Finance Minister Jim Flaherty says the federal government will not pursue its current plan to create a national securities regulator after the Supreme Court of Canada said Thursday that doing so would be "not valid" under the Constitution.
"We have the decision and we will respect it," Flaherty said in a short statement following the publication of an opinion by Canada's top court, which dealt a major blow to the plan.
"It is clear we cannot proceed with this legislation. We will review the decision carefully and act in accordance with it," Flaherty said.
In its unanimous decision, the Supreme Court upheld that view, saying the Proposed Canadian Securities Act, drafted by Ottawa and sent to the court for an opinion on its validity in May 2010, overreaches the federal government's jurisdiction.
"Canada has shown that aspects of the securities market are national in scope and affect the country as a whole," the opinion said. "However, considered in its entirety, the proposed Act is chiefly directed at protecting investors and ensuring the fairness of capital markets through the day-to-day regulation of issuers and other participants in the securities market."
The court was not convinced by the government's argument that creating the single regulator to oversee all securities — the collective term used to describe investments like stocks, bonds, and derivatives — falls within its constitutional power to regulate trade and commerce.
Alberta, Quebec, and other provinces had argued that regulating securities falls within their power over property and civil rights. Lower courts in both those provinces have already ruled that Ottawa is overstepping its boundaries in trying to set up the national body.
Ontario is one of the provinces that strongly supported the idea, and the Ontario Securities Commission, far and away the largest regulator in Canada already, issued a statement expressing cautious optimism Thursday. "We remain focused on regulating Ontario's capital markets in the best interests of the province's investors and market participants," OSC chair Howard Wetston said.
"With respect to national regulatory initiatives, we will continue to work with other provincial and territorial securities regulators."
In the opinion, Canada's top court said that capital markets "have long been considered local concerns subject to provincial legislative competence over property and civil rights within the province."
Flaherty has pushed for the creation of such a body since 2006, but has faced opposition from Quebec, Alberta and some other provinces that bristle at the notion of surrendering control to an outside body.
Critics of the status quo say that has led to unnecessary complications, regulatory overlap and bureaucratic red tape.
Major international bodies such as the Organization for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF) support the plan, as does the Canadian Bankers Association (CBA), which governs the banking industry.
Proponents of the national regulator idea claim it will help discourage white-collar crime by making enforcement much tougher. But detractors note that the presence of a single regulator — the Washington-based Securities and Exchange Commission — did little to avert or subsequently punish those responsible for the financial meltdown of 2008 in the United States.
The federal government had recognized that securities regulation falls within provincial jurisdiction. But it argued that the securities market has evolved from a provincial matter to a national one affecting the country and its economy as a whole therefore justifying its proposed intervention in regulating securities.
The court agreed that some aspects of the proposed legislation — such as those aimed at managing systemic risk — are related to the broader national interest and could justify the federal government’s involvement.
But it didn't buy Canada's argument that the securities market has been so transformed that it needs to step in and make day-to-day regulation of securities trading a matter for Ottawa instead of the provinces.
In short, the opinion stated that the current legislation goes too far, and is too detailed.
'There is more work to be done'
“Canada's problem is that the proposed act reflects an attempt that goes well beyond these matters of undoubted national interest and concern and reaches down into the detailed regulation of all aspects of securities,” the court said.
The opposition NDP welcomed the court's opinion on Thursday, saying a national regulator could harm local economies.
"New Democrats have always maintained that regulating securities trading is a provincial responsibility," interim Opposition Leader Nycole Turmel said. “The Constitution makes it pretty clear what provincial duties are and today’s decision reflects that.
"The provinces and territories have done a good job monitoring securities trading, so why fix something that isn’t broken?" she said.
The Alberta Securities Commission also welcomed the news, with chair Bill Rice saying he's pleased to see an end to the uncertainty. "We welcome the clarity that the Supreme Court of Canada has now brought to the question of constitutional jurisdiction," he said. "It will be up to the provincial governments in Canada to determine the future structure of securities regulation in this country.
Quebec also came out in support of the court's view, with Finance Minister Raymond Bachand saying "it's a great victory today for the Quebec government, first, but also for Canadian federalism, and Canada."
Bachand dismissed the need for a centralized regulator, noting that the system works well as it is."We have, in Canada one of the best systems of regulation in the world, one of the best systems of surveillance in the world."
The court was not asked to judge which regime — the existing system or the one proposed by Flaherty — is better.
Door left open
The court did not say what should happen next, writing only that "is not for the Court to suggest."
But the court did take the opportunity in its opinion to talk about "seeking cooperative solutions" and stopped well short of completely shutting the door on the idea.
"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," the court's opinion stated.
That signified a ray of hope for the Canadian Bankers Association's Terry Campbell, who said the court recognized there is a federal interest in some areas and that gives him optimism that a single regulator can still be created.
"There is more work to be done," said Campbell, who called this a "historic day. "
He said the principles outlined in the opinion should be used to continue negotiations on setting up a single regulator and that the proposed legislation may have to be redrafted.
Heather Zordel, a lawyer with Cassels Brock in Toronto, says the court's statement could be a pathway to a single regulator. "It hasn't said we can't proceed," she told CBC News. "It says co-operated federalism is the way to go."
"The door is open to proceed that way …You can move forward with about 90 per cent of the legislation as drafted."
Indeed, Ontario Finance Minister Dwight Duncan, who has long supported the idea of a national regulator, said the province continues to prefer that route on Thursday.
"The Ontario government is reviewing the Supreme Court of Canada's decision carefully to assess its full implications for Ontario," he said in a statement. "Ontario has long advocated for a strong national securities regulator that addresses Ontario's interests and that promotes safe, efficient and competitive national capital markets."
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