Ottawa Canal at night

Battle lines are being drawn in preparation for the latest legal fight in the long-running struggle to establish some form of national securities regulation. The Supreme Court of Canada (SCC) has set March 22 as the date on which it will field arguments regarding the constitutionality of the proposed Co-operative Capital Markets Regulator (CCMR).

Both the federal government and the Ministry of the Attorney General (AG) of British Columbia are appealing a ruling from the Quebec Court of Appeal that was handed down in May, which ruled that the proposed CCMR model is unconstitutional.

In particular, the Quebec court ruled that the proposed model for the CCMR subjects provincial legislative power improperly to the approval of an outside entity (a “council of ministers”), and that the CCMR’s rule-making mechanism would, in effect, give certain provinces veto power over proposed federal legislation, a concept that also is unconstitutional.

Now, Canada and B.C. are preparing to argue that the Quebec court is wrong, and that the CCMR should be established as proposed. Some provinces have “intervener” status in the SCC case, with Ontario, Saskatchewan, New Brunswick and Prince Edward Island lining up behind the feds. Conversely, Alberta and Manitoba will join Quebec in opposing the latest federal effort.

The most recent time that the SCC was asked to weigh in on the question of a federal role in securities regulation was in 2011. The court rejected the concept at that time, ruling that securities regulation falls under provincial jurisdiction. However, the SCC also opened the door to this latest effort by ruling that certain issues, such as managing systemic risk, could come under federal authority. Furthermore, the SCC ruled that a co-operative federal/provincial model could be created that would not violate the Constitution.

The CCMR was conceived as an answer to that ruling. In September 2013, B.C., Ontario and the feds agreed to create a co-operative model that includes provinces that choose to participate under a combination of new federal legislation and uniform provincial legislation. Since then, a handful of provinces and one territory have signed on to that initiative.

The submission from the office of the AG of Canada to be presented in the SCC hearing in March argues that this approach will provide better protection for investors and the Canadian economy.

“All jurisdictions may join,” that AG submission states, “but the scheme respects the authority of those that choose not to do so. Both levels of government have roles to play: provinces and territories continue to be responsible for the day-to-day regulation of capital markets, and the federal government for the stability of the national economy.”

The respondents in the case are seeking to uphold the decision of the Quebec Court of Appeal and, potentially, derail the CCMR initiative, which already is years behind schedule. Initial plans projected the regulator would be up and running by July 2015, but the project has missed numerous deadlines. Supporters now hope the CCMR legislation will be passed, at both the federal and provincial levels, by the end of June and the regulator will be operational this year.

However, that timeline appears to be in jeopardy, even if the SCC ultimately rules in favour of the feds and supporting provinces – given that the previous time the court tackled this issue, the decision was issued eight months after the hearing.

How the SCC will rule in this latest case, and whether the political will exists to move ahead with the initiative, is difficult to predict.

Past supporters of the proposed CCMR, such as the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada), have turned against the project, warning that it could weaken investor protection. A paper issued by FAIR Canada last year states: “In both its governance structure and substance, the CCMR is not in investors’ interests.”

FAIR Canada’s paper points out the lack of investor representation under the proposed regulator and that critical investor protection initiatives, such as a proposed “best interest” standard, banning embedded commissions and rewarding whistleblowers, will be abandoned if the CCMR is adopted. FAIR Canada’s paper calls for “considerable reform” to the proposed model.

But the CCMR needs to get past the legal challenge in March first. The federal AG’s briefs to the SCC argue that the feds and the provinces that will participate in the CCMR are seeking to implement the same concept that the SCC shot down in 2011: a single set of securities laws and rules to be overseen and enforced by a centralized agency in a co-operative approach.

Quebec’s submission to the SCC maintains that the proposal still violates the Constitution. In particular, the submission states, the CCMR’s governance model puts the scheme out of bounds in relation to the Constitution: “Indeed, the [Quebec] Court of Appeal rightly looked beyond the appearance of co-operation and saw that the real objective of the parties is to uniformize [sic] and centralize securities regulation and strip the provinces of the ability for any autonomous legislative action. This is a surrender of jurisdiction, far from the type of collaboration [the SCC] contemplated in its 2011 ruling.”

Another key issue set out in Quebec’s filing is the question of the regulation of systemic risk, which is one area in which the SCC’s 2011 ruling suggested there could be a role for the feds.

Although the SCC has indicated this task could require federal involvement, the question now is whether the approach being proposed in the CCMR model fits under both the Constitution and the SCC’s 2011 decision.

Manitoba’s filing states that the province intends to argue that the answer to that question is “No, it does not” – and that the proposed CCMR will stray too far onto the provinces’ turf.

Monitoring and managing systemic risk is a core objective of the provincial regulators already, as Manitoba’s AG states in its brief: “Federal jurisdiction over systemic risk in the securities industry must be constrained so as not to run roughshod over existing provincial jurisdiction in this area.”

A concern is that systemic risk is not a neatly defined area; it could emerge from normal industry practices, firms or products. So, opening the door to federal involvement could allow the feds to encroach on provincial jurisdiction. Indeed, Manitoba’s brief argues that the approach proposed under the CCMR “represents a significant intrusion into matters regulated by provincial securities commissions on a daily basis.”

Manitoba’s submission maintains that a federal role in guarding against systemic risk should be limited to emergency situations, which now require national action and, typically, involve a temporary response.

The province’s submission further suggests that the federal role in dealing with systemic risk should be similar to its response to a health emergency, such as a major flu epidemic, which requires the urgent, short-term action (such as a quarantine order or a travel ban), but doesn’t give the feds a role in treating every virus that could lead to a national emergency.

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