The federal government's ambitious plan to set up a single national securities regulator has been dealt a severe blow by the Supreme Court of Canada, which ruled Thursday that Ottawa's proposed legislation is unconstitutional.
In a ruling that is bound to disappoint Ottawa, Ontario, and several business groups, the Supreme Court held that oversight for the investment industry fits squarely within the "property and civil rights" powers that are assigned to the provinces by the Constitution Act of 1867.
Ottawa had tried to claim control over the securities business by invoking its regulatory power over trade and commerce, but the Supreme Court ruled that the federal government's plan overstepped the constitutional boundaries that case law has erected over time to prevent Ottawa from overusing that power.
In the unanimous decision, which was released by the court and is therefore not attributed to any specific judge as author, the court says Ottawa's planned approach would dive too deeply into the day-to-day operations of the securities industry, which are contractual in nature and therefore fit squarely within the provincial power over property and civil rights.
Yet the ruling does suggest that it would be possible for both levels of government to seek "common ground" and share oversight of securities, with the provinces able to look after the day-to-day aspects of the industry and the federal government able to keep an eye on systemic risk.
"While the proposed act must be found ultra vires (beyond) Parliament's general trade and commerce power, a co-operative approach that permits a scheme that recognizes the essentially provincial nature of securities regulation while allowing Parliament to deal with genuinely national concerns remains available," the court's written 64-page written ruling states.
Finance Minister Jim Flaherty introduced the Proposed Canada Securities Act in May 2010. The federal government's plan called for the provinces to voluntarily join a scheme that would gradually transfer regulation of securities to a single national regulator from the current patchwork of 13 provincial and territorial securities commissions.
The federal proposal is too heavy handed and upsets the existing constitutional balance that exists in the division of powers, the court said.
"Co-operation is the animating force. The federalism principle upon which Canada's constitutional framework rests demands nothing less."
The court's reasoning strictly adheres to previous court rulings and treats the question before the court as a legal problem, not a policy one. It applied a five-step test from a 1989 decision called General Motors that sets out the boundaries for the federal government's trade and commerce power. The essence of the test is to determine whether the federal government seeks to oversee something that would be beyond the ability of the provinces to regulate on their own.
For generations, previous court rulings have confirmed that securities oversight was a provincial competence under the "property and civil rights" provisions of the Constitution.
Indeed, provincial courts of appeal in Alberta and Quebec have previously concluded that Ottawa's planned legislation is constitutionally out of bounds. Alberta's Court of Appeal last March ruled 5-0 that Ottawa lacked the power to regulate securities, while Quebec's court in early April rejected Ottawa's plan in a 4-1 ruling.
In a decision that reiterates long-held constitutional boundaries, the nine Supreme Court judges unanimously confirmed that Ottawa's legislations fails the constitutional test.
Josh Rubin and Les Whittington of the Toronto Star report, Concerns and praise meet Court’s decision against national securities regulator:
I am 100% behind Jim Flaherty, Canada needs a national securities regulator. The current arrangement is weak, leaving the entire country exposed and vulnerable to serious contagion risk. Ask David Dodge, the former governor of the Bank of Canada, about the pressure he received from Henri-Paul Rousseau, the former President & CEO at the Caisse, following the ABCP blow-up. A friend of mine saw a red-faced Rousseau at the lobby of Fairmont Royal York hotel in Toronto after tense meeting where the Bank of Canada basically told him to "fuck off" and clean up his own mess.
Investors are more vulnerable to corporate fraud, Canadian companies will have a harder time raising money and the financial services industry in Toronto will be less competitive thanks to a Supreme Court of Canada decision nixing the federal government’s plan to create a national securities regulator, critics say.
In a 7-0 ruling, the Supreme Court said Thursday that the government’s proposed legislation was an unconstitutional infringement on provincial jurisdiction, but left the door open for a more cooperative approach.
“While the economic importance and pervasive character of the securities market may, in principle, support federal intervention that is qualitatively different from what the provinces can do, they do not justify a wholesale takeover of the regulation of the securities industry.”
“It is a fundamental principle of federalism that both federal and provincial powers must be respected, and one power may not be used in a manner that effectively eviscerates another. Rather, federalism demands that a balance be struck, a balance that allows both the federal Parliament and the provincial legislatures to act effectively in their respective spheres,” the decision read.
It was a heavy blow for federal Finance Minister Jim Flaherty, who had sought the Court’s opinion on the legislation in 2010.
Flaherty said Ottawa will respect the Court’s opinion, but added in an official statement “it is clear we cannot proceed with this legislation.”
Prior to Thursday’s decision, the federal government had a very gun-ho attitude toward creating a national securities regulator. The court’s word was non-binding and if the justices had delivered a wishy-washy, debatable “no” verdict on the plan, Flaherty had planned to push ahead with the legislation anyway, sources said.
But the court’s unequivocal and unanimous rejection of the national securities regulator as unconstitutional has stopped Flaherty in his tracks.
