Canadian Securities Act ReferenceWhy the SCC will declare the proposed Act intra vires

Ben Segel-Brown

100791531

LAWS 2501-D

Prof. E. Milanovic

Carleton University

3 December 2010

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The Government of Canada referred the following question to the Supreme Court of

Canada (hereinafter “the SCC”):

Is the annexed Proposed Canadian Securities Act within the legislative authority of the Parliament of Canada?1

This essay explains why the SCC will declare the Proposed Canada Securities Act (hereinafter

“the Act”) intra vires.

Upon examining the Act, the SCC will identify its pith and substance as the unified

regulation of securities markets for the public benefit. The SCC will therefore declare the Act to

fall under the federal power to make laws relating to “general trade and commerce affecting

Canada as a whole.”2 Consequently, the SCC will declare the Act to be within the legislative

authority of the Parliament of Canada.

In researching for this essay, I found five constitutional opinions on the Act, and the

potential for national securities regulation more generally. Three of these opinions come from

law firms commissioned to address this issue by the federally established Wise Persons

Committee to Review the Structure of Securities Regulation in Canada.3 One was published in

the Saskatchewan Law Review,4 and the last was written by a Senior Contributing Editor of the

Osgoode Hall Law School blog.5 Although they varied in their approach, all of these opinions

1 Department of Finance Canada, Fact Sheet on Reference to the Supreme Court of Canada on the Proposed Canadian Securities Act (Fact Sheet) (Ottawa: Department of Finance Canada, 2010), online: Department of Finance Canada at para 4 http://www.fin.gc.ca/n10/data/10-051_3-eng.asp.2 City National Leasing Ltd. v. General Motors of Canada Ltd., 1989 CarswellOnt 125 at para 25, [1989] 43 BLR 225 [CNL v. GM].3 Oglivy Renault, “Re: Constitutional Opinion Concerning the Canadian Securities Commission Model” (10 November 2003), online: WPC - Committee to Review the Structure of Securities Regulation in Canada http://www.wise-averties.ca/report_en.html. See also, John B. Laskin, “Re: Constitutional Authority to Implement the CSC Model” (10 November 2003), online: WPC - Committee to Review the Structure of Securities Regulation in Canada http://www.wise-averties.ca/report_en.html. See also, Allan McEachern, “Re: Constitutional Opinion on Securities Commission Model” (10 November 2003), online: WPC - Committee to Review the Structure of Securities Regulation in Canada http://www.wise-averties.ca/report_en.html .4 Don Tse, “Establishing a Federal Securities Commission” (1994), 58 Sask. L. Rev 427.5 This opinion lacks the quality of the former opinions but benefits from being written after the publication of the Act. Allison MacIsaac, “Revisiting the federal trade and commerce power: Will the federal Securities Act be held constitutional at the SCC?” (9 June 2010) at para 7, online: The Court, www.thecourt.ca.

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also concluded that national securities regulation would be upheld by the SCC under the second

branch of the federal government’s ‘trade and commerce’ power. This essay will note where and

how its approach is the same or differs from theirs.

Before applying the specific tests that will be entailed by the SCC’s approach, it is

necessary to establish what the Canadian Securities Act entails.6 In essence, the Act “seeks to

harmonize existing provincial legislation in the form of a single statute.”7 It claims that its

purposes are to protect investors, foster efficient and competitive capital markets, and to

contribute to the integrity and stability of Canada’s financial system.8

More specifically, the Act sets out the mandate, form, governance, and accountability

framework for a Canadian Securities Regulatory Authority (hereinafter “the Authority”.) 9 The

Authority is run by a Board of Directors and its investigations are carried out by a Chief

Regulator.10 The decisions of the Authority are subject to appeals to a new independent Canadian

Securities Tribunal with the powers and status of a superior court of record led by a Chief

