A new route to a national securities regulator

Although the Supreme Court of Canada’s Nov. 9 decision declaring the constitutional validity of the current proposal for a national securities regulator has been acclaimed by some as a green light for the proposed Cooperative Capital Markets Regulatory System, there are still seven non-participating provinces and territories, and Alberta and Quebec have responded by again rejecting the proposed scheme. In eschewing political considerations and disavowing policy preferences other than co-operative federalism, the court’s decision leaves open avenues for further provincial action in opposition and for alternatives that could help to motivate participation by all.

First, the potential for opposition. The Co-operative System is based on three enactments: a model Capital Markets Act (the Provincial Act) to be enacted by each participating province and territory; the federal Capital Markets Stability Act (the Federal Act); and a Capital Markets Regulatory Authority Act (the enabling act) that will create and empower the Capital Markets Regulatory Authority (the Authority) as the national regulator. Drafts of the former two acts have been published.

The Supreme Court noted that the enabling act has not been published and expressly limited its decision to the constitutionality of the two acts that have. It went on to say that the authority’s “enabling statute … will have to be carefully drafted … to respect the limits on … federal and provincial authority.”

As the court expressly left undecided the constitutional validity of this basic legislative component of the Co-operative System, a non-participating province that opposes the Co-operative System may challenge the enabling act, when it is published. Any such challenge, whether or not wellfounded, would cause further delay, which may lead to attrition of the political will required to implement the Co-operative System.

On the positive side, the decision may provide additional paths for participation by objecting provinces. The Supreme Court upheld the Co-operative System on the basis that each provincial legislature must enact the Provincial Act and may then amend or repeal its own act.

The assumption underlying the Co-operative System is that the provincial acts will be uniform and that the participating jurisdictions will enact identical acts and any amendments to them. But this is not the only way to achieve a co-operative system.

As a result of existing cooperation among Canadian securities administrators, the rules concerning registration of dealers, distributions of securities and disclosure by issuers are largely uniform, subject to a few technical differences among jurisdictions in exemptions and other matters, but this is not the case with recognition and supervision of markets or enforcement. A nonparticipating province could delegate administration of part or all of its existing securities laws to the authority, if the enabling act authorizes the authority to accept the delegation. If adopted by non-participating provinces, such delegation could result in national administration of all or most provincial acts by a single regulator with the substantive requirements for non-participating provinces still determined locally.

The Supreme Court’s decision would also allow a province that participates in the Co-operative System to amend its own Provincial Act to achieve a local regulatory policy that it considers sufficiently important, although other participating jurisdictions do not agree.

As the enabling act will necessarily authorize the authority to administer the provincial acts of the participating jurisdictions, the authority would be obligated to apply the singular provincial policy to transactions and market participants that are subject to the act of the enacting participating province.

While any such divergence would likely only occur for matters of significant importance to the enacting province, the ability to retain policy control over such local matters may provide a basis for provinces like Quebec and Alberta to reconsider their positions and participate.

The drafting of the enabling act may thus provide another opportunity to encourage the provinces and territories that have not participated to join in a truly national co-operative regulatory regime that would promote the interests of all Canadians.

THE COURT’S DECISION LEAVES OPEN AVENUES FOR ALTERNATIVES THAT COULD HELP TO MOTIVATE PARTICIPATION BY ALL.