Mr. Michael Phelps
Chair
WPC – Committee to Review the Structure
of
Securities Regulation in Canada
25th Floor
700 West Georgia Street
Vancouver, British Columbia
V7Y 1B3
| Re: |
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You have asked my opinion on two constitutional questions relating to the Canadian Securities Commission (“CSC”) model outlined in Chapter 6 of the Committee’s report. The two questions, and a summary of my opinion concerning them, are as follows.
1. Does the federal government have the legislative authority to enact legislation implementing the CSC model? Do the provinces and territories correspondingly have legislative authority to enact legislation that: (a) incorporates by reference the new federal securities legislation; (b) delegates administrative powers to the CSC; and (c) dissolves their respective existing provincial and territorial securities regulators?
The federal government has legislative authority under its general regulation of trade power, conferred by s. 91(2) of the Constitution Act, 1867, to implement the CSC model. Based on the factors that the Supreme Court has identified as relevant, the CSC model would constitute a valid general regulation of trade rather than an impermissible regulation of a particular trade. The provinces and territories may enact the corresponding legislation to which this question refers. Legislatures are afforded wide scope to enact incorporations by reference and administrative interdelegations. The power to establish a regulatory body includes the power to dissolve it.
2. If one or more
provinces or territories decide not to enact the legislation described above,
and the federal government concludes that this would jeopardize the successful
operation of the scheme in other parts of the country, would the federal government
nevertheless have the legislative authority to implement the CSC model on a
national basis by including in its legislation an express paramountcy clause
that plainly demonstrates an intention to enact a complete code and which states
that federal legislation alone would govern, to the exclusion of provincial
and territorial regulation, on prescribed matters, including amongst other matters:
(a) prospectus review; (b) registration of market intermediaries; (c) take-over
bid regulation; (d) continuous disclosure by public companies: (e) prospectus
exempt financings (f) international securities agreements; and (g) securities
regulatory enforcement actions?
Federal legislation that included an express paramountcy clause of
this kind would be effective to exclude the operation of provincial and territorial
regulation of the matters to which the paramountcy clause applied. As currently
interpreted, the paramountcy doctrine renders provincial legislation inoperative
where the application of the provincial legislation would displace the legislative
purpose of Parliament. While it is not necessary that it do so, Parliament
is entitled to state expressly its purpose that the CSC model, and it alone,
should govern specified aspects of securities regulation. I will now set out the basis for my opinion,
dealing with the two questions in turn. In my view, the federal government has
authority under its general regulation of trade power, conferred by s. 91(2)
of the Constitution Act, 1867, to implement the CSC model. It is also
arguable that the federal power to legislate on matters of “national concern”,
recognized as stemming from the “peace, order and good government” clause
in the opening words of s. 91 of the Constitution Act, 1867, would
support implementation of the model. Other federal powers would be available
to support legislation implementing portions of the model. But since the
federal government could in my view rely on the general regulation of trade
power in implementing the model in its entirety, I will focus my discussion
on that power. Section 91(2) of the Constitution Act,
1867 gives the federal government a power described as “The Regulation
of Trade and Commerce”. Since the decision in Citizens Insurance Co. v.
Parsons (1881), 7 App. Cas. 96, it has been settled constitutional law
that the power conferred by s. 91(2) has two branches: (1) the regulation
of interprovincial and international trade, and (2) “the general regulation
of trade affecting the whole dominion”. It has also been settled that s.
91(2) does not authorize regulation of the contracts of a particular business
or trade. That power rests with the provinces under s. 92(13) as a matter
of property and civil rights. The general regulation
of trade power lay largely unused, and its content largely unexplored, for
many years following the Parsons case. However, in more recent cases
the Supreme Court of Canada has clarified the scope of the power. Where it
applies, it authorizes federal regulation not only of interprovincial and
international trade, but also of trade within a province.