Adjudicator.11

The positions at all of these organisations are appointed by the Minister of Finance to

whom the organisation reports. 12 However, the Minister is advised by a new Council of Ministers

with representatives from each participating province and an advisory panel representing the

interests of investors.13 The policies and regulations of the Authority are set by its Board of

6 Only MacIssac uses this step as the other legal opinions were asked to comment on the potential for regulation on the abstract while she had the benefit of the Act.7 Department of Finance Canada, Fact Sheet on Proposed Canadian Securities Act (Fact Sheet) (Ottawa: Department of Finance Canada, 2010), online: Department of Finance Canada at para 2 http://www.fin.gc.ca/n10/data/10-051_2-eng.asp.8 Department of Finance Canada, Proposed Canada Securities Act (Proposed Act) (Ottawa: Department of Finance Canada, 2010) at para 9, online: Department of Finance Canada http://www.fin.gc.ca/drleg-apl/csa-lvm.pdf.9 Ibid at cl 250. See also, Finance, “On Act,” supra note 7 at para 24. 10 Finance, “Proposed Act” supra note 8 at cl 14-7.11 Ibid at cl 16-7, 28-38-49 and 56-8.12 Ibid at cl 39-49 and 56-63.13 Ibid at cl 11-13.

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Directors with the advice of a Regulatory Policy Forum representing the heads of each of the

branches of the Authority.14 The Authority is to be self-financing, with loans from the Minister of

Finance when he deems it necessary.

The Act then sets out the regulatory, criminal, and civil powers of the Authority;

however, it is important to note that these powers do not have effect in provinces which have not

opted into the Act, save for a few provisions I will discuss later. The Authority is given

monopoly power of recognising securities market institutions such as credit rating organisations,

and all newly issued securities must receive the consent of the Authority, as must all exchanges

of derivatives.15 Securities issues are required to disclose a wide array of information, and

insiders of those companies are required to disclose their special interests.16

In terms of enforcement, the Act allows the Chief Regulator to designate persons to

enforce the Act and gives these enforcers broad powers, including a power to search any

business they have reasonable grounds to believe contains some information relevant to their

investigations.17 The Tribunal is also given broad powers, and judges are given a power to issue

orders for the production of information.18

The Act then sets out the framework for criminal prosecutions under the Act, including

maximum penalties and where responsibility lies within corporations.19 It also sets out the

offences this authority will deal with and how those cases will be conducted. Specifically, it

deals with fraud, falsehood affecting the market price of a stock, market manipulation, insider

trading, and misrepresenting a security.20

14Ibid at cl 50.15 Ibid at cl 73-92.16 Ibid at cl 93-8.17 Ibid at cl 131-8.18 Ibid at cl 139-52.19 Ibid at cl 153-7.20 Ibid at cl 162.

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It also contains several powers relating to how these laws will be implemented. For

instance, it allows for production orders, prohibition, and restitution.21 It gives the power to

implement these laws to the provinces as well as to the federal government.22 It also creates a

civil cause for action where securities are misrepresented in a prospectus, take-over or issuer bid

circular, or prescribed offering, and establishes the defences, procedures and how damages will

be calculated and procedures to be used in these cases.23

In terms of the mandatory changes, the criminal offences created by the Act and some of

the powers to be used in investigations apply to all provinces.24 The definition of ‘persons in a

special relationship,’ the power allowing for orders of production of information, the criminal

offences created under that Act, and the civil immunity given to whistleblowers all involuntarily

apply to provinces.25

Under the SCC’s interpretation of the Canadian Constitution, the legislative authority to

enact a law is determined by the heading of the Constitution under which its ‘pith and substance’

falls.26 In their own words:

There are two stages to this analysis [of constitutional validity].  The first step is to determine the ‘pith and substance’ or essential character of the law.  The second step is to classify that essential character by reference to the heads of power under the Constitution Act, 1867 in order to determine whether the law comes within the jurisdiction of the enacting government.  If it does, then the law is valid.

...