While business representatives seized on the potential opening the court gave Flaherty to craft a role for Ottawa in national securities regulation in a more cooperative arrangement with the provinces, there was no talk of such a fresh approach in the disappointed halls of the finance department Thursday. “No one’s saying anything about next steps today,” an official said.
The debate over a national regulator is already in danger of being overtaken by the international nature of financial markets, according to Michael E. J. Phelps, who chaired a federally-appointed committee looking at the industry.
“Capital markets are increasingly integrated. It will be a struggle to even keep national regulation, let alone lower level jurisdictions,” said Phelps, whose 2003 “Wise Persons’ Committee” came out strongly in favour of a national regulator.
But opponents of a single regulator welcomed the decision.
“This is a victory of federalism against unilateralism,” said Quebec Finance Minister Raymond Bachand.
“It’s better to regulate from Manitoba than from Bay Street,” said Manitoba Finance Minister Stan Struthers in support of the court’s position.
In Ottawa, the New Democrats and Liberals said the court’s stance was proof the government was readying to trample on provincial rights.
Ontario Finance Minister Dwight Duncan said the Supreme Court decision is “not good” for securities regulation and Ontario will continue working with other provinces to find ways of making the system more efficient without a national securities regulator.
“Now we have to go back to the drawing board,” a disappointed Duncan told the Star, noting Toronto is home to the country’s largest stock exchange and headquarters for investment dealers. “Given we have such a large role in it, I think we’ll take a lead. The Supreme Court said this is up to governments to negotiate.”
While Ontario has supported Flaherty’s idea, six provinces — led by Quebec and Alberta — opposed a national securities watchdog on the grounds that it trampled on provincial rights under the Constitution.
Flaherty had argued that having 13 separate provincial and territorial securities agencies is inefficient, costly for business and fails to adequately protect consumers. That kind of patchwork approach is a problem, agrees Michael King, assistant professor of finance at the University of Western Ontario’s Ivey School of Business.
“Canada is one of very few countries without a national securities regulator. This has created loopholes that have been exploited by white collar criminals,” said King. “It seems absurd that we have national banks and national stock exchanges, but we have regulators that are regional.”
The lack of a single regulator, says King, could make it harder for Canadian companies to attract investment from outside the country, or that they’ll demand a higher return in exchange for the perceived risk.
A single regulator would also make it easier to stop problems that are national in scope, including the asset-backed commercial paper crisis which swept across the country in the wake of the 2008 collapse of Lehman Brothers, said Ian Russell, president of the Investment Industry Association of Canada.
“The asset-backed commercial paper problem was national. … The system we had didn’t do a great job at solving that,” said Russell, who was nonetheless encouraged by the Supreme Court’s suggestion that a collaborative approach by the federal government and the provinces would work.
“It sends a negative message to global investors,” said Janet Ecker, president of the Toronto Financial Services Alliance industry association.
The decision also means the loss of what would have likely been a sizeable Toronto office of the proposed regulator, says Ecker.
“It would have made sense to have had either the headquarters or the biggest office here,” said Ecker.
This country is a joke on so many levels, especially national secuirties regulation and white-collar crime. How do I know? My first job coming out of McGill was consulting the Special Investigations branch at Revenue Canada (now called the Canada Revenue Agency), producing a report on white-collar fraud in Canada. I was mandated to estimate the "size of the underground economy," which was totally stupid because you can't measure what you can't see.
I saw first-hand how they cut sweetheart deals to white-collar tax evaders and crooks. Unlike the US, Canada treats white-collar criminals with kid gloves. We simply are not doing enough to investigate, prosecute and protect our most vulnerable citizens. And while I welcome the new RCMP commissioner's tough stance on white-collar crime, the reality is he first needs to clean up that organization, targeting outrageous conduct. He should also investigate how the RCMP's pensions are managed and serious breaches of confidentiality (like the one I experienced).
One thing I did like about Canada's Revenue Agency is that they had some of the best certified fraud examiners in the country (do not know if that is still the case). These investigators are the best of the best. They've seen it all. I still remember guys like Ron Moore (now retired) who investigated thousands of fraud cases. He knew the legal challenges of prosecuting these crimes and so did Jeanne Flemming, my boss's boss at the time, now FINTRAC's director.
Back to the Supreme Court's decision. It might be legally right, albeit way too rigid, but it fails in so many respects to be the right decision for the collective interests of our country. That's why groups like CARP are not pleased with this decision and rightfully concerned. And unlike Supreme Court judges, most Canadians do not enjoy the benefits of gold-plated defined-benefit pension plans.
Finally, Mr. Bachand, Quebec's finance minister should be more concerned about the bureaucratic red tape imposed by the Autorité des marchés financiers which makes it next to impossible to set up a fund in this province (gross overreaction to Norbourg, Earl Jones and Norshield). That, and the fact that Quebec's financial institutions are not doing enough to seed and support money management funds, is why our investment industry has been steadily contracting over the last decade. Below, Global Montreal reports on this decision.