The leading case on the scope of the
power is General Motors of Canada Ltd. v. City National Leasing Ltd.,
[1989] 1 S.C.R. 641. According to the Court’s reasons in that case, five
factors are relevant in determining whether federal legislation qualifies
as a general regulation of trade. These factors also assist in making this
determination in a way that maintains an appropriate balance between federal
power under s. 91(2) and the provinces’ property and civil rights power
under s. 92(13). The five factors are: (1)
the legislation must be part of a general
regulatory scheme; (2)
the scheme must be monitored by a regulatory
agency; (3)
the legislation must be concerned with trade
as a whole rather than with a particular industry; (4)
the legislation should be of a nature that
the provinces jointly or severally would be constitutionally incapable of
enacting; and (5)
the failure to include one or more provinces
or localities in a legislative scheme would jeopardize the successful operation
of the scheme in other parts of the country. The Court stated that these five factors
are not exhaustive, and that the presence or absence of any of them will
not necessarily be determinative. However, their presence will “make it
far more probable that what is being addressed in a federal enactment is
genuinely a national economic concern and not just a collection of local
ones”. In the General Motors case, the
Supreme Court applied these factors to uphold the federal Combines Investigation
Act (now the Competition Act) as a general regulation of trade.
It had no difficulty finding a regulatory scheme and oversight by a regulatory
agency, the Director of Investigation and Research (now the Commissioner
of Competition), so that the first two factors were present. It described
the last three factors as sharing “a common theme: all three are indications
that the scheme of regulation is national in scope and that local regulation
would be inadequate”. In concluding that the third factor was present,
it focused on the generality of application of the Combines Investigation
Act. It described the Act as “quite clearly concerned with the regulation
of trade in general, rather than with the regulation of a particular industry
or commodity”, and as “aimed at eliminating commercial practices which are
contrary to healthy competition across the country, and not in a specific
place, in a specific business or industry”. In addressing the last two factors,
the Court reviewed what it described as “the diverse economic, geographical,
and political factors which make it essential that competition be regulated
on the federal level”. These included the increased mobility of labour,
capital, goods and technology across provincial boundaries, facilitated
by improvements in communications and transportation, and the need for national
competition policy to promote and protect the national common market and
the welfare of the national economy, free from the distortions that might
result from differing provincial competition policies. It saw it as “evident
... that competition cannot be effectively regulated unless it is regulated
nationally”. For the same reasons,
the Court rejected the argument that the legislation should be read down
so as not to apply to intraprovincial trade. Intraprovincial trade could
not be excluded both “[b]ecause regulation of competition is so clearly
of national interest and because competition cannot be successfully regulated
by federal legislation which is restricted to interprovincial trade”. It
is clear, therefore, that where federal legislation qualifies as a general
regulation of trade, it can validly extend not only to interprovincial and
international but also to intraprovincial trade.
