Canadian Court Says Single Regulator Unconstitutional
December 23, 2011, 8:03 AM ESTBy Andrew Mayeda and Sean B. Pasternak
(Updates with bank group reaction in final paragraph, case details throughout.)
Dec. 22 (Bloomberg) -- The Supreme Court of Canada ruled that Finance Minister Jim Flaherty’s proposal to create a national securities regulator is unconstitutional, arguing that overseeing capital markets is primarily a provincial matter.
The nine members of the country’s highest court said in its unanimous opinion that the federal government’s proposal “overreaches genuine national concerns.”
While the “economic importance and pervasive character of the securities market” may support federal action, it doesn’t “justify a wholesale takeover of the regulation of the securities industry,” the court said in Ottawa today.
Canada is the only industrialized country in the world without a national securities regulator. Flaherty has pushed for a single model, saying the current system of 13 provincial agencies is more costly and reduces the country’s ability to regulate the securities industry.
Flaherty proposed legislation last year to create a national agency and sought the court’s opinion on whether it was constitutional. The case turned on whether the federal government has the authority to create a national regulator under a section of the Canadian constitution that gives Parliament the power to regulate “trade and commerce.”
Provincial Opposition
Provinces that opposed the plan, such as Alberta, Quebec and Manitoba, argued that the plan encroaches on the constitutional right of provinces to regulate local matters and industries within their borders.
Quebec has been the strongest opponent of the plan, arguing that a common regulator might shift more financial power away from Montreal, the French-speaking province’s biggest city and home to the country’s derivatives market.
Ontario, the country’s most populous province and home to the Ontario Securities Commission and the Toronto Stock Exchange, has been supportive of a single regulator.
The court acknowledged that the “preservation of capital markets to fuel Canada’s economy and maintain Canada’s financial stability” is a national matter.
Still, the proposed law is “chiefly concerned with the day-to-day regulation” of all aspects of securities contracts, which “remain essentially provincial concerns,” the court added.
The court relied partly on a 1989 Supreme Court decision on whether competition law falls under federal jurisdiction in a case involving General Motors Co.’s Canadian unit.
General Motors
The General Motors decision laid out five criteria for whether the federal government’s power over national trade and commerce applies. The government must show that a proposed law is concerned with “trade as a whole” rather than a specific industry, that the provinces themselves are “constitutionally incapable” of making the changes themselves, and that the federal plan would be in jeopardy without the participation of any province.
The court concluded that the federal government didn’t satisfy those three tests.
Still, the court left the door open to a revised proposal that satisfies the rights of the provincial governments. Canada can still adopt a “cooperative approach that permits a scheme recognizing the essentially provincial nature of securities regulation while allowing Parliament to deal with genuinely national concerns,” the court said, adding it is “not for the courts to decide” what such a model should look like.
“Real progress has been made here,” Terry Campbell, chief executive officer of the Canadian Bankers Association, told reporters in Ottawa today. “For the first time, the court has recognized that there’s federal jurisdiction over securities.”
Campbell, whose group represents 53 domestic and foreign bank subsidiaries operating in Canada, said there is still “more work to be done.”
(The Docket number is 33718.)
--With assistance from Doug Alexander in Toronto, Frederic Tomesco in Montreal, Jeremy Van Loon in Calgary and Theophilos Argitis in Ottawa. Editors: Paul Badertscher, David Scanlan
To contact the reporters on this story: Andrew Mayeda in Ottawa at amayeda@bloomberg.net; Sean B. Pasternak in Toronto at spasternak@bloomberg.net.
To contact the editor responsible for this story: David Scanlan at dscanlan@bloomberg.net
