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.
The Dissent
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.
Showing posts with label Federal. Show all posts
Showing posts with label Federal. Show all posts
Tuesday, April 5, 2011
Monday, March 14, 2011
Musings on the Alberta decision on federal securities legislation
Last week, the Alberta Court of Appeal issued a ruling that the federal government did not have the power under the Constitution Act, 1867 to adopt federal securities legislation. The ruling was in response to a reference by the Alberta government challenging the federal legislation.
The court began by noting that securities law is one of the four pillars of financial regulation (the others being banking, insurance and trust companies) and that, of the four, only banking is regulated federally and only then because of an express head of power in the Constitution. The court also noted that provincial jurisdiction over securities law has traditionally been upheld as an exercise of the "property and civil rights" power.
The federal government argued that it had the authority under the "general" trade and commerce power first set out by the Privy Council in 1881 in Citizens Insurance Co. of Canada v. Parsons. That case also held that the federal government could have jurisdiction over international and interprovincial trade, but the government did not assert these latter aspects as the proposed legislation would govern transactions within a province.
The general trade and commerce power was fleshed out by the Supreme Court in 1989 in General Motors of Canada Ltd. v. City National Leasing. That case set out a non-exclusive, five-point test for determining whether the federal government had a valid basis for legislating:
1. The legislation must be part of a general regulatory scheme;
2. The legislation must be concerned with trade as a whole, not a particular industry;
3. The legislation must establish a scheme subject to continuing oversight by a regulatory authority;
4. The provinces jointly or severally do not have the constitutional authority to enact similar legislation; and
5. The failure of one or more provinces to enact legislation would thwart the purpose of the legislation in other parts of the country.
The court conceded that the legislation was part of a regulatory scheme with continuing oversight by a regulatory authority, but found the legislation failed to meet the other tests. It did not consider the act to regulate "trade" but "a particular industry, namely that which raises money from the general public." It also found that the provinces do have the constitutional authority to enact securities legislation, and that the fact that the federal act will not initially apply nationally (as it allows provinces to opt in to the federal regime) means the fifth criterion is not met.
The court held that it is not enough that federal legislation be desirable or that it would impose uniform regulation across the country. If that were sufficient, any federal legislation would be valid and the property and civil rights power would have little meaning. It stated that the same argument could be used to justify federal regulation of insurance, which the courts have repeatedly held is a matter for exclusive provincial jurisdiction.
Although the federal government did not try to justify the legislation as an attempt to regulate international or interprovincial trade, the court held that securities legislation is at its core the regulation of raising funds from members of the general public, that securities are a form of property and that trading in that property is a series of contractual and property arrangements, none of which involves the cross-border movement of property. The court also noted that Canadian companies have relied upon access to international capital markets since Confederation.
A Critique
In my view, the court has taken an overly restrictive view of the nature of securities legislation. While it is true that the first provincial acts governed the sales of securities to local investors, the industry (and the scope of regulation) has grown substantially since then, to encompass regulation of issuers (not only of disclosure, but shareholder rights and corporate governance issuers), brokers, stock exchanges, self-regulatory organizations and clearing corporations to name but a few. It is much more than raising funds.
I think it would be better to think of the pith and substance (to use a term beloved of constitutional lawyers) of securities regulation not as regulation of capital raising or sales practices but as regulation of the capital markets as a whole. I believe that market participants, including foreign investors, see a Canadian capital market, not separate Ontario and Alberta ones, and that a failure by any one province to regulate its capital markets properly will damage the reputation of the capital markets as a whole. An argument can certainly be made that effective regulation of national capital markets can only be done at the federal level. This was the rationale in the General Motors case, which held that competition could only be effectively regulated at the national level.
A secondary matter is that much of securities legislation today has an extraprovincial effect. This is particularly true for Ontario, where a company that has raised money in the province or listed on the Toronto Stock Exchange becomes a "reporting issuer" subject to ongoing regulation by the OSC. Most of the TSX/S&P Index issuers were incorporated outside the province, meaning that OSC rules have a broad impact on corporate activity that may only marginally touch upon the province.
