Reference Re Securities Act

[122] ... Canada’s problem is that the proposed Act reflects an attempt that goes well beyond these matters of undoubted national interest and concern and reaches down into the detailed regulation of all aspects of securities. In this respect, the proposed Act is unlike federal competition legislation, which has been held to fall under s. 91(2) of the Constitution Act, 1867. It would regulate all aspects of contracts for securities within the provinces, including all aspects of public protection and professional competence within the provinces. Competition law, by contrast, regulates only anti-competitive contracts and conduct — a particular aspect of economic activity that falls squarely within the federal domain. In short, the proposed federal Act overreaches the legislative interest of the federal government.

[103] Systemic risks have been defined as “risks that occasion a ‘domino effect’ whereby the risk of default by one market participant will impact the ability of others to fulfill their legal obligations, setting off a chain of negative economic consequences that pervade an entire financial system” (M. J. Trebilcock, National Securities Regulator Report (2010), at para. 26). By definition, such risks can be evasive of provincial boundaries and usual methods of control. The proposed legislation is aimed in part at responding to systemic risks threatening the Canadian market viewed as a whole. Without attempting an exhaustive enumeration, the following provisions of the proposed Act would appear to address or authorize the adoption of regulations directed at systemic risk: ss. 89 and 90 relating to derivatives, s. 126(1) on short-selling, s. 73 on credit rating, s. 228(4)(c) relating to urgent regulations and ss. 109 and 224 on data collection and sharing.

[128] To summarize, we accept that 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. However, as important as the preservation of capital markets and the maintenance of Canada’s financial stability are, they do not justify a wholesale takeover of the regulation of the securities industry which is the ultimate consequence of the proposed federal legislation. The need to prevent and respond to systemic risk may support federal legislation pertaining to the national problem raised by this phenomenon, but it does not alter the basic nature of securities regulation which, as shown, remains primarily focused on local concerns of protecting investors and ensuring the fairness of the markets through regulation of participants. Viewing the Act as a whole, as we must, these local concerns remain the main thrust of the legislation — its pith and substance.

[129] This is not a case of a valid federal scheme that incidentally intrudes on provincial powers. It is not the incidental effects of the scheme that are constitutionally suspect; it is rather the main thrust of the legislation that goes beyond the federal power. The federal government properly did not invoke the ancillary powers doctrine. To apply that doctrine, the proposed statute considered as a whole must be valid — which it is not. We further note that we have not been asked for our opinion on the extent of Parliament’s legislative authority over securities regulation under other heads of federal power or indeed the interprovincial or international trade branch of s. 91(2).

[130] While the proposed Act must be found ultra vires Parliament’s general trade and commerce power, a cooperative approach that permits a scheme that recognizes the essentially provincial nature of securities regulation while allowing Parliament to deal with genuinely national concerns remains available.

[131] The various proposals advanced over the years to develop a new model for regulating securities in Canada suggest that this matter possesses both central and local aspects. The same insight can be gleaned from the experience of other federations, even if each country has its own constitutional history and imperatives. The common ground that emerges is that each level of government has jurisdiction over some aspects of the regulation of securities and each can work in collaboration with the other to carry out its responsibilities.

[132] It is not for the Court to suggest to the governments of Canada and the provinces the way forward by, in effect, conferring in advance an opinion on the constitutionality on this or that alternative scheme. Yet we may appropriately note the growing practice of resolving the complex governance problems that arise in federations, not by the bare logic of either/or, but by seeking cooperative solutions that meet the needs of the country as a whole as well as its constituent parts.

[133] Such an approach is supported by the Canadian constitutional principles and by the practice adopted by the federal and provincial governments in other fields of activities. The backbone of these schemes is the respect that each level of government has for each other’s own sphere of jurisdiction. Cooperation is the animating force. The federalism principle upon which Canada’s constitutional framework rests demands nothing less.

[7] It is a fundamental principle of federalism that both federal and provincial powers must be respected, and one power may not be used in a manner that effectively eviscerates another. Rather, federalism demands that a balance be struck, a balance that allows both the federal Parliament and the provincial legislatures to act effectively in their respective spheres. Accepting Canada’s interpretation of the general trade and commerce power would disrupt rather than maintain that balance. Parliament cannot regulate the whole of the securities system simply because aspects of it have a national dimension.

[8] We therefore answer the reference question in the negative.

[9] It is open to the federal government and the provinces to exercise their respective powers over securities harmoniously, in the spirit of cooperative federalism. The experience of other federations in the field of securities regulation, while a function of their own constitutional requirements, suggests that a cooperative approach might usefully be explored, should our legislators so choose, to ensure that each level of government properly discharges its responsibility to the public in a coordinated fashion.

[10] At this juncture, it is important to stress that this advisory opinion does not address the question of what constitutes the optimal model for regulating the securities market. While the parties presented evidence and arguments on the relative merits of federal and provincial regulation of securities, the policy question of whether a single national securities scheme is preferable to multiple provincial regimes is not one for the courts to decide. Accordingly, our answer to the reference question is dictated solely by the text of the Constitution, fundamental constitutional principles and the relevant case law.