Canada’s top court has dealt what is likely a fatal blow to the federal government’s attempt to create a national stock market regulator, ruling unanimously that the legislation presented to it “overreaches” into provincial jurisdiction.
The decision by all nine justices of the Supreme Court of Canada flies in the face of assurances from Finance Minister Jim Flaherty and a panel of experts he appointed that Ottawa was on sound constitutional ground in legislating in the field.
While not binding, Thursday’s decision likely brings to an end Flaherty’s five-year drive to dismantle the fragmented regime of 13 provinces and territories that currently regulate securities, to the consternation of most stock market participants who favour the single regulator approach.
The government had argued that financial markets have become such a critical aspect of the interwoven global economy that Canada needed a single voice representing its interests on the world stage, and that a single regulator would be more effective detecting and policing fraud.
If so, the government failed to make its case, said the court.
“Canada has not established that the area of securities has been so transformed that it now falls to be regulated under the federal head of power,” the justices wrote.
“In sum, the proposed Act overreaches genuine national concerns,” the court added. “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.”
The analysis sides with six provinces that opposed Ottawa at the court, led by Quebec and Alberta, who argued that under the current passport regime by which decisions in one jurisdiction are recognized in all, the system was working.
Following two similar judgments by appeals courts in Alberta and Quebec, the latest ruling means that since Flaherty introduced the securities legislation in the spring of 2010, 19 justices have looked at the bill and 18 found it wrong in law.
The court noted it was not in the business of deciding whether a national regulator – which is how securities are policed in most advanced countries – is a superior system to what exists today, its decision was based solely on what the law dictates.
Regulating securities has long been a provincial concern under the “property and civil rights” provision of the Constitution, the court said, and the federal government has not shown that the provinces are incapable of regulating and policing in this area.
The decision does not necessarily end Ottawa’s push to become more directly involved in securities regulation, however.
The court ruled that where securities transcend into other areas of general trade, such as posing systemic risks to the economy, Ottawa has a right to intervene for the good of the nation under the “general trade and commerce” clause of the Constitution.
“Legislation aimed at imposing minimum standards applicable throughout the country and preserving the stability and integrity of Canada’s financial markets might well relate to trade as a whole,” the court said.
“However, the proposed Act reaches beyond such matters and descends into detailed regulation of all aspects of trading in securities, a matter than has long been viewed as provincial.”
The court also said that Ottawa can go back to the drawing board and seek a co-operative approach with the provinces, while recognizing that the matter is essentially of a provincial nature.
More to come…