The Supreme Court of Canada Finds the Proposed Canadian Securities Act Unconstitutional
On December 22, 2011 the Supreme Court of Canada released its decision regarding the ability of the federal government to legislate securities trading. The Court unanimously decided that the proposed federal securities legislation is not constitutional: the federal government does not have the power to regulate comprehensively securities under its general trade and commerce jurisdiction under the Constitution Act, 1867.
The Court noted that parliament's power over the regulation of trade and commerce as set out in the Constitution Act, 1867, while drafted broadly, cannot be used in a way that denies the provincial legislature the power to regulate local matters and industries within their boundaries. The Court did acknowledge a limited capacity on the part of the federal government, to regulate securities matters having genuine national importance and scope, such as the management of systemic risk and national data collection.
In determining that the proposed Securities Act was not constitutional, the Court applied the five considerations set out in General Motors of Canada v. City National Leasing,  1 S.C.R. 641; the leading decision on the scope of the federal trade and commerce power under the Constitution Act, 1867:
- whether the law is part of a general regulatory scheme;
- whether the scheme is under the oversight of a regulatory agency;
- whether the legislation is concerned with trade as a whole rather than with a particular industry;
- whether it is of such a nature that provinces, acting alone or in concert, would be constitutionally incapable of enacting it; and
- whether the legislative scheme is such that, the failure to include one or more provinces or localities in the scheme, would jeopardize its successful operation in other parts of the country.
The Court found that the first two requirements of the General Motors test were met.
In addressing the third, fourth and fifth parts of the test, the Court observed that the purpose of the proposed Act was to establish a comprehensive regime to regulate securities trading across the country, which would have the effect of duplicating and displacing the existing provincial and territorial securities regimes. The Court found that the proposed legislation as a whole "did not address a matter of genuine national importance and scope going to trade as a whole in a way that is distinct and different from provincial concerns." The Court did note, that while the day-to-day regulation of securities trading fell clearly within provincial jurisdiction, specific parts of the proposed Act that related to management of systemic risk and national data collection, did appear to be permitted under the general federal trade and commerce power.
The Court observed that the federal government and provincial governments could still work cooperatively to regulate securities trading in light of the Court's decision: "The federalism principle upon which Canada's constitutional framework rests demands nothing less."
McCarthy Tétrault Comments
The decision seems to rule out a comprehensive federal "opt-in" statute based on the federal trade and commerce power: for example, matters such as registration are reserved to the provinces. The Court also observed that a comprehensive regime would need to be the result of interprovincial cooperation.
The decision comments favourably on the jurisdiction of the federal government to regulate in areas of systemic risk threatening the Canadian market viewed as a whole such as regulation of derivatives, short selling, credit rating and data collection and sharing and reflects the judiciary's ongoing encouragement of negotiation and compromise between the federal government and the provinces.