National Securities Regulator on the Ropes? Quebec Court of Appeal Rules Proposed Cooperative System Unconstitutional
On May 10, 2017, the Quebec Court of Appeal ruled that the proposed cooperative capital markets regulatory system (Cooperative System) is in significant respects unconstitutional, although it ruled that the federal government’s proposed Capital Markets Stability Act (CMSA) was, excepting one aspect, within federal jurisdiction.
The government of Quebec, which is opposed to the establishment of the Cooperative System and which desires to preserve provincial regulation of securities, directed a reference on the constitutionality of the Cooperative System to the Quebec Court of Appeal in 2015. A five-judge panel of the Court of Appeal heard arguments in November of 2016.
The government’s reference asked the court to rule on two issues:
- Whether the implementation of a pan-Canadian securities regulator under the authority of a single regulator, in the model proposed in the memorandum of agreement (Memorandum of Agreement) among the governments of Canada, Ontario, British Columbia, Saskatchewan, New Brunswick, Prince Edward Island and the Yukon (Participating Jurisdictions) was constitutional
- Whether the federal government had the jurisdiction to enact the CMSA under the general branch of the federal trade and commerce power
In 2013, the federal government and the governments of Ontario and British Columbia launched the Cooperative System in response to the 2011 decision of the Supreme Court of Canada (SCC) defeating the Canadian government’s previous initiative to establish a single national securities regulator (Securities Act Reference). Since then, the other Participating Jurisdictions have signed on as members of the Cooperative System.
Under the Cooperative System, a single regulator, the Capital Markets Authority (Authority), would receive delegated powers from the Participating Jurisdictions to administer both the CMSA and a uniform Capital Markets Act (CMA), which would be adopted by all participating provinces and territories in the Cooperative System to replace their respective current Securities Acts.
The CMA is intended to address matters of provincial or territorial jurisdiction in the regulation of capital markets and the CMSA is intended to address systemic risk in national capital markets, national data collection and criminal law matters. The legislation establishing the Authority has not yet been published.
CONSTITUTIONALITY OF PAN-CANADIAN REGULATOR
On the first question, four of the five judges on the panel held that the implementation of the Cooperative System would be unconstitutional because it would fetter the parliamentary sovereignty of the participating provinces and would effectively provide provinces with a veto over federal regulations.
Because the legislation establishing the Authority has not yet been released, the majority of the court focused on the Memorandum of Agreement provisions that outline the structure of the Authority in deciding that the structure of the Cooperative System was unconstitutional.
The Memorandum of Agreement provides for a council of ministers (Council) consisting of the federal minister of finance and the minister responsible for capital markets regulation from each participating province or territory. Among its other powers, the Council would be required to approve regulations proposed by the board of directors of the Authority and any changes to the CMA. Participating provinces and territories would be bound to make any changes to the CMA that were approved by the Council.
The four-judge majority held that this power of the Council over changes to the CMA rendered the Cooperative System unconstitutional. By requiring the participating provinces to adopt changes to the CMA that were adopted by the Council, the Cooperative System would “impose real limits on the parliamentary sovereignty of the participating provinces” and was therefore unconstitutional.
Similarly, the majority determined that the ability of the Council to approve or reject regulations under the CMSA undermined the constitutional validity of the CMSA by providing provincial ministers with an effective veto over regulations made under federal power.
The fifth judge would have declined to answer the question on the constitutionality of the Cooperative System because the Memorandum of Agreement was not a law but rather an agreement among the various parties and, as a result, was not subject to judicial review. The dissenting judge appeared, however, to agree with the majority that the provisions of the Memorandum of Agreement limiting the power of a participating province to amend its own CMA would not be constitutional if they were included in a piece of legislation.
CONSTITUTIONALITY OF THE CMSA
The court unanimously held that the CMSA was constitutional, although four judges determined that certain sections that dealt with the role and powers of the Council were unconstitutional and would, unless removed, render the CMSA as a whole unconstitutional. The court held that the CMSA fell within federal jurisdiction because its primary focus (or “pith and substance”) was to “promote the stability of the Canadian economy by managing systemic risks related to capital markets having the potential to have material adverse effects on the Canadian economy.”
Despite the finding that the substance of the CMSA was within federal jurisdiction, the majority held that the role of Council set out in certain sections of the CMSA — in particular, the power to reject regulations under the CMSA — was “completely irreconcilable with the purposes” of the CMSA and was unconstitutional. These provisions would, in the view of the majority, render the entire CMSA as proposed unconstitutional.
The fifth judge also found that the CMSA was constitutional and disagreed with the majority view that the powers of the Council were unconstitutional. Rather, in the fifth judge’s view, the CMSA was constitutional in its entirety because Parliament is free to delegate its legislative authority in any manner it sees fit. The mere presence of provincial ministers on the body that exercises delegated legislative authority would not, in the fifth judge’s view, invalidate the delegation of powers.
Under the most recently published schedule, the Participating Jurisdictions agreed to attempt to implement the Cooperative System by June 20, 2018 and expected the Authority to be operational in 2018. The Quebec Court of Appeal ruling may push back the timeline for implementation as the Participating Jurisdictions consider how to proceed with the implementation of the Cooperative System in light of the decision.
One option is to push ahead with implementing the Cooperative System in a form modified to address the Council’s powers that the Court of Appeal identified as incompatible with parliamentary sovereignty and the division of powers between the federal and provincial governments.
Another, and more likely, option is for the federal government to seek the SCC’s opinion on the Cooperative System. If it chooses this option, the federal government could either appeal the Quebec Court of Appeal’s decision to the SCC or direct a separate reference to the SCC. The SCC’s decision would take precedence over that of the Quebec Court of Appeal.
Notably, in the Securities Act Reference, the SCC specifically pointed to a “cooperative approach that permits a scheme recognizing the essentially provincial nature of securities regulation while allowing Parliament to deal with genuinely national concerns” and noted that such a system would be “supported by Canadian constitutional principles and by the practice adopted by the federal and provincial governments in other fields of activities.”
Blakes has published a series of Bulletins regarding various aspects of the Cooperative System and summarizing comments received on the drafts of the CMSA, the CMA and the CMA regulations (please see our various Bulletins posted on our website).
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Posted in: Capital Markets
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