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Can Ottawa claim authority over securities sector? Add to ...

How much has the world really changed?

When the Supreme Court of Canada meets this spring to consider whether the federal government can create a national securities commission, that simple question will form a key part of the legal debate in the case.

The supporters and opponents of Finance Minister Jim Flaherty's controversial plan to create a new national regulator have now filed their submissions with the top court in preparation for a two-day hearing in April, and they show a stark difference of opinion about whether the federal government can claim authority over the securities sector.

The court has been asked to decide whether the Conservative government has the constitutional authority to move ahead with its planned legislation, not whether the creation of a national regulator is a good policy move.

York University constitutional law expert Patrick Monahan says a central question emerging from the submissions is whether the federal government can use its constitutional powers over national trade and commerce as grounds for regulating the securities industry.

To do that, Ottawa must convince the court that the securities industry has become dramatically more national - even international - in recent decades and, therefore, fits the national nature of the trade and commerce category.

"I think clearly an important part of the argument is the nature of the capital markets and the increasingly national and international scope of capital markets," Prof. Monahan said.

The recently announced stock exchange mergers should help to support the argument, Prof. Monahan says, offering further evidence that the traditionally local nature of stock exchanges has changed.

"That will not be the last of those mergers - it is a reflection of the increasingly globalized nature of securities and of capital markets generally."

Opponents of the proposed national regulator - including the governments of Alberta and Quebec - are dismissing the federal argument, saying the nature of securities trades has not fundamentally changed, and that there are distinct and local elements to the industry in every province.

Provinces have traditionally been responsible for regulating securities because of their constitutional authority over property and civil rights. They say prior precedents upholding those rights should dominate the Supreme Court's thinking.

In its submission, Alberta has warned the Supreme Court to be careful to not broaden the scope of federal trade and commerce powers so that provinces could lose jurisdiction over lots of other areas, saying the test for shifting powers to the federal government should be rigorous so federalism can still work in Canada.

"This high threshold test is important to maintain the balance of federalism and to avoid intrusions into the degree of local autonomy for the provinces contemplated by the constitution," the province argues.

To convince the Supreme Court that securities regulation is or isn't a federal responsibility, both sides will point to a precedent-setting 1989 case involving General Motors of Canada Ltd. and City National Leasing. That ruling, which upheld the validity of a federal anti-competition law known as the Combines Investigation Act (now the Competition Act), said the law intrudes on provincial powers but "because the regulation of competition is so clearly of national interest" it must be upheld.

But the court's ruling laid out five tests important in deciding if federal trade and commerce powers should apply to a particular sector, and opponents say Ottawa's proposal doesn't meet all of them.

One test looks at whether the proposed legislation is something provinces could not enact jointly by themselves. The court said another critical test is whether the failure by some provinces to join would jeopardize the successful operation of the scheme.

While the federal government says its plan fits all the tests, some of the criteria may present a challenge.

The opposing provinces say they've already created an existing co-operative "passport model" for securities regulation that is up and running - so legislation can be enacted by provinces themselves. The proposed new federal act is almost identical to existing provincial securities acts, they note.

"There are no legislative gaps to fill here," the Quebec filing says.

Opponents also argue the national regulator plan clearly doesn't require participation by all provinces - it will be voluntary for those who choose to join and will proceed even if some provinces do not participate.

University of Toronto law professor Anita Anand, who is running a website publishing court filings from the national regulator case, believes the Supreme Court shouldn't rule against the federal government just because it is opting not to impose the legislation on all the provinces - and may not meet the final test outlined in the GM case.

She said the federal legal filing argues "persuasively" that the court should not focus on the means it is choosing to reach its goal, but rather on its right to regulate.

Prof. Anand said the court will also have to grapple with the significance of new developments in the securities realm since the meltdown of financial markets in 2008, including growing concerns about the need to centrally monitor systemic risks in the financial system.

Those changes could help convince the court securities regulation is shifting from a provincial to federal responsibility, she said.

"I think the fact that things have changed since the financial crisis heightens the federal government's case that this is indeed a trade and commerce issue of a national nature," she said.

Prof. Monahan said his reading of other decisions leads him to believe the top court has grown more flexible over the past 30 years when determining what falls under trade and commerce powers.

"It recognizes that the economy is an interconnected whole and you can't divide up the economy into certain transactions within borders and other transactions that are completed within a province," he said. "You have to look at more of a functional approach, I would say."

A key case

In a 1989 case known as General Motors of Canada Ltd. v. City National Leasing, the Supreme Court of Canada laid out five tests for determining whether a business area should fall under federal - rather than provincial - jurisdiction under the "trade and commerce" provisions of Canada's constitution. The five key questions:

1. Is the legislation part of a regulatory scheme?

2. Is the scheme monitored by the continuing oversight of a regulatory agency?

3. Is the legislation concerned with trade as a whole rather than a particular industry?

4. Is the legislation of a nature that the provinces jointly or severally would be incapable of enacting it?

5. Would the failure to include one or more provinces or localities in the scheme jeopardize the successful operation of the scheme in other parts of the country?

The players

Supporters and opponents of the proposed national regulator legislation who have applied for status to present arguments to the Supreme Court in April:


Attorney-General of Canada, Attorney-General of Ontario, Canadian Foundation for Advancement of Investor Rights, Canadian Coalition for Good Governance, Investment Industry Association of Canada, Canadian Bankers Association, Ontario Teachers' Pension Plan.


Attorney-General of British Columbia, Attorney-General of Alberta, Attorney-General of Saskatchewan, Attorney-General of Manitoba, Attorney-General of Quebec, Attorney-General of New Brunswick, Attorney-General of Nova Scotia, Mouvement d'éducation et de défense des actionnaires, Barreau du Québec, Institut sur la gouvernance d'organisations privées et publiques.

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