National regulator delayed

But, with the SCC’s decision, which was handed down on Dec. 22, 2011, none of that matters.

To those who followed the SCC case closely, the decision came as a surprise. Many had expected the feds to get some sort of green light from the SCC, albeit with the likelihood of some dissenting opinion or carefully crafted limitations on federal power. The outright rejection of the government’s proposed legislation — in a unanimous decision — is not the outcome that many would have bet on. Yet, that is what the SCC has delivered.

The SCC decision derails the plans that had been in motion for several years now to launch a new national regulator by July 1. Work on the planned transition had carried on during the court case, in the hope of a favourable verdict. Reportedly, the initial set of rules for the new regulator had been written and much of the operational planning, in terms of issues such as human resources for the new organization, had been worked out. Under the original transition plan, the head of the new regulator was to be named this month, with its executives and senior managers added over the next couple of months.

Instead, the federal government is now left pondering the SCC’s decision and trying to determine how to proceed amid the SCC’s rejection of the proposed federal legislation. Says Doug Hyndman, chairman of the Canadian Securities Transition Office: “The CSTO is working with the government to analyze the SCC decision and consider what is the appropriate way forward, in light of the finding that there is both federal jurisdiction and provincial jurisdiction in the field of securities regulation.”

Advocates of a national regulator maintain that while the SCC unequivocally rejected the federal government’s proposed legislation, the decision doesn’t slam the door on a national regulator for good; it just demands that the feds and the provinces take a more collaborative approach.

Industry groups that support the creation of a national regulator, including the Investment Industry Association of Canada and the Portfolio Management Association of Canada, suggest that despite rejecting the feds’ approach, the SCC decision does sketch out a possible path to a national regulator.

Ian Russell, president and CEO of the IIAC, welcomes the SCC decision, and hopes it will accelerate the push to create a national authority. Although the SCC has rejected the proposal that the entire business of securities regulation should come under federal jurisdiction, Russell points out, the SCC decision does recognize that there are areas of national interest, such as systemic risk. And, with that recognition that there is some room for federal jurisdiction, Russell hopes that the provinces and the federal government can work together to create a new national authority.

But, at this point, Ontario remains alone among the provinces explicitly supporting such an effort. In the immediate wake of the SCC’s ruling, the finance ministers of the provinces that opposed the federal effort, including Alberta, Quebec and Manitoba, applauded the SCC decision as a rebuke to what they saw as the federal government trying to overstep its authority.

As for the prospect of a more co-operative approach, they point to the passport system, which represents the provinces’ effort to achieve a more efficient regulatory system without scrapping provincial regulation. Ontario is the only province that doesn’t participate in the passport system, as it had been holding out for a national regulator. Immediately following the SCC’s decision, Alberta’s finance minister, Ron Liepert, had suggested that he hopes there will now be a push for Ontario to join the passport system.

Such a step would be welcome by Bill Rice, chairman of the Canadian Securities Admin-istrators and chairman and CEO of the Alberta Securities Commission, who would like to see the CSA working more effectively than it has been in recent years, given Ontario has been at odds with the rest of the provinces over the future of regulatory structure. “Our wish would be that we all could be working from basically the same song sheet,” Rice says. “And that would obviously mean having Ontario in line with the rest of us.”

Rice stresses that he recognizes the importance of the Ontario capital markets to the country, and the work of the Ontario Securities Commission on regulation.

“I really hope that everyone would make a best effort,” Rice adds, “and give that effort a chance at fixing difficulties within the current system rather than tearing the thing apart. It’s proven to be a good system.”

The CSA’s next meeting is slated for Jan. 25 to 27 in Vancouver. Hopefully, by then, policy-makers will have had time to digest the SCC decision and determine where it will lead them. All eyes will be on Ontario, in particular, to see the position it takes.

Says Rice: “If the next bit of dialogue is ‘We still want to establish a national securities commission, but we’re going to do it a different way,’ then we really haven’t gotten over the difficulties. And we’ll still be distracted.”

Yet, that may well prove to be the case. Not-withstanding the SCC’s ruling, none of the justifications for pursuing national regulation have changed. And it’s hard to imagine the federal Conservative government simply dropping an issue that it has pushed for so doggedly, even when it had only a minority government.

Moreover, there appears to be a legal basis to continue pursuing the creation of a national regulator, although the political case for doing so is probably more important and less certain. For example, the federal government could try to claim jurisdiction over securities regulation on a different basis from the one it used in the SCC case, in which it relied on its general power to regulate trade and commerce.

At the SCC hearing last April, the feds and their supporters had argued that the feds could claim jurisdiction under that power; the securities industry, while historically a provincial concern, has now evolved to the point at which it should be considered a national issue. And the federal camp had pointed to specific areas in which provincial regulation is inadequate.

The provinces (with the exception of Ontario), on the other hand, had argued that the feds’ effort represents an unjustified intrusion into an area of historically provincial jurisdiction, and that allowing the federal government to do so would fundamentally upset the balance of power between the provinces and the feds.

Effectively, the SCC has sided with the provinces, ruling that the proposed federal legislation would usurp provincial power by duplicating and displacing the existing provincial regulatory regimes. The SCC also found that the feds did not make their case that the securities industry has evolved to warrant consideration as a matter of national importance requiring federal involvement.

Instead, the SCC has ruled that securities regulation deals with essentially provincial concerns that fall within property and civil rights in the provinces. While the SCC decision allows that there may be issues of national importance, such as systemic risk, it found that these are not enough on their own to justify a national system: “While the economic importance and pervasive character of the securities market may, in principle, support federal intervention that is qualitatively different from what the provinces can do, they do not justify a wholesale takeover of the regulation of the securities industry, which is the ultimate consequence of the proposed federal legislation.”

Now, the feds could try to stake a claim to jurisdiction under a different federal power. The SCC decision does point out that the court was asked only to consider the constitutionality of federal jurisdiction under the trade and commerce power. However, there’s no assurance that the feds could succeed in another argument either, and litigating this whole case again may not be the best way to win the co-operation of the provinces that have resisted the feds’ efforts to date.

Or the feds could try to come up with an approach that fits within the parameters set out in the SCC’s decision, which specifically calls for a more collaborative model: “A co-operative approach that permits a scheme recognizing the essentially provincial nature of securities regulation while allowing Parliament to deal with genuinely national concerns remains available and is supported by Canadian constitutional principles and by the practice adopted by the federal and provincial governments in other fields of activities.”

It’s not entirely clear what this would achieve in terms of improving the efficiency of the regulatory system, or how it could work in practice. If systemic risk is considered a genuine national concern, what would it mean for the feds to regulate this while leaving traditional tasks, such as registration, setting conduct rules and enforcing them, to the provinces?

Rice is not sure how creating a federal role out of the areas cited in the SCC decision would work at a practical level: “We’ve never contemplated what role there would be for some body that somehow claims jurisdiction over systemic risk.”

Then there’s the question of whether it makes sense to create a national authority largely to deal with systemic risk, which is an issue that goes far beyond the securities field alone.

And if the feds do try to stake out some regulatory turf in areas of truly national concern, would they then have to drop the voluntary approach that has allowed the provinces to opt in that has characterized this effort from the start? Can the feds claim to address a national issue if some of the provinces aren’t participating?  IE