Based on the factors discussed by
the Supreme Court in General Motors and the approach to
the federal general regulation of trade power that they express, I conclude
that federal legislation implementing the CSC model would be constitutionally
valid as a general regulation of trade. The first two factors to which the
Supreme Court referred in General Motors – that the legislation
be part of a general regulatory scheme and that the scheme be monitored
by a regulatory agency – would readily be met. The remaining three factors
require more detailed discussion. In my view, legislation implementing
the CSC model would properly be described as concerned with trade as a
whole rather than with a particular trade or industry, so as to meet the
third factor. While it could be argued that the regulation was of a particular
trade or industry – the securities trade or industry – that characterization
would not accurately capture what the model would entail. It is true that provincial securities
legislation has often been characterized as regulating the securities
trade. This characterization fits well with the constitutional basis,
s. 92(13) of the Constitution Act, 1867, invoked to support provincial
legislation: s. 92(13) has long been held to confer on the provinces
the power to regulate particular trades or industries. But the CSC model
would extend to a great many participants in the capital markets other
than dealers, brokers and others who can be regarded as involved in the
securities trade or industry per se. In extending to issuers,
for example, it would apply to market participants engaged in a wide variety
of businesses and trades – to all those, whatever their ordinary business
or trade, who issue and seek to raise capital in Canada on the strength
of securities. In this respect the model can properly be analogized to
the generally applicable scheme regulating competition upheld in General
Motors. The fourth factor, again, is that
the provinces jointly or severally would be constitutionally incapable
of enacting the legislation. The Supreme Court did not fully spell out
the meaning of the fourth factor in General Motors. It focused
more on the fifth factor– whether the failure to include one or more provinces
or localities would jeopardize the successful operation of the scheme
in other parts of the country – and on the question whether provincial
regulation of competition could be effective, than on the question of
constitutional incapability. However, its acknowledgement that provinces
can and do pass their own competition laws makes it clear that the absence
of any provincial power at all in the field is not required for the fourth
factor to be present. Although it was not explicit in General
Motors, the key to the Court’s conclusion on the fourth factor
seemed to be that the increasingly interprovincial nature of the flow
of goods, services and capital precluded the provinces from effectively
setting competition policy and regulating competition. A variety of means
have been suggested through which the provinces can enhance the cooperation
that already exists between them in securities regulation and deploy their
powers to create a virtual scheme of national regulation. But this does
not necessarily mean that the constitutional incapability factor is absent.
The Supreme Court’s recent decision in Unifund Assurance Co. v. Insurance
Corp. of British Columbia, 2003 SCC 40, emphasizes that a province
may only exercise its regulatory authority over people and matters with
a sufficient connection to the province. The Committee’s research, as
I understand it, strongly suggests that capital markets have become increasingly
integrated, and that Canada’s capital markets have become national in
scope. It can readily be argued that separate provincial regulatory regimes,
each subject to territorial limits, are constitutionally incapable of
comprehensively regulating securities, just as they could not effectively
regulate competition.
The fifth factor – the potential
impact of failure to include one or more provinces or localities on
other parts of the country – encompasses in the securities context,
in my view, the potential consequences of regulatory failure in one
province for capital markets and participants in capital markets elsewhere
in Canada. There appears to be a sound basis for concluding that this
factor is present. For example, one province’s failure to adopt an
adequate regulatory scheme could both impair the reputation of Canadian
capital markets generally, and adversely affect the residents of other
provinces whose securities are traded there. According to the decision in General
Motors, the presence of all of the factors is not strictly necessary
for legislation to constitute a general regulation of trade. The underlying
purpose of all of the factors is to help determine whether what the
scheme is addressing is genuinely a national economic concern and not
just a collection of local ones. The last three factors go to whether
the scheme of regulation is national in scope and whether local regulation
would be inadequate. Upholding the CSC model as a general
regulation of trade could therefore ultimately turn on how the courts
approached the two overarching questions of national scope and adequacy
or effectiveness of provincial regulation. The answer to the national
scope question would likely favour upholding the model. The Supreme
Court has shown itself prepared, in cases like Multiple Access Ltd.
v. McCutcheon, [1982] 2 S.C.R. 161, and Global Securities Corp.
v. British Columbia (Securities Commission), [2000] 1 S.C.R. 494,
to recognize that there is a strong transprovincial and transnational
dimension to Canadian capital markets. The Committee’s conclusions
appear to provide further support for this assessment. The CSC model
would be general and national, not particular and local, in its application. The Court’s repeated
references in General Motors to the need for federal regulation
if there is to be effective regulation indicate that the question of
effective regulation might well be determinative. The way in which
the general regulation of trade power has developed thus places the
Court in a somewhat unusual position. Ordinarily, as the Supreme Court
stated in Reference re Firearms Act (Can.), [2000] 1 S.C.R. 783,
the Court does not evaluate the efficacy – or lack of efficacy – of
legislation in deciding constitutional division of powers questions.
Ordinarily, for a number of institutional reasons, it is not for judges
but for legislators to gauge the effectiveness of legislation.
