This isn’t about a national securities regulator. It is about how far federal powers extend and is the most important division of powers case in decades. The heart of the fight is whether the fed’s power to regulate trade and commerce under s. 91(2) of the Constitution Act, 1867 trumps the provinces’ power to regulate property and civil rights under s. 92(13).
The federal government lays out a strong argument as to why it can create a national regulator. It argues there is a need to reduce systemic risk and create better investor protection. Since trade in securities crosses provincial boundaries, international trade and commerce powers apply. It doesn’t seek to usurp the provinces, it merely claims to coexist with them by creating a national system where provinces can opt in. Those that don’t can continue to regulate their own markets.
Originally, only Alberta, Manitoba, and Quebec balked at the proposal. That was until other provinces read the legal briefs and began to understand the impact a favourable ruling would have on their domain. The test the federal government proposes is wide and the most aggressive federal power play since Pierre Trudeau unilaterally repatriated the Constitution.
In justifying its move into the securities sphere, the federal government makes sweeping statements. It says capital markets: “affect the well-being and prosperity of all Canadians”; “are increasingly national and international”; and “are evolving rapidly and are increasingly complex.” The brief argues provinces are ill-equipped to deal with these developments.
The danger is that today it is capital markets. What is it tomorrow? One can easily argue natural resources affect the well-being and prosperity of all Canadians. Our food systems, technology, and other industries governed by provinces are also becoming more global. If the feds succeed here, how soon before they go after marketing and dairy boards or provincial oversight of professions, mining approvals, or other local endeavours?
It’s fine to say we need a national securities regulator. Few dispute that. The provinces have attempted to create a harmonized regime through the passport system with the lone holdout being Ontario. It is puzzling why the Dalton McGuinty government, which faces a fall election, agrees to back the federal government’s intrusion into a space so cherished by provinces as property and civil rights.
Meanwhile, playing out in the background is the move by the Toronto Stock Exchange to merge with the London Stock Exchange. That has muddied the waters in a rather humorous way. On one hand, the federal government argues that markets are global and Canada needs a national regulator. Yet, when Canada’s biggest exchange claims it needs to merge with a competing exchange because securities markets are global, the government gets cold feet and claims it needs to review the net benefits of the merger to Canada. You can’t have it both ways. If you argue on one hand that markets are global, it seems disingenuous to protect a stock exchange from those market vagaries.
The federal government also claims a need to protect the public. It already has that right. The feds control the criminal law. Yet, here we are a decade later and the two guys convicted of cooking the books at Cineplex Inc. are still walking the street. It doesn’t instil confidence in the fed’s ability to regulate the markets when the laws it has written can’t garner convictions for the very thing they regulate.
Frankly, the provinces aren’t much better on enforcement. The Ontario Securities Commission can’t seem to secure an insider-trading charge, while other provinces have seen some of the biggest Ponzi schemes operate right under their noses. In the middle of this fight, the B.C. Securities Commission opportunistically decides to crack down on fraudsters — too little, too late. About the only one province that has been effective on behalf of investors is the Quebec Securities Commission in the Norbourg scam.
This fight will be divisive but has been simmering for decades. Why Finance Minister Jim Flaherty chose this moment to bring the reference with a pending federal election is not clear. Chances are it was a result of the market meltdown of 2008 and he probably promised other nations Canada would seek a national regulator. But it’s not that easy. The country was founded on the division of powers. For the court to allow the gutting of the provinces’ powers over property and civil rights — securities are simply contracts — would substantially alter the power balance and shift it to the feds. Let’s hope that there are still some provincialists sitting on the Supreme Court bench.
Jim Middlemiss is a Toronto lawyer and co-owner of WebNews Management Corp. He can be reached at email@example.com.