To determine the pith and substance, two aspects of the law must be examined:  the purpose of the enacting body, and the legal effect of the law. 27

21 Ibid at cl 150-165.22 Ibid at cl 167.23 Ibid at cl 169-73 and Parts 13-4.24 Ibid at cl 251-3. 25 Ibid at cl 8, 148-53, 158-168.26 See also, MacIsaac, supra note 5 at para 8. The other legal options did not have the benefit of the text of the Proposed Act to evaluate and therefore could not seek the pith and substance of the law.27 Reference re Firearms Act (Can.), 2000 SCC 31 at para 15, [2000] 1 SCR 783 [Firearms].

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Ostensibly, the purpose of Parliament in making this Act is to regulate the securities market to

protect investors, foster efficient and competitive capital markets, and to contribute to the

integrity and stability of Canada’s financial system.28 In short, it aims to regulate the trade of

securities for the public benefit. The SCC’s determination of the legal effects of a policy has

been described as “considering how the law will operate and how it will affect Canadians.”29 In

the case of the Act, the effect of the law will be primarily to unify rather than change securities

market regulation.30 Combining these two ideas, the pith and substance of the Act is the unified

regulation of securities markets for the public benefit.31

This interpretation of the Act is generally consistent with that of secondary sources. One

exception exists in that the government and one investor group seem to deemphasise the

universal application of the criminal provisions of the Act. Borden, Ladner and Gervais’

interpretation claimed “the proposed Act would apply only in participating provinces and

territories, with the exception of evidence gathering provisions.”32 Similarly, the Government of

Canada implies in its fact sheet on the Act that it is entirely optional, stating “[t]he proposed Act

reflects the Government’s preference for and commitment to a process under which the Canadian

securities regulatory regime would apply as willing provinces and territories opt in [does not

identify exceptions],”33 although it elsewhere admits “[t]he criminal powers and criminal

offences in the proposed Act would apply in all jurisdictions, including non-participating

28 Finance, “Proposed Act” supra note 8 at cl 9. See also, MacIsaac, supra note 5 at para 9.29 Firearms, supra note 27 at para 8.30 The federal provisions and existing provincial provisions are generally identical, reflecting the basis of the Act in the regulatory coordination agreements reached by the provinces. See Robert P. Hutchison, Fred R. Pletcher & David Surat, “Proposed Federal Securities Act Refferred to the Supreme Court of Canada” (2010) at 1, online: WPC - Committee to Review the Structure of Securities Regulation in Canada http://www.wise-averties.ca/report_en.html.31 See also, MacIsaac, supra note 5 at para 9. See also, Finance, “Proposed Act” supra note 8 at preamble.32 Hutchison, supra note 30 at 1. See also, MacIsaac, supra note 5 at para 6. “Notably, provincial participation in the Act is on a volunteer basis.”33 Finance, “On Act,” supra note 7 at para 24.

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provinces.”34 As shown above, the non-voluntary criminal offences and powers of the Act are

broad. Thus, the interpretation that provinces can opt-out is misleading and the unification of

legislation is a key effect of the Act.

In terms of the head of power under which this essential character aims to fall, the Act

clearly aims to fall under the second branch of the federal trade and commerce power, “general

trade affecting the whole dominion.”35 The procedure the SCC has adopted to test the validity of

legislation under this branch is:

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. Each of these requirements is evidence of a concern that federal authority under the second branch of the trade and commerce power does not encroach on provincial jurisdiction.36

Following the SCC’s approach, I will apply these indicative37 tests, and then consider the

concern behind them.38

For the first question relating to whether the Act is part of a regulatory scheme, the SCC

refined the definition of a general regulatory scheme when it identified the Canadian Combines

Act as fulfilling this criterion. The SCC decided the “elucidation of prohibited conduct, creation

of an investigatory procedure, and the establishment of a remedial mechanism, constitute a well-

integrated scheme of regulation[...]” 39 The Act creates several criminal offences and civil causes

