The Supreme Court of Canada (“SCC”) on November 9, 2018 released its written decision on the Cooperative Capital Markets Regulatory System (“CCMR”) and the proposals of the federal government and the governments of Ontario, British Columbia, Saskatchewan, New Brunswick, Prince Edward Island, and Yukon to implement a national cooperative system for the regulation of capital markets in Canada.

The framework of the CCMR is set out in an agreement between the federal government and the participating provincial and territorial governments (the “Memorandum”), first signed in September 2014 , and includes a model provincial and territorial statute (the “Model Provincial Act”) that deals primarily with the day-to-day aspects of the securities trade, a proposed federal statute (the “Draft Federal Act”) that is aimed at preventing and managing systemic risk and which establishes criminal offences relating to financial markets, and a national securities regulator (the “Authority”) charged with administering this coordinated regime. The Authority and its board of directors are to operate under the supervision of a Council of Ministers, which will comprise the ministers responsible for capital markets regulation in each participating province and the federal Minister of Finance.

In July, 2015, the Government of Quebec referred the following two questions pertaining to the CCMR to the Quebec Court of Appeal:
• Does the Constitution of Canada authorize the implementation of pan-Canadian securities regulation under the authority of a single regulator, according to the model established by the most recent publication of the “Memorandum of Agreement regarding the Cooperative Capital Markets Regulatory System?”
• Does the most recent version of the draft of the federal “Capital Markets Stability Act” exceed the authority of the Parliament of Canada over the general branch of the trade and commerce power under subsