In its 2012 Budget, the federal government reiterated its economic arguments in support of creating a federal securities regulator.
In December 2011, in the Reference re Securities Act, the Supreme Court of Canada ruled that the proposed Canadian securities legislation referred to it by the government is unconstitutional.
The government had asked the Supreme Court to determine whether the Proposed Canadian Securities Act was within the legislative authority of the Parliament of Canada, in order to “provide legal certainty to the provinces, territories and market participants.”
According to the Supreme Court, the government’s proposed securities legislation is not valid, because it does not fall under the general branch of the federal power to regulate trade and commerce under the Constitution.
Basing its decision on well-established jurisprudence, the Court ruled that the proposed system falls instead under the provinces’ constitutional jurisdiction over property and civil rights. The Supreme Court ruling states that the federal government has a role in matters of genuine national importance, such as the management of systemic risk and the assurance of fair and efficient capital markets across the country.
The Court did not determine what constitutes an optimal model for regulating the securities market, since it believes that it is not the responsibility of the courts to rule on political matters. However, it did bring up the possibility of a cooperative approach between the federal and provincial governments.
From an economic standpoint, the creation of a federal securities regulator does not have unanimous agreement. Some stakeholders and observers are not convinced that such a body would be more effective than the current system, the “passport system.”
The passport system resulted from harmonization efforts by the Canadian Securities Administrators (CSA) to provide participants with a single window into Canadian capital markets. Under this system, a participant can gain automatic access to the capital markets in other provinces and territories by obtaining a decision from the principal regulator, that is, the regulator in the participant’s home province or territory. Although Ontario does not participate in the passport system, it generally recognizes the decisions of the principal regulator, and vice versa.
There are strongly held views regarding the creation of a federal securities regulator in Canada. The same data and sometimes even the same empirical studies are used to support arguments for opposing positions.
For example, some believe that the current system is ineffective and costly and should be replaced by a federal regulator. Others believe that the claims that a federal regulator would be more effective and less costly simply do not add up.
The choice is not an easy one, since both options pose certain problems. On the one hand, the passport system cannot claim to fully harmonize the securities rules throughout Canada without Ontario’s participation. On the other hand, efficiently implementing a federal law governing national securities issues would require the cooperation of the provinces, which is also far from certain.
Will the outcome of the current debate result from further work by the CSA toward harmonization of the rules through a passport system and a single window of access to the capital markets? Or will it result instead in continued efforts to create a federal securities regulator that would oversee truly national issues, based on some sort of cooperation with the provinces as recommended by the Supreme Court?
Whichever path is taken, the nature of the interests and players involved – coupled with the federal government’s stated intention of moving forward with its plans – mean that the next events could have a decisive impact both on securities regulation in Canada and on the operation of Canadian federalism.