34 Finance, “Proposed Act,” supra note 8 at cl 11.35 This interpretation was followed in all five legal opinions, although some speculated that other provisions, particularly the criminal law power and residual ‘Peace, Order and Good Government’ clause may be applicable. I chose not to consider these arguments as they did not reflect the pith and substance of the Act.36 CNL v. GM, supra note 2 at para 34.37 Indicative is used here to incorporate the SCC’s assertions that “These indicia do not, however, represent an exhaustive list of traits that will tend to characterize general trade and commerce legislation. Nor is the presence or absence of any of these five criteria necessarily determinative.” Ibid at para 36.38 All the WPC legal opinions and Tse also applied these criteria. See, Renault, supra note 3 at 3. See also, Laskin, supra note 3 at 3. See also, McEachern, supra note 3 at 10. See also, Tse, supra note 4 at 6.39 CNL v. GM, supra note 2 at para 57.

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for action, dictates how these cases will be investigated, and sets up the Tribunal as a remedial

mechanism. Thus, the SCC will find that the Act is a general regulatory scheme.40

For the second question as to whether the scheme is monitored by a regulatory agency,

the SCC decided on a similar situation with the Canadian Combines Act in City National

Leasing Ltd. v. General Motors of Canada Ltd. (hereinafter CNL v GM). It noted that:

The authority to launch an inquiry into suspected anti-competitive conduct lies with the director. The director is required to initiate an inquiry whenever there is reason to believe either that a person has failed to comply with an order of the commission or where an offence proscribed by the Act has been or is about to be committed, whenever the Minister of Consumer and Corporate Affairs so directs, and on application of six residents of Canada over the age of 18. The inquiry is conducted by the director and his or her staff. If the director concludes that there has been a violation of Part V of the Act, the director may refer the matter to the commission whose role is to hold proceedings and to report the outcome, including any remedial recommendations, to the Minister. It is clear that the director exercises a significant degree of control over the operation of the Combines Investigation Act. In my view, the control over the entire process exercised by the director and the commission satisfies the requirement that there be vigilant oversight of the administration of a regulatory scheme.41

In the Canadian Securities Act, the Chief Regulator also has the authority to launch and conduct

an inquiry. Because the Chief Regulator has similar powers and follows similar procedures to the

director of the quote above, the SCC will declare the Act to be monitored by a regulatory

agency.42

The third test relates to the scope of the legislation. The precedent from Labatt Breweries

v. Canada (Attorney General) is that the legislation must not relate to a specific industry:

The impugned regulations [do not fall under the second branch of the trade and commerce power because they] are not concerned with the control and guidance of the flow of articles of commerce through the distribution channels, but rather with the production and local sale of the specified products of the brewing industry.

40 Several legal opinions came to the same conclusion through various means. See, Renault supra note 3 at 3. See also, Laskin supra note 3 at 15. See also, Tse supra note 4 at 6.41 CNL v. GM, supra note 2 at para 59.42 All the WPC legal opinions and Tse also decided the system would be deemed to be monitored by a regulatory agency. See, Renault, supra note 3 at 3. See also, Laskin, supra note 3 at 3. See also, McEachern, supra note 3 at 11. See also, Tse, supra note 4 at 6.

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[...]

What clearly is not of general national concern is the regulation of a single trade or industry.43

Security markets do not relate to the ‘production and local sale of the specified products’ so

much as they relate to ‘the control and guidance of the flow of articles of commerce through the

distribution channels.’ Security markets are innately national and international in scope, and the

SCC acknowledged this in Multiple Access Ltd. v. McCutcheon.44 The Act also does not deal

with a trade, it does not relate to how a product is made or how people do their work. For these

reasons it is likely the SCC will rule that the Act relates to the economy as a whole rather than to

a specific industry.45 These indicators suggest that the Act is likely to be found to be a valid

exercise of the ‘general trade affecting the whole of Canada’ branch of the trade and commerce

power.

