Capital Markets

Nigel Campbell, Aaron Palmer and Doug McLeod

In a significant announcement made in yesterday's federal budget (the Budget), the federal government proposed the creation of a national securities regulator by way of negotiated agreement with the provinces, but also indicated that it would act unilaterally and introduce federal legislation if a negotiated resolution could not be reached in a timely manner. As stated in the Budget:

"The Government's preferred approach to improving the regulation of Canada's capital markets is through a common securities regulator established co-operatively with provinces and territories. If a timely agreement cannot be reached on a common regulator, the Government will propose legislation to carry out its regulatory responsibilities consistent with the decision rendered by the Supreme Court of Canada."

Some of the implications of this announcement are outlined below.

Background: The Constitutionality of Federal Securities Regulation
The federal government's attempts to bring national securities regulation to Canada began well before yesterday's announcement. Most recently, after decades of public debate on the issue, in 2010 the federal government released a proposed federal Securities Act (the Proposed Act), the provisions of which were discussed in a prior Blakes Bulletin, found here. The introduction of the Proposed Act triggered a series of references on the constitutionality of the proposed legislation, including references brought by Alberta and Quebec to their respective Courts of Appeal, and ultimately, a reference brought by the federal government to the Supreme Court of Canada. Blakes Bulletins on those proceedings can be found here, here, and here.

In its decision, released in late 2011, the Supreme Court ultimately held that the Proposed Act was not constitutional. The Supreme Court's decision was based on its finding that the federal government did not have constitutional authority in regard to the bulk of "day-to-day" regulation of securities, and that its authority was limited to areas with a national scope, such as the regulation of systemic risk.

Pursuit of a Negotiated Solution
In its reference decision, the Supreme Court also encouraged the parties to find common ground in regard to their respective areas of authority. In the wake of the decision, there was some optimism among proponents of a national regulator that the Supreme Court's decision could paradoxically serve to help facilitate the creation of a single regulator, by allowing the provinces to negotiate without concern that doing so would fetter their constitutional authority. However, although there have been occasional indications of ongoing discussions amongst the provinces and the federal government since the Supreme Court's reference decision, no agreement has been announced and the current state of discussions is unclear.

The Budget sets out a proposal by which the federal government, and relevant provincial and territorial governments, would delegate administrative authority to a single common securities regulator if a "critical mass of provinces and territories" agreed to do so. As stated in the Budget, the federal government would look for the following four core elements in a negotiated solution to the adoption of a common securities regulator:

  • The regulator should administer a single set of rules
  • It should be operationally independent and self-funded through a single set of fees
  • It should be directed by a professional board of directors with broad capital markets-related expertise
  • The regulator would also preserve the elements of the current system that work well, such as maintaining regulatory offices in each participating jurisdiction, with the capacity and resources to serve market participants locally.

The Budget reiterates the federal government's view that a common regulatory regime would contribute to a stronger national economy, allow Canada to better compete in global capital markets, and permit Canadian businesses to raise capital more quickly and at lower cost.

What Would a Unilaterally Enacted Federal Act Look Like?
This proposal for a co-operatively established securities regulator is presented against the backdrop of the alternative promised in the Budget: the unilateral introduction of federal legislation.

In the event that the federal government unilaterally introduced its own legislation, it is difficult to speculate at this time on what precisely the legislation would look like. In its broad strokes, any legislation would have to comply with the Supreme Court's guidance that the federal jurisdiction to regulate securities is limited to areas of national concern (including, potentially, regulation of systemic risk and capital markets stability), and not the "day-to-day" aspects of securities regulation that are the domain of the provinces.

However, the Supreme Court's guidance is very general and broad, and in practice, regulation of the areas identified by the Supreme Court as likely falling within federal jurisdiction might still, in at least some cases, arguably encompass regulation of some ongoing or "day-to-day" matters that are a central part of provincial jurisdiction. This would be particularly true if the federal government sought to take an expansive approach to the scope of its authority.

What Will Happen Now?
Since the Supreme Court's decision at the end of 2011, discreet discussions have continued between the federal government and many of the provinces. One way or the other, the federal government's announcement may mark the end of the "quiet" phase of any such discussions. The federal government has signalled that if a negotiated agreement cannot be reached in the medium term, it will, if necessary, act alone. Yesterday's announcement suggests that while the ultimate outcome of the debate on securities regulation in Canada remains unclear, there is little chance that the debate will simply quietly fade away.

For further information, please contact Nigel Campbell at 416-863-2429 or nigel.campbell@blakes.com, or Aaron Palmer at 416-863-4227 or aaron.palmer@blakes.com, Doug McLeod at 416-863-2705 or doug.mcleod@blakes.com or any other member of our Capital Markets Group.

Tags: Capital Markets, Litigation & Dispute Resolution, Corporate & Commercial

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