Creation of federal regulator will unleash constitutional showdown

By Jeff MacIntosh

This commentary was first published in The Lawyers Weekly on February 20, 2009.

The suggestion that Canada needs a federal securities regulator is about as fresh as the sinking of the Titanic. Nonetheless, the report of the federally commissioned "Expert Panel on Securities Regulation" (the Hockin Report) contains a material innovation on the concept.

The report suggests that market actors in non-participating provinces should be given the option of opting into the federal scheme, to the exclusion of any extant provincial legislation. Both the creation of a national regulator and the aforementioned "opt in" provision are sure to lead to a constitutional showdown with the current crop of provincial recalcitrants (Quebec, Alberta and Manitoba). While Las Vegas oddsmakers have not yet tipped their hat, the odds may favour the recalcitrants.

The best bet that federal securities regulation would survive a constitutional challenge is under the "general regulation of trade" branch of the federal trade and commerce power (s. 91(2) of the Constitution Act, 1867) (T&C). In General Motors of Canada Ltd. v. City National Leasing Ltd., [1989] 1 S.C.R. 641, the Supreme Court stated that it will look for the presence of five factors in assessing the validity of legislation:

"First, the impugned legislation must be part of a general regulatory scheme. Second, the scheme must be monitored by the continuing oversight of a regulatory agency. Third, the legislation must be concerned with trade as a whole rather than with a particular industry... [Fourth,] the legislation should be of a nature that the provinces jointly or severally would be constitutionally incapable of enacting; and [Fifth,] the failure to include one or more provinces or localities in a legislative scheme would jeopardize the successful operation of the scheme in other parts of the country."

The court made it clear that the imposition of these requirements is "to ensure that federal legislation does not upset the balance of power between federal and provincial governments."

There is little doubt that a federal scheme of securities regulation will satisfy the first three elements of the test. However, it may come to grief on the last two.

The meaning of "constitutional incapability" is not immediately obvious. As a practical matter, the issue of the constitutional validity will only arise where a valid head of provincial power exists side-by-side the T&C power. Thus, if applied with absolute rigour, the fourth branch of the test will invariably be fatal to the federal legislation.

It is well settled, for example, that the provinces have authority to enter the field of securities regulation via their power over "property and civil rights in the Province" (s. 92(13) of the Constitution Act, 1867). Indeed, this power forms the basis for all provincial schemes of regulation.

This suggests that "provincial incapability" means that the federal government, acting under the T&C power, is somehow better able to address securities regulatory problems than the provinces acting "jointly or severally."

But this too is capable of producing an absurd result. The main advantages of federal legislation are typically said to be nation-wide uniformity and more effective enforcement. But it can easily be argued that these advantages are always inherent in federal legislation. If this, therefore, is the meaning of "provincial incapability," federal legislation will always pass the test, rendering it functionally meaningless.

Alternatively, if the benchmark of "incapability" is what the provinces are capable of doing "jointly," it is always open to the provinces to create a national regulatory scheme via mutual interdelegation of power, as proposed, for example, in the Crawford Report ("Blueprint for a Canadian Securities Commission," Ontario, 2006). Under this interpretation, once again, the federal legislation always fails.

Even absent joint action, the courts have been extraordinarily generous in defining the scope of the s. 92 (13) power as it applies to securities regulation, allowing it to encompass inter-jurisdictional transactions even where they are more closely connected with another province (Québec (Sa Majesté du Chef) v. Ontario Securities Commission, [1992] O.J. No. 2232 (Ont. C.A.)). This expansionary tendency of the courts cuts against any argument of provincial incapability.

Whatever intermediate content the test might hold, opponents of a federal regulator will be able, quite rightly, to point to the fact that the current provincially-based system works remarkably well. Even if a federal regulator would add efficiencies, as vociferously claimed by its proponents (and just as vociferously denied by its opponents), it is not at all clear that benefits added at the margin are capable of grounding a case of provincial incapability.

Should the federal legislation be upheld, it will be nonetheless be an uphill battle for the government to sustain a claim that federal legislation suspends the operation of provincial legislation through the doctrine of paramountcy - as required to make the "opt in" scheme effective (and to effectively impose the federal scheme on the entire country).

The test propounded in Multiple Access Ltd. v. McCutcheon, [1982] 2 S.C.R. 161 requires an "operational conflict" between the federal and provincial legislation. Subsequent decisions indicated that an operational conflict may arise if provincial legislation substantially impairs the "purpose" of the federal legislation. However, the "purpose" doctrine has been applied narrowly, in situations where the provincial legislation aims to effect some end manifestly at odds with the federal legislation.

However, the underlying purposes of federal and provincial securities legislation (investor protection, market efficiency and so on) are identical. As was stated in Multiple Access (in a passage endorsed by the Supreme Court in B.C. (Attorney-General) v. Lafarge Canada, [2007] 2 S.C.R. 86):

[T]here is no true repugnancy in the case of merely duplicative provisions since it does not matter which statute is applied; the legislative purpose of Parliament will be fulfilled regardless of which statute is invoked by a remedy-seeker; application of the provincial law does not displace the legislative purpose of Parliament. (emphasis supplied by the court in Lafarge)

If the Supreme Court should accept "nationwide uniformity" as a purpose sufficient to displace provincial legislation, this would effect a fundamental shift in our constitutional jurisprudence from "double aspects" to "occupied field." This is completely at odds with the courts' avowed purpose of maintaining a "balance of power" between federal and provincial governments. It appears that any paramountcy argument is doomed to failure.