Beyond these three tests, in CNL vs. GM the SCC adopted two more indicative tests, “(i)

the legislation should be of a nature that the provinces jointly or severally would be

constitutionally incapable of enacting; and (ii) 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.”46 As identified above, an important element of the Act is its

unification of existing legislation. The effect of the Act is to make the rules governing securities

markets consistent across Canada. Even though the current provincial securities regulation is

very similar to the proposed legislation, the provinces would be unable to enact the national

43 Labatt Breweries v. Canada (Attorney General), 1979 CarswellNat 7 at para 22-4, [1980] 1 SCR. 914.44 Multiple Access Ltd. v. McCutcheon, [1982] 2 SCR 161 at 173 [Multiple Access].45 All the WPC legal opinions and Tse also concluded that the Act did not relate to a specific industry. See, Renault, supra note 3 at 3. See also, Laskin, supra note 3 at 4. See also, McEachern, supra note 3 at 11. See also, Tse, supra note 4 at 6.46 CNL v. GM, supra note 2 at para 36.

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aspect of the regulatory scheme of the Act.47 Furthermore, interprovincial coordination of

securities regulation would be very complicated and leave a system that is very slow to react to

shocks.48 It is also worth noting that the provinces did launch a Uniform Securities Legislation

Project but the legislation it produced was not implemented, suggesting that provinces found

themselves incapable of the required coordination.49 Because the scheme is optional for

provinces, it clearly does not pass the second test.50

Given this success on four out of the five tests indicative of validity under the second

branch of the trade and commerce power, it is very likely that the SCC will find the Act to be a

valid exercise of this power. Furthermore, the partially voluntary nature of the national regulator

gives further respect to the underlying principle that “federal authority under the second branch

of the trade and commerce power does not encroach on provincial jurisdiction.”51

The regulation of securities has previously been affirmed to fall under both federal and

provincial jurisdiction in Multiple Access Ltd. v. McCutcheon. In this case and in the instance of

the Act, the double aspect doctrine applies. This doctrine states that both levels of government

can have jurisdiction over the same topic in different aspects. Only if one legislation frustrates

the purpose of the other does the principle of federal paramouncy apply, rendering the offensive

provincial provision inactive.52 In the SCC’s own words:47 All the WPC legal opinions and Tse also concluded that the provinces would be constitutionally unable to enact the Act. See, Renault, supra note3 at 4. See also, Laskin, supra note 3 at 5. See also, McEachern, supra note 3 at 11. See also, Tse, supra note 4 at 6.48 MacIssac, supra note 5 at para 3.49 Shaun Fluker, “The Counterview to a National Securities Regulator in Canada” (17 January 2009), online: University of Calgary Faculty of Law Blog on Developments in Alberta Law http://ablawg.ca/wp-content/uploads/2009/10/blog_sf_securities_jan2009.pdf at 1.50 Several of the legal opinions suspected that the scheme would pass this test and it is quite possible there may be external negative effects of poor regulation in one province, but in its present form it would be impossible to argue that what the Act does not require is necessary.51 CNL v. GM, supra note 2 at para 34. The Act infringes of provincial powers in that it creates several civil causes for action, despite the SCC interpretation that “[t]he creation of civil actions is generally a matter within provincial jurisdiction under s. 92(13) of the Constitution Act, 1867.” Ibid, 50. 52 All the WPC legal opinions and Tse mention the potential application of these principles. See, Renault, supra note 3 at 10. See also, Laskin, supra note 3 at 7. See also, McEachern, supra note 3 at 21. See also, Tse, supra note 4 at

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Insider trading provisions have both a company law and a securities law aspect. Where, as here, the contrast between the relative importance of the two features is not sharp, the double aspect doctrine is applicable to validate both sets of legislative provisions.53

Insider trading provisions are both part of and typical of the provisions of the Act. This indicates

that both federal and provincial legislation would remain operative.