In the General Motors case,
the Supreme Court paid heed in considering the effectiveness question
to the conclusions of studies that formed part of the background to
the enactment of federal competition legislation. It was appropriate
in my view for the Court to do so. It would be equally appropriate
in considering the effectiveness question in relation to federal legislation
implementing the CSC model for courts to take account of your Committee’s
conclusions and recommendations, along with other views considered
by Parliament before enacting the legislation. There will almost
certainly continue to be a range of opinions on the effectiveness
question, as there has been to date. But particularly if the material
put before it gave Parliament a reasonable basis to conclude that
federal securities regulation is necessary to ensure effective regulation,
it is likely in my view that legislation implementing the CSC model
would be held constitutionally valid as a general regulation of trade. Once the federal legislation implementing
the CSC model was enacted, in my view the provinces would be fully
entitled to enact legislation incorporating the new federal securities
legislation by reference, delegating administrative powers to the
CSC and dissolving their respective securities regulators. Because the territorial legislatures
do not have independent constitutional status, and the exercise of
their legislative authority is subject to federal legislation, the
federal government would have authority to decide how best to deal
with securities regulation in the territories following the implementation
of the CSC model. I will therefore confine the balance of this discussion
to the provinces’ authority to defer to the CSC model. The enactment of the federal legislation
would not by itself preclude the provinces from continuing to regulate
securities. They could continue to do so. The federal power to enact
legislation that constitutes a general regulation of trade does not
take away the provinces’ regulatory powers. Whether their legislation
would continue to operate if they chose not to defer to the new federal
legislation would depend on the application of the paramountcy doctrine,
discussed below in answer to the Committee’s second question. But there would
be no constitutional difficulty with their exercising their powers,
if they chose to do so, by referentially incorporating the federal
legislation and delegating administrative powers to the CSC. It is
constitutionally impermissible for the federal Parliament and provincial
legislatures to delegate legislative authority directly to each other.
But as the Supreme Court of Canada confirmed in R. v. Furtney,
[1991] 3 S.C.R. 89, “Parliament may delegate legislative authority
to bodies other than provincial legislatures, it may incorporate provincial
legislation by reference and it may limit the reach of its legislation
by a condition, namely the existence of provincial legislation.”
Provincial legislatures have corresponding authority to delegate to
other bodies, to incorporate federal legislation by reference and
to limit the reach of provincial legislation by conditioning its application
on federal legislation.
Incorporation by reference entails
enacting legislation providing that a matter within the legislature’s
authority be governed by legislation enacted by another legislature,
either as it exists at the time of the incorporation or, where the
incorporating legislation is explicit on this point, as it might
be modified in the future. This is regarded as one legislature’s
adopting as its own and for its own purposes legislation enacted
by another. It is very common in Canada to combine this technique
with the delegation of regulatory authority to a regulatory body
created by another legislature, coupled with a direction to that
regulatory body to apply that legislature’s law. While there are suggestions
in the case law that the power of delegation is subject to “reasonable
limits”, and that Parliament or a legislature may not go so far
as to “abdicate” or “abandon” its powers to a delegate, very broad
delegations of authority have repeatedly been upheld. These include
delegations that give regulatory bodies extensive powers to fashion
regulatory schemes governing particular areas of economic activity.
The courts have appreciated the desirability of intergovernmental
cooperation in enacting comprehensive schemes of regulation. In
my view it is very unlikely that any delegation of authority to
regulate securities would be regarded as an impermissible abdication
or abandonment of legislative power. There would also, in my view,
be no constitutional difficulty with dissolving existing regulators.
