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Jeremy Fraiberg says the prospect of a Supreme Court hearing may prompt holdout provinces to strike a deal (Fred Lum)
Jeremy Fraiberg says the prospect of a Supreme Court hearing may prompt holdout provinces to strike a deal (Fred Lum)

Taking sides on a single securities regulator Add to ...

The federal government's bold announcement that it will seek the Supreme Court's opinion on the constitutionality of a national securities regulator has brought Canada one step closer to reaching this elusive goal.

Unlike the United States, where Congress created the Securities and Exchange Commission during the Great Depression, Parliament has to date chosen to let the provinces regulate our capital markets.

The fact that Parliament has opted not to regulate securities has led some to believe - mistakenly - that it does not have the power to pass comprehensive securities legislation.

But in the opinion of many of Canada's leading constitutional experts, the federal government does indeed have the authority under the trade and commerce power of the Constitution to act unilaterally in creating a national securities regulator.

Historically, the federal government has been reluctant to ask the Supreme Court to confirm its power, fearing a constitutional battle that would antagonize the provinces.

What's changed the landscape is the Quebec government's announcement in July that it plans to challenge in the Quebec Court of Appeal the federal government's jurisdiction to establish a Canadian regulator.

Quebec's court challenge is surprising because the federal government has not yet proposed legislation creating a national regulator. Instead, Ottawa has only passed legislation that established the Canadian Securities Transition Office, which is tasked with managing the transition to a national regulator by willing provinces, and that also provides funding for the transition.

To date all provinces except for Quebec, Alberta and Manitoba have agreed to participate in the Transition Office's advisory committee.

In its bid to protect its jurisdiction, Quebec has arguably given the Conservative government the political leverage it needs to ask the Supreme Court to confirm Parliament's ability to create a new national regulator.

The Conservatives can credibly say that they did not start the constitutional litigation, Quebec did.

In addition, the Conservatives can correctly argue that any decision of the Quebec Court of Appeal will ultimately be appealed to the Supreme Court.

Accordingly, it is in the national interest to refer the matter directly to the Supreme Court in order to provide legal certainty to market participants.

A Supreme Court reference also gives the Conservatives the opportunity to frame questions that are posed to the court about the constitutionality of a national securities regime.

There is general consensus that the federal government has the jurisdiction to pass comprehensive securities legislation.

A potentially trickier issue is whether the federal government can include a so-called paramountcy clause in the legislation that would allow it to regulate exclusively in certain key areas, such as approval of public company prospectuses and the registration of investment dealers. Such moves would render any provincial regulation in these areas inoperative.

Under the paramountcy doctrine, whenever there is a so-called operational conflict between valid federal and provincial law or where the provincial law is contrary to the purpose of the federal law, federal law prevails.

In a previous Supreme Court decision relating to insider trading, the court ruled that mere duplication does not result in operational conflict.

However, if Parliament's objective is to create a single regulator with exclusive jurisdiction in certain key areas, that goal would be frustrated if the provinces could continue regulating in those areas.

It will be interesting to see whether the federal government asks the Supreme Court for its opinion on the efficacy of a paramountcy clause in the debate over a national securities regulator.

The Supreme Court's answer will have important implications not just for securities regulation, but for other areas of joint federal-provincial jurisdiction as well.

A decision favourable to the federal government from the Supreme Court would greatly strengthen Ottawa's bargaining position with the provinces.

Even the prospect of a Supreme Court hearing may prompt the provinces to strike a deal.

One possible negotiated outcome could be a single regulator for all provinces other than Quebec, with a passport system between the new regulator and Quebec.

This example of asymmetrical federalism could be justified on the basis of Quebec's distinctive civil law regime and French-language requirements.

It may be politically attractive to the Conservatives, and would presumably be supported by the Bloc Québécois. Quebec may even be able to maintain its seat at the International Organization of Securities Commissions.

There is also precedent for asymmetrical deals with Quebec relating to national institutions, as evidenced by the arrangements involving the Canada Pension Plan and Quebec Pension Plan.

It is also possible that the Conservatives, emboldened by a strong Supreme Court judgment, might propose legislation creating a single regulator even in the face of provincial opposition. The Liberals have publicly supported the creation of a single regulator and might be willing to join the Conservatives on this issue.

A Supreme Court hearing will provide a unique opportunity to resolve years of constitutional bickering about an important question of economic regulation, and for Canada to create a world-leading securities regulatory structure.

Special to The Globe and Mail

Jeremy Fraiberg is a partner at Osler Hoskin & Harcourt LLP. The views expressed are his own.

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