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In a decision released Wednesday, the judges ruled the mechanism for setting up a common set of rules for participating provinces “fetters the parliamentary sovereignty” of those provinces and is therefore unconstitutional.

Christinne Muschi/The Globe and Mail

The Quebec Court of Appeal has ruled that the planned new national securities regulator is unconstitutional in several respects, dealing a blow to the co-operative effort less than four years after it was hatched.

Legal experts cautioned the ruling doesn't necessarily mean the end for a national watchdog. They said the court's conclusion is not that a pan-Canadian regulator can't be set up but that there are issues with how it is being set up.

Quebec asked the court to rule on two questions related to the Capital Markets Regulatory Authority, which was launched in 2013 by the federal government, five provinces and one territory to build a national regulator based on a co-operative system. Quebec is among four provincial holdouts against a pan-Canadian scheme.

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The first question asked whether the Canadian Constitution authorizes the implementation of coast-to-coast securities regulation under the authority of a single regulator, according to the model established by the co-operative system's backers. A majority of the five judges answered no.

In a decision released Wednesday, the judges ruled the mechanism for setting up a common set of rules for participating provinces "fetters the parliamentary sovereignty" of those provinces and is therefore unconstitutional, the court said in a summary of the decision on its website. "It subjects the province's power to legislate in this matter to the approval of an external entity (the council of ministers), which is not permitted," the court said.

Judges also ruled that voting mechanisms adopted by the council of ministers overseeing the regulator would give individual provinces what amounts to veto power over federal initiatives. This, in turn, would call into question the constitutional validity of the special legislation the federal government put in place to create the new regulator.

The second question asked whether that legislation, which would create a new "systemic risk" oversight system for capital markets in Canada managed by the new regulator, exceeds Parliament's authority under the Constitution Act. The Quebec judges answered no, saying Parliament has the necessary jurisdiction to adopt the legislation, except as it relates to the proposed roles and powers of the ministers in charge of the new regulator. Under those proposed powers, the judges said the federal legislation would be unconstitutional.

Lawyers contacted for their take on whether the court's decision dashes hopes for a national regulator said the effort likely will live on.

"My own sense is that this is by no means the end of the story," said Lawrence Ritchie, co-chair of the securities regulatory enforcement and broker-dealer practice at Osler Hoskin & Harcourt LLP in Toronto. "There is a path forward."

The Quebec court expressed concerns largely with the framework of the deal, Mr. Ritchie said. Judges "were very clear that it was really the governance model – the voting model at the council of ministers – that was at issue, not with the approach or any other aspects of the sharing of powers and authorities," he said.

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Anita Anand, a law professor at the University of Toronto, said that provinces participating in the Capital Markets Regulatory Authority could amend the contemplated governance structure and the role of the council of ministers. "In short, I do not see [Wednesday's] decision as a deal-breaker" for the new regulator, she said.

It was not immediately clear what the next steps would be. The court's ruling can be appealed to the Supreme Court.

Officials with the group setting up the Capital Markets Regulatory Authority could not be reached. Quebec Finance Minister Carlos Leitao said he believes the court reiterated his government's position, namely that the federal project as it exists is not constitutional.  "This comforts us," the minister told reporters, adding the current passport system works well.

Quebec had argued that Ottawa's revised plan to create a national securities regulator jointly run by participating provinces still violates Canada's constitutional division of powers between federal and provincial governments and runs afoul of a 2011 Supreme Court of Canada ruling on the issue. Many business leaders in Quebec also oppose a national effort, saying it could result in a decrease in securities services for companies located in the province and result in a hollowing out of its legal and business professional network.

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