affirmatively. What could be more obvious than that securities regulation is an intrinsic aspect of the regulation of trade and commerce in a modern economy?
However, this is not how the Judicial Committee of the Privy Council in London (the ultimate court for appeals in civil matters from Canada before 1949) interpreted Section 91(2). Rather, as early as 1889, the Privy Council held that s.91(2) did not entitle the federal government to regulate specific trades and types of commerce. Those powers remained with the provinces under section 92(13) of the Constitution.
The federal government argued in the Alberta and Quebec courts of appeal that the proposed federal Act went beyond the provincial legislation and also addressed the national dimensions of securities regulation and their impact on the integrity of Canada's financial markets. However, the argument made no headway there, with the exception of the lone dissenting judgment in the Quebec Court of Appeal. Similarly, counsel for the federal government encountered stiff questioning from members of the court in pursuing the same line of reasoning in the Supreme Court of Canada hearings.
So how is the Supreme Court likely to decide? I believe it's a reasonable prediction that the court will render a divided judgment. The critical question is: divided, but in whose favour? The best hope for the federal government must be that a majority of the Supreme Court judges will reject the Privy Council's narrow construction of section 91(2) and find that the federal government has the power to regulate a specific sector of the economy, even it already is regulated by the provinces, provided the federal government can show that federal regulation is in the national interest and cannot be adequately served even by uniform provincial legislation and close cooperation among the provinces.
When appeals to the Privy Council were abolished in 1949, it was said that the Supreme Court was now master in its own home. It remains to be seen whether the Supreme Court will heed the admonition or whether it will decide that the Privy Council's intuition about the proper balance of power between the federal and provincial governments still makes good sense in the 21st century.