I also don't believe that trading does not involve cross-border elements. While it is true that a sale by a Victoria Investor to a Miami Investor on the TSX involves a number of discrete steps, it is equally true that the exchange and the clearing corporation are acting on a national basis. Furthermore, the fact that the trade occurred on the TSX may be happenstance, as an order may have been required to be routed there to meet "best price" obligations.
The court states that the argument for federal regulation could be applied to insurance, but I don't think so. Although insurance companies operate nationally, it is fundamentally a series of bilateral contracts. If I take out an insurance policy (or a mortgage with a trust company), that is the beginning and the end of the transaction. There is no interprovincial aspect to my dealings(even if my insurer lays off its risk to a foreign re-insurer), which there easily could be in a trade in securities.
The argument that the legislation fails to meet the final test because of the opt in feature ignores the fact that the government is attempting to introduce the legislation in the most politically palatable manner, and insisting that the scope be national from the beginning is, to quote Voltaire, an example of the perfect being the enemy of the good. It would certainly put the cat among the pigeons if the court's ruling is interpreted to mean that the federal government cannot act in an incremental manner, but has the authority to occupy the whole field in one fell swoop.
What the Court Got Right
The Court quite properly didn't get into an analysis of whether federal regulation would be better or more desirable. These are political, not legal, arguments. If the federal government has the power to regulate, it can, no matter how disastrous the outcome may be. Similarly if it does not, it cannot no matter how inefficient and fragmented the markets may be under provincial jurisdiction.
The court also rebuked the federal government for arguing that federal regulation was necessary to address systemic risk, noting that there were no prudential provisions in the draft federal act dealing with systemic risk.
Interprovincial Trade
I'm somewhat perplexed that the federal government isn't attempting to justify the legislation under the interprovincial trade test. While it's true that the draft legislation regulates transactions within a province, limiting the scope of the federal power to interprovincial matters would still allow federal regulation of the vast bulk of securities law matters. In this respect, it would be similar to the United States, where state regulators still have authority over intrastate transactions. It is also the approach that the federal government took when adopting the Grain Futures Act in 1939, allowing it to regulate trading on the Winnipeg Commodity Exchange. It's interesting how few people in this industry realize that the Winnipeg exchange was regulated only at the federal level until 2000, when Manitoba enacted its Commodity Futures Act and the Manitoba Securities Commission assumed oversight authority.
The court began by noting that securities law is one of the four pillars of financial regulation (the others being banking, insurance and trust companies) and that, of the four, only banking is regulated federally and only then because of an express head of power in the Constitution. The court also noted that provincial jurisdiction over securities law has traditionally been upheld as an exercise of the "property and civil rights" power.
The federal government argued that it had the authority under the "general" trade and commerce power first set out by the Privy Council in 1881 in Citizens Insurance Co. of Canada v. Parsons. That case also held that the federal government could have jurisdiction over international and interprovincial trade, but the government did not assert these latter aspects as the proposed legislation would govern transactions within a province.
The general trade and commerce power was fleshed out by the Supreme Court in 1989 in General Motors of Canada Ltd. v. City National Leasing. That case set out a non-exclusive, five-point test for determining whether the federal government had a valid basis for legislating:
1. The legislation must be part of a general regulatory scheme;
2. The legislation must be concerned with trade as a whole, not a particular industry;
3. The legislation must establish a scheme subject to continuing oversight by a regulatory authority;
4. The provinces jointly or severally do not have the constitutional authority to enact similar legislation; and
5. The failure of one or more provinces to enact legislation would thwart the purpose of the legislation in other parts of the country.
The court conceded that the legislation was part of a regulatory scheme with continuing oversight by a regulatory authority, but found the legislation failed to meet the other tests. It did not consider the act to regulate "trade" but "a particular industry, namely that which raises money from the general public." It also found that the provinces do have the constitutional authority to enact securities legislation, and that the fact that the federal act will not initially apply nationally (as it allows provinces to opt in to the federal regime) means the fifth criterion is not met.
The court held that it is not enough that federal legislation be desirable or that it would impose uniform regulation across the country. If that were sufficient, any federal legislation would be valid and the property and civil rights power would have little meaning. It stated that the same argument could be used to justify federal regulation of insurance, which the courts have repeatedly held is a matter for exclusive provincial jurisdiction.