There is a parallel argument the SCC has acknowledged several times in passing that over

the last couple of decades securities markets have become less local in character:

The securities market has been an international one for years [...] However, the Internet has greatly increased the ability of securities traders to extend across borders:

‘[T]he very qualities that make the Internet a valuable tool for investors and the securities industry may render it a convenient tool to perpetrate securities fraud and other violations.  The Internet also provides for instantaneous cross-border communication and interactivity, which challenge traditional notions of jurisdiction and territoriality.’ (International Organization of Securities Commissions, Securities Activity on the Internet (September 1998), at p. 3.)

In order to regulate effectively this electronic trading, regulators must equally be able to respond, and surmount borders where legally possible.54

Many actors within provincial government have come to the same conclusion, for instance the

Ontario Five year Review Committee Final Report Reviewing the Securities Act stated:

We add our voice to countless others raised in support of the urgent need for a single Canadian securities regulator. This is the most pressing securities regulation issue in Ontario and across Canada.55

It is likely that the SCC will recognize the changing nature of securities markets, noting that

regulation increasingly requires a more responsive, cross-border regulator, and further noting the

national impact of those securities markets.

9.53 Multiple Access, supra note 44 at 173.54 Global Securities Corp. v. British Columbia (Securities Commission), 2000 SCC 21 at 28, [2000] 1 SCR 494.55 Department of Finance Ontario, Five year review committee final report reviewing the Securities Act (Report) (Toronto: Publications Ontario, 2003) at 7, online: Department of Finance Ontario http://www.fin.gov.on.ca/en/publications/2003/5yrsecuritiesreview.pdf.

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There can be little doubt that the SCC will find that the Act is within the legislative

powers of the federal government. Before concluding however, there is one key provincial

objection to be addressed. The provinces may attempt to argue that the Act duplicates existing

valid provincial legislation. However, the SCC has repeatedly rejected this argument, stating

that:

The validity of the federal legislation must be determined without heed to the ... [provincial] legislation.56

Instead of this mutually exclusive conception of legislative authority, the SCC of Canada has

allowed both levels of government to legislate on the same topics in different aspects so long as

the effect of one law does not frustrate the purpose of the other.57

In the case of the Act and existing provincial legislation, the legislative provisions

duplicate each other. The SCC has held that cases of duplication such as this are “the ultimate in

harmony” and both laws are valid.58

With Mr. Justice Henry I would say that duplication is, to borrow Professor Lederman’s phrase, ‘the ultimate in harmony’. The resulting ‘untidiness’ or ‘diseconomy’ of duplication is the price we pay for a federal system in which economy ‘often has to be subordinated to […] provincial autonomy’ (Hogg, at p. 110). Mere duplication without actual conflict or contradiction is not sufficient to invoke the doctrine of paramountcy and render otherwise valid provincial legislation inoperative.59

Even if the laws were in conflict, because the pith and substance of the Act falls under federal

jurisdiction, the Act would still be valid and provincial legislation would be rendered inoperative

only to the extent to which they conflict with the Act.60

56 CNL v. GM, supra note 2 at para 65.57 Peter W. Hogg, “Paramountcy and Tobacco" (2006) SCLR(2d) 34 at 341.58 Ibid 338.59 Multiple Access, supra note 44 at 190.60 Hogg, supra note 57 at 339. See also, Bank of Montreal v. Hall, [1990] 1 SCR 121 at para 54. In this case the SCC stated that, under the “doctrine of paramountcy [...] validly enacted provincial legislation will be held to be inoperative to the extent that it conflicts with federal legislation.”

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In conclusion, the SCC will find that Act is a valid exercise of the ‘general trade and

commerce affecting the whole dominion’ branch of the federal government’s trade and

commerce power. The court will hold that in line with the double aspect doctrine, both federal

and provincial laws will be deemed valid. In the event of conflict, the provincial law will be

rendered invalid to the extent that it conflicts with the Act.