As a matter of legislative sovereignty, the power to enact legislation
includes the power to repeal it. Legislation that created a regulatory
body could be amended or repealed to dissolve it. 2. Federal authority to
exclude provincial and territorial regulation through paramountcy In my view the federal government would
be entitled to ensure that the CSC model operated as a complete code governing
specified securities matters by including in the implementing legislation an
express paramountcy clause. Federal
legislation would be effective to exclude provincial securities regulation
under the paramountcy doctrine if it plainly demonstrated an intention that it
and it alone govern the matters from which provincial regulation was to be
excluded. An express paramountcy clause
would constitute an unmistakable, and in my view constitutionally effective,
expression of this intention. Because of the
territories’ dependant constitutional status, there would be no
need to invoke the paramountcy doctrine to exclude the operation
of territorial securities regulation. The federal Parliament could
directly override territorial legislation.
The paramountcy doctrine applies
where there is conflict in operation between valid provincial
and valid federal legislation. Its result is that the federal
legislation prevails, and the provincial legislation is inoperative,
to the extent of the conflict. The key determinant of whether
the paramountcy doctrine applies is the test for identifying a
conflict in operation between the federal and the provincial legislation.
As the Supreme Court’s recent decisions make clear, the test now
applied is whether operation of the provincial legislation “would
displace the legislative purpose of Parliament”. That phrase first appeared
in Multiple Access Ltd. v. McCutcheon, where the Supreme
Court appeared to adopt a stringent test of express contradiction
for determining the existence of a conflict sufficient to trigger
operation of the paramountcy doctrine. Paramountcy was invoked
in that case to argue that federal insider trading legislation,
applicable to federally incorporated companies, rendered inoperative
the virtually identical insider trading provisions of the Ontario
Securities Act. The Supreme Court held that
the paramountcy doctrine did not apply. It stated the test as
one of “actual conflict in operation as where one enactment says
‘yes’ and the other says ‘no’; ‘the same citizens are being told
to do inconsistent things’; compliance with one is defiance of
the other”. Duplicate legislation did not present a conflict
based on this test. Rather, duplication was “the ultimate in
harmony”. The Court added that because the two sets of legislation
were so similar, “the legislative purpose of Parliament will be
fulfilled regardless of which statute is invoked by a remedy-seeker;
application of the provincial law does not displace the legislative
purpose of Parliament.” The Court’s inference was that Parliament
did not intend that only its legislation govern. Three more recent Supreme
Court decisions signal a less restrictive approach to identifying
a conflict, one that builds on the reference in Multiple Access
to “displacing the legislative purpose of Parliament”, and gives
primacy to Parliament’s intention as to whether its legislation
should operate as a complete code. In Bank of Montreal v.
Hall, [1990] 1 S.C.R. 121, the Court held that provincial
legislation setting conditions on secured creditors’ enforcement
of security interests conflicted with and was rendered inoperative
by federal legislation governing Bank Act security. The
federal statute gave a bank holding the security an immediate
right to realize on it on default. The Court rejected the argument
that there was no conflict in operation because banks could simply
follow the provincial legislation. “The focus of the inquiry,”
it stated, “must be on the broader question whether operation
of the provincial Act is compatible with the federal legislative
purpose.” “Dual compliance will be impossible when application
of the provincial statute can fairly be said to frustrate Parliament’s
legislative purpose.” The Court summarized the situation as one
in which Parliament had “enacted a complete code”, so that there
was “no room left for the operation of the provincial legislation”.
In M &
D Farm Ltd. v. Manitoba Agricultural Credit Corp., [1999]
2 S.C.R. 961, the Court referred to the “extended meaning” given
by the relevant jurisprudence to the “express contradiction” between
federal and provincial statutes necessary to trigger the paramountcy
doctrine. In that case a farmer had obtained a stay of proceedings
by creditors under federal legislation. As permitted by provincial
legislation, a mortgagee then obtained leave from the court to
commence foreclosure proceedings. Though the creditor could comply
with both statutes by not taking enforcement measures, the Court
found an operational conflict: the legal system could not simultaneously
create an entitlement to enforce and a prohibition on enforcement.
