Canada’s Top Court Says Single Regulator Is Unconstitutional

The Supreme Court of Canada said that Finance Minister Jim Flaherty’s proposal to create a national securities regulator is unconstitutional, arguing that the federal government overstepped its authority into provincial jurisdiction.

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 today in Ottawa.

Canada is the only industrialized country in the world without a national securities regulator. Flaherty had 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.

The government will “respect” the ruling, a spokesman for Flaherty said after the opinion was released.

“It is clear we cannot proceed with this legislation,” Chisholm Pothier, Flaherty’s director of communications, said in an e-mail. The government will review the opinion “carefully and act in accordance with it.”

Flaherty Proposal

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.”

Provinces that opposed the plan, such as Alberta, Quebec and Manitoba, argued it encroached on the constitutional right of provinces to regulate local matters and industries within their borders.

Quebec had 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.

The current “harmonized” approach is “one of the best systems in the world in terms of regulation and market surveillance,” Quebec Finance Minister Raymond Bachand told reporters in Montreal. “It’s not just me saying it, it’s the OECD and the World Bank saying it.”

Ontario, home to the Ontario Securities Commission and the Toronto Stock Exchange, has been supportive of a single regulator.

Ontario ‘Remains Committed’

Finance Minister Dwight Duncan’s office released a statement today saying Ontario “remains committed” to pursuing a national securities regulator.

The Ontario government will review the court’s ruling “carefully,” the minister’s office said in an e-mailed statement.

Ontario should join the “passport” system where regulator decisions in one province are recognized by the others, Alberta Finance Minister Ron Liepert said. “We have progressed to the point that while it may not be one securities regulator, it’s a harmonized securities registration system,” Liepert told reporters in Calgary.

The Ontario Teachers’ Pension Plan, the country’s third-biggest pension fund manager, said it was “disappointed” with the Supreme Court opinion.

Teachers Disappointed

“Teachers’ contends that Canada needs more efficient and transparent capital markets and that the current fragmentation of the Canadian regulatory system must be addressed,” the Toronto-based fund, which had C$107.5 billion ($105.3 billion) in assets as of Dec. 31, 2010, said in an e-mailed statement.

The Supreme 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.

Five Criteria

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 may 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’s “not for the courts to decide” what such a model should look like.

‘Temporary Setback’

“In terms of securities regulation this is a setback for the country, but it should only be a temporary setback,” said Philip Anisman, a Toronto Securities lawyer and author of “Proposals for a Securities Market Law for Canada.”

“They do leave open the potential for the federal government and the provincial governments to develop a cooperative scheme,” Anisman said in a telephone interview.

“We believe the adoption of a single regulator would help Canada move to a more principles-based system of regulation and help improve enforcement,” said Richard Waugh, chief executive officer of Toronto-based Bank of Nova Scotia. “We look forward to playing whatever role we can to assist.”

Terry Campbell, chief executive officer of the Canadian Bankers Association, said “real progress has been made.”

“For the first time, the court has recognized that there’s federal jurisdiction over securities,” Campbell told reporters in Ottawa.

Brendan Caldwell, CEO of Caldwell Investment Management Ltd. in Toronto, said the regulation of securities is “simply a provincial matter, full stop.”

“As tempting as it is for the federal government to want, in the best interest of Canadians, to make a good solution, it’s over to the provinces to actually agree on something without Papa Bear imposing a solution,” said Caldwell, whose company oversees about C$1 billion in assets.

(The Docket number is 33718.)

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