Although the federal government did not try to justify the legislation as an attempt to regulate international or interprovincial trade, the court held that securities legislation is at its core the regulation of raising funds from members of the general public, that securities are a form of property and that trading in that property is a series of contractual and property arrangements, none of which involves the cross-border movement of property. The court also noted that Canadian companies have relied upon access to international capital markets since Confederation.
A Critique
In my view, the court has taken an overly restrictive view of the nature of securities legislation. While it is true that the first provincial acts governed the sales of securities to local investors, the industry (and the scope of regulation) has grown substantially since then, to encompass regulation of issuers (not only of disclosure, but shareholder rights and corporate governance issuers), brokers, stock exchanges, self-regulatory organizations and clearing corporations to name but a few. It is much more than raising funds.
I think it would be better to think of the pith and substance (to use a term beloved of constitutional lawyers) of securities regulation not as regulation of capital raising or sales practices but as regulation of the capital markets as a whole. I believe that market participants, including foreign investors, see a Canadian capital market, not separate Ontario and Alberta ones, and that a failure by any one province to regulate its capital markets properly will damage the reputation of the capital markets as a whole. An argument can certainly be made that effective regulation of national capital markets can only be done at the federal level. This was the rationale in the General Motors case, which held that competition could only be effectively regulated at the national level.
A secondary matter is that much of securities legislation today has an extraprovincial effect. This is particularly true for Ontario, where a company that has raised money in the province or listed on the Toronto Stock Exchange becomes a "reporting issuer" subject to ongoing regulation by the OSC. Most of the TSX/S&P Index issuers were incorporated outside the province, meaning that OSC rules have a broad impact on corporate activity that may only marginally touch upon the province.
I also don't believe that trading does not involve cross-border elements. While it is true that a sale by a Victoria Investor to a Miami Investor on the TSX involves a number of discrete steps, it is equally true that the exchange and the clearing corporation are acting on a national basis. Furthermore, the fact that the trade occurred on the TSX may be happenstance, as an order may have been required to be routed there to meet "best price" obligations.
The court states that the argument for federal regulation could be applied to insurance, but I don't think so. Although insurance companies operate nationally, it is fundamentally a series of bilateral contracts. If I take out an insurance policy (or a mortgage with a trust company), that is the beginning and the end of the transaction. There is no interprovincial aspect to my dealings(even if my insurer lays off its risk to a foreign re-insurer), which there easily could be in a trade in securities.
The argument that the legislation fails to meet the final test because of the opt in feature ignores the fact that the government is attempting to introduce the legislation in the most politically palatable manner, and insisting that the scope be national from the beginning is, to quote Voltaire, an example of the perfect being the enemy of the good. It would certainly put the cat among the pigeons if the court's ruling is interpreted to mean that the federal government cannot act in an incremental manner, but has the authority to occupy the whole field in one fell swoop.
What the Court Got Right
The Court quite properly didn't get into an analysis of whether federal regulation would be better or more desirable. These are political, not legal, arguments. If the federal government has the power to regulate, it can, no matter how disastrous the outcome may be. Similarly if it does not, it cannot no matter how inefficient and fragmented the markets may be under provincial jurisdiction.
The court also rebuked the federal government for arguing that federal regulation was necessary to address systemic risk, noting that there were no prudential provisions in the draft federal act dealing with systemic risk.
Interprovincial Trade
I'm somewhat perplexed that the federal government isn't attempting to justify the legislation under the interprovincial trade test. While it's true that the draft legislation regulates transactions within a province, limiting the scope of the federal power to interprovincial matters would still allow federal regulation of the vast bulk of securities law matters. In this respect, it would be similar to the United States, where state regulators still have authority over intrastate transactions. It is also the approach that the federal government took when adopting the Grain Futures Act in 1939, allowing it to regulate trading on the Winnipeg Commodity Exchange. It's interesting how few people in this industry realize that the Winnipeg exchange was regulated only at the federal level until 2000, when Manitoba enacted its Commodity Futures Act and the Manitoba Securities Commission assumed oversight authority.
Monday, January 19, 2009
A federal securities commission on the horizon?
On Tuesday, the federal government’s Expert Panel issued its recommendations on securities law reform. It is the umpteenth panel since the 1930s to study this issue. Unlike its predecessors, it has a very good chance of seeing its recommendations implemented.