The Court was also prepared to look to the substance rather than
the form of the two enactments – one of which directly stayed
creditor enforcement actions and the other of which required leave
to commence enforcement proceedings – to recast them as creating
conflicting directives to the court dealing with enforcement of
the mortgage.
In Law Society of British
Columbia v. Mangat, [2001] 3 S.C.R. 113, the Court again
emphasized the importance of looking, in determining whether
a conflict in operation exists, at “whether the application
of the provincial law will displace the legislative purpose
of Parliament”. The Court found an operational conflict where
a provincial law prohibited non-lawyers from acting in immigration
proceedings, while the federal law authorized non-lawyers to
appear and charge a fee. The Court dismissed as “superficial”
the suggestion that there was no operational conflict because
a person could comply with both enactments, either by becoming
a lawyer or by not charging a fee. While complying with the
stricter provincial statute would necessarily involve complying
with the federal statute, dual compliance was impossible based
on the “expanded interpretation” of conflict in M & D
Farm and Bank of Montreal v. Hall. “Where there
is an enabling federal law,” the Court stated, “the provincial
law cannot be contrary to Parliament’s purpose.” In my view, the current
focus in the paramountcy cases on the purpose of Parliament
means that the federal government could, through legislation
implementing the CSC model, preclude the operation of provincial
securities regulation. It would not be strictly necessary in
my view to include an express paramountcy clause to bring about
this result. It would be sufficient that the legislation plainly
manifested an intention that it and it alone govern the specified
aspects of the transactions and activities to which it applied.
If this intention was apparent, then a court should conclude,
whatever the degree of similarity or duplication between the
federal and the provincial legislation, that the operation of
the provincial legislation would “displace the legislative purpose
of Parliament”, so that the paramountcy doctrine would render
it inoperative. While an express paramountcy
clause would not be necessary if this intention was otherwise
clearly expressed, it would in my view be open to Parliament
to include an express paramountcy clause specifying that the
federal legislation alone should govern. An express paramountcy
clause would, among other things, make it clear that Parliament’s
intention was not the same as that expressed in the legislation
considered in the Multiple Access case. The question
of paramountcy of the CSC model would arise in a very different
legislative and policy context from that of the Multiple
Access case. But because that case was a securities case,
in which the Supreme Court applied the paramountcy doctrine
so as to permit federal and provincial regulatory schemes to
operate concurrently, a court might in the absence of an express
paramountcy clause be tempted to follow Multiple Access
and hold that both sets of regulations could operate. An express
paramountcy clause would constitute an unmistakable expression
that the continued operation of provincial regulation in the
face of the CSC model would “displace the legislative intention
of Parliament”. Including
express paramountcy clauses has not been the ordinary practice
in federal legislative drafting. As a result, courts have typically
been left to infer Parliament’s legislative purpose from the
operative terms of the legislation. But I see no reason in
principle why Parliament should not be entitled to make its
purpose express, and why the courts should not give effect to
an express paramountcy clause in federal securities legislation.
As I understand it, the
Committee’s second question contemplates an express paramountcy
clause that would not apply generally to the legislation implementing
the CSC model, and would thus not seek to exclude all aspects
of provincial securities regulation. Instead, it would cover
specified aspects of securities regulation, from which Parliament
considered it necessary to exclude provincial regulation to
avoid jeopardizing the operation of the federal scheme. Framing an express paramountcy
clause in this way would in my view enhance the likelihood
that the courts would accept this technique. An approach
along these lines should not as a legal matter be required
for an express paramountcy clause to be given effect. However,
a more focused rather than a more general clause might as
a practical matter be regarded as more palatable, because
it would allay possible concerns about the extent of the impact
of paramountcy on a recognized field of provincial regulation.
Yours very truly, John B. Laskin JBL/tp1 Federal authority to implement, and provincial and territorial
authority to defer to, the CSC model
Federal authority to implement the
CSC model
The federal general regulation of
trade power
The CSC model as a general regulation
of trade
Provincial and territorial
authority to defer to the CSC model