On November 9, 2018 the Supreme Court of Canada (the “SCC”) released a highly anticipated decision about the Cooperative Capital Markets Regulatory System, the proposed pan-Canadian securities regulator. The SCC overturned the findings of the Quebec Court of Appeal, determining that the draft of the federal Capital Markets Stability Act (“CMSA”) and the model established by the most recent publication of the Memorandum of Agreement regarding the Cooperative Capital Markets Regulatory System (“MOA”) were constitutionally sound.
In September 2014, the Government of Canada, along with the Governments of the Provinces of British Columbia, New Brunswick, Ontario, Prince Edward Island and Saskatchewan, signed the MOA to formalize the terms and conditions of a new proposed cooperative capital markets regulatory system. The Government of Yukon joined in April 2015. The MOA calls for the creation of a co-operative capital markets regulatory regime under the oversight of a national regulatory authority.
Although the Province of Québec had not signed the MOA, the Government of Québec asked the Québec Court of Appeal to rule on the constitutionality of the MOA and the CMSA.
The Québec Court of Appeal was asked two questions:
The majority of the Québec Court of Appeal answered the first question in the affirmative, and determined that the CMSA does not exceed the authority of Parliament, except for sections 76 to 79. The Attorneys General of Canada and B.C. appealed the decision to the SCC.
Question 1: Does the Constitution allow the implementation of the MOA?
The SCC disagreed with the Québec Court of Appeal on the first question, and determined that the MOA “does not improperly fetter the legislatures’ sovereignty, nor does it entail an impermissible delegation of law-making authority.”
The Attorney General of Québec took the position that the MOA violates the principle of parliamentary sovereignty because decisions reached by the Council of Ministers would have the effect of amending statutes passed by the provincial legislatures. The SCC held that this argument reflects a misunderstanding of parliamentary sovereignty: the principle, at its most basic, means that a legislature has the right to make or unmake any law whatsoever (subject to constitutional limits). An executive-branch official cannot bind a legislature. It follows, then, that a decision of the Council of Ministers cannot per se affect any statutes passed by a legislature, and therefore cannot violate the principle of parliamentary sovereignty.
Question #2: Does the CMSA exceed the authority of the Parliament of Canada?
The Court held that the CMSA falls within Parliament’s general trade and commerce power. The Court disagreed with the majority of the Quebec Court of Appeal and held that the manner in which the CMSA delegates the power to make regulations in sections 76 to 79 of the CMSA have no impact on its constitutionality. The Court noted that provinces can and do regulate systemic risk in their capital markets. As such, the Court determined that the provinces, acting alone or in concert, cannot effectively address systemic national concerns which transcend their own respective concerns and the CMSA, with its carefully tailored scope, constitutes a response to this provincial incapacity, with Parliament stepping in to fill this constitutional gap.”
Canada is one of the only developed countries in the world that does not have a national regulator to oversee its capital markets. There has been a long effort to establish a national securities regulator, which has suffered a series of delays and roadblocks. This decision in the Reference re Pan‑Canadian Securities Regulation makes it clear that the Constitution allows the federal, provincial and territorial governments to work together to regulate securities trading under a single, unified system in Canada. Once the participating provinces finalize the new system it will bring a new era to securities regulation for businesses and capital market participants.