On the heels of the recent Alberta appellate decision striking down the proposed federal securities act, which I blogged about last month, the Quebec Court of appeal has released its own decision finding that the proposed law is unconstitutional. A link to the decision, which is only in French, is provided here.
The Quebec court generally agrees with the Alberta court's analysis. The ruling is not unanimous - there are two concurring majority opinions and one dissenting opinion finding the proposal is constitutionally valid. All of the judges agreed that the proposed law should not be given the usual presumption of constitutional validity because it was merely a proposal, not a law that had gone through the parliamentary requirements for readings, debates and committee hearings.
The Majority Decision
The majority believed that the federal law was concerned with regulation of an industry, namely the regulation of participants in the securities markets. The courts have consistently upheld the validity of provincial regulation in this field.
The majority then examined the "double aspect" doctrine, where federal and provincial legislation regulating the same conduct may have different purposes, each of which is valid. For example, a federal law prohibiting drunk driving has been held valid as an exercise of the criminal law power, while a provincial law imposing penalties for drunk driving has been held valid as a necessary aspect of regulation of local highways. The majority found that the proposed legislation regulated the same activities as the provincial legislation for the same purpose: protection of investors. They found only a single aspect that failed to meet the General Motors test for determining whether a matter could be under the federal power to regulate trade and commerce described in my previous post.
The majority held that the proposal concerned regulation of a single industry (the securities industry) rather than of trade and commerce in general, and the provinces were perfectly capable of regulating the field. The court contrasted the subject matter with other federal commercial legislation. While entities regulated by the securities act are in the securities industry, entities regulated by the competition act are not in the "competition industry," nor are entities regulated by trademark law in the "trademark industry." The fact that the securities industry has extra-provincial or international aspects does not change its fundamental characteristic. The court cited previous caselaw that held that the fact that the federal government has entered into a treaty governing a particular matter does not give it jurisdiction to pass implementing legislation if the subject matter is properly of provincial concern.
Mr. Justice Pierre Dalphond wrote a dissenting opinion upholding the proposed legislation as valid. He began by noting that the terms "capital markets" (marchés des capitaux), "securities market" (marché des valeurs mobilières), "trading/dealing in securities" (commerce des valeurs mobilières) and "securities industry" (industrie/secteur des valeurs mobilières) should not be considered synonyms.
Dalphond, J. agreed with the majority that the federal proposal should not be presumed to be constitutional. He disagreed with the majority's holding that the proposal could not be valid under the double aspect doctrine as it duplicated provincial law. It is possible for Parliament and the provincial legislatures to pass identical legislation provided the subject matter falls within each body's sphere of competence.
Dalphond, J. then gave an overview of the history of the capital markets in Canada and the relevant court decisions. This was particularly pleasing to a history buff like me. He noted that while a number of Privy Council decisions upheld the power of the provinces to regulate brokers and securities trading in the province, none of them were precedent establishing the ability of the provinces to regulate the capital markets as a whole.
Dalphond, J. held that the Canadian capital market is integrated and national in scope, with stock exchanges and self-regulatory organizations operating on a national level, characterized by transactions that are mostly extraprovincial in nature. More than 95% of issuers, including smaller ones, raise capital in more than one province.
This national market is more than simply a collection of provincial capital markets. It is also unlike the insurance industry, where each policy is an isolated contract and not part of a greater whole.
Because the capital market is national, no one commission can fully regulate it. In particular, only the OSC regulates the TSX, which is a national institution. Only a national commission can simultaneously regulate all components of the market.
The dissent mirrors more or less my own thinking on this topic, and I will be finalizing a paper shortly. It remains to be seen which side the Supreme Court of Canada will fall on when the case is argued later this week.