While imperfect, establishing one national securities regulator will make regulation and capital raising more efficient and effective. All capital market participants should support the implementation of the Panel’s recommendations as quickly as possible.
The recommendation
The Panel’s report recommends that the federal government establish a national securities commission. It trots out the usual reasons for a national securities commission, such as the slow pace of policy making because of the need for consensus among the various provincial regulators and the need for a strong voice on international bodies.
It recommends a model in which provinces would opt in, that is, amend their securities legislation to mirror the federal legislation and defer to the federal commission. Predictably, some provinces are resisting this. The Panel recommends that public companies and registrants in non-participating jurisdictions also be able opt in and be governed by the federal regime rather than their provinces’. Few, if any, companies or registrants would fail to avail themselves of this option, which is why we are likely to see a federal commission in the not-too-distant future.
The legislation
The draft legislation accompanying the Panel’s report is based on the Alberta Securities Act, which is the most up-to-date in the country. While this is no worse than what is in place today, it is unfortunate that the Panel didn’t take this opportunity to improve it.
For example, the Panel supports principles-based regulation, where the legislation specifies the desired outcome but not the means of achieving it. The draft legislation is very rules- and process-based. The draft legislation also carries forward the current incoherent approach to self regulation, where stock exchanges must obtain recognition from the Commission while other entities may be recognized. Parliament should fix these and other problems before anything is finalized.
What does this mean to me?
If you are a public company or a registrant, you should pay close attention to developments in Ottawa. Creating a national regulator is clearly a priority of the current government. The Liberals have indicated their agreement in principle, but not necessarily with the Panel’s specific recommendations. In particular, they may not support the recommendation that companies and registrants have the ability to opt into the federal regime.
If Parliament enacts the Panel’s recommendations, public companies and registrants in jurisdictions that do not opt in (at least Alberta, Manitoba and Quebec) will need to decide whether to opt in to federal regulation.
While imperfect, establishing one national securities regulator will make regulation and capital raising more efficient and effective. All capital market participants should support the implementation of the Panel’s recommendations as quickly as possible.
While imperfect, establishing one national securities regulator will make regulation and capital raising more efficient and effective. All capital market participants should support the implementation of the Panel’s recommendations as quickly as possible.
The recommendation
The Panel’s report recommends that the federal government establish a national securities commission. It trots out the usual reasons for a national securities commission, such as the slow pace of policy making because of the need for consensus among the various provincial regulators and the need for a strong voice on international bodies.
It recommends a model in which provinces would opt in, that is, amend their securities legislation to mirror the federal legislation and defer to the federal commission. Predictably, some provinces are resisting this. The Panel recommends that public companies and registrants in non-participating jurisdictions also be able opt in and be governed by the federal regime rather than their provinces’. Few, if any, companies or registrants would fail to avail themselves of this option, which is why we are likely to see a federal commission in the not-too-distant future.
The legislation
The draft legislation accompanying the Panel’s report is based on the Alberta Securities Act, which is the most up-to-date in the country. While this is no worse than what is in place today, it is unfortunate that the Panel didn’t take this opportunity to improve it.
For example, the Panel supports principles-based regulation, where the legislation specifies the desired outcome but not the means of achieving it. The draft legislation is very rules- and process-based. The draft legislation also carries forward the current incoherent approach to self regulation, where stock exchanges must obtain recognition from the Commission while other entities may be recognized. Parliament should fix these and other problems before anything is finalized.
What does this mean to me?
If you are a public company or a registrant, you should pay close attention to developments in Ottawa. Creating a national regulator is clearly a priority of the current government. The Liberals have indicated their agreement in principle, but not necessarily with the Panel’s specific recommendations. In particular, they may not support the recommendation that companies and registrants have the ability to opt into the federal regime.
If Parliament enacts the Panel’s recommendations, public companies and registrants in jurisdictions that do not opt in (at least Alberta, Manitoba and Quebec) will need to decide whether to opt in to federal regulation.
While imperfect, establishing one national securities regulator will make regulation and capital raising more efficient and effective. All capital market participants should support the implementation of the Panel’s recommendations as quickly as possible.
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