This commentary by Prof. Jeffrey MacIntosh was first published in the Financial Post on November 23, 2010.
Do the feds have the constitutional jurisdiction to create a national securities regulator? Not surprisingly, the federal government thinks so. Also not surprisingly, the government of Quebec does not. Quebec has referred the matter to the Quebec Court of Appeal for a decision (just as the feds have sent a reference to the Supreme Court of Canada, but the Quebec court gets the first kick at the can).
Ottawa’s legal case, in a recently filed factum with the Quebec Court of Appeal, totters on the brink of schizophrenia. At the outset, the factum invites the court to conclude that the issue of constitutionality “does not involve a performance assessment of the existing 13 provincial and territorial regulators.” But, mirabile dictu, much of the balance of the argument is sedulously devoted to demonstrating the manifest superiority of federal legislation. Go figure.
On the legal front, the government has an uphill slog. Of the five factors that the Supreme Court has indicated constitute the presumptive test of constitutional validity, two are almost certainly fatal to the feds’ case. The feds’ first line of attack (the “Houdini gambit”?) is simply to pretend that these factors do not exist. Rather, their presence is merely “confirmatory evidence” of a decision that the court has already arrived at based on the first three factors. By implication, the absence of the other two is essentially inconsequential. While perhaps praiseworthy for its inventive flair, this argument finds no support in the jurisprudence. The Supreme Court enunciated five presumptive factors for constitutional validity, not three. There is no indication whatever that any of these elements was expected to play a merely subsidiary or collateral role.
What are the two factors on which the government’s case comes adrift? One is that “the legislation should be of a nature that the provinces jointly or severally would be constitutionally incapable of enacting.” However, it is abundantly clear not only that the provinces have the authority to enact securities laws, but that such laws may encompass transactions that do not take place entirely (or even mostly) within a given province. In an irony that we may assume is not lost on Ottawa, the courts have been munificent to the point of prodigality in defining the constitutional jurisdiction of the provincial securities regulators, all because there is no federal regulation. Whatever tune the courts might have sung had there been a comprehensive federal scheme in place, the horse has bolted. It is too late to shut that particular barn door.
The government thus labours mightily to establish provincial incapability by exposing the deep-seated flaws in provincially based legislation. Without retreading the gruesome details, an effective rejoinder lies in a simple rhetorical question. If provincial legislation is so broke, how come the manifest regulatory failures of recent years have occurred in our highly regulated neighbour to the south, which, coincidentally enough, has a federal regulator? Similarly, why did none of the much lauded federal regulators in other parts of the world do any more than our provincial regulators to head off the crisis?
The feds are thus reduced to arguing that only they can enact “a comprehensive national regime of securities regulation monitored by a single national agency.” But this utterly trivializes the “incapability” requirement, since national application is essentially a pro forma aspect of federal regulation. Is it truly possible that the Supreme Court would have troubled itself to erect a barrier to federal legislation when that barrier can be routinely and effortlessly surmounted?
The other fatal constitutional indicium of validity is that “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.” On this, the feds are happily hoisted on their own petard. The draft legislation is not in fact national at all. It allows provinces to opt in if they choose. Quebec, Manitoba, and Alberta have indicated that they will not do so. Indeed, the likelihood that all recalcitrants — particularly Quebec — will ever sign on is extremely remote, to say the least. The “national scope” factor is thus inevitably fatal to the legislation. Indeed, in a remarkable concession, the government’s factum states that “participation by all provinces and territories is highly desirable, and necessary to make the operation of the new regime fully successful.”
The feds nonetheless limply attempt to dodge this .45 calibre bullet by arguing that “the act seeks to achieve its goal of a single national regulator through progressive implementation,” and even though the opt-in feature “may render the goal of a single regulator more difficult to attain quickly, it should not affect the constitutional validity of the regime.”
In other words, it is constitutionally valid now because it may be constitutionally valid at some point in the future.
The feds also hurl a change-up in arguing that “the validity of the legislation should be judged in terms of the intended scope of the legislation, not the efficacy of what would result if the intention was not fully realized.” This has all the flavour of a rash of squirrels bailing madly with acorn shells as the Titanic slips serenely beneath the waves. Legislation is to be judged by what it is. It is not to be bootstrapped into constitutional validity on the basis of what the government wishes it was, no matter how fervently.
Even if they somehow win their constitutional case, the feds have mounted themselves securely on the horns of an obstreperous dilemma. Finance Minister Jim Flaherty will be saddled with the unenviable job of selling Parliament on the virtues of legislation that the government has already declared (in court, no less) to be ineffective. He might as well serve up his own head on a tray. Interesting politics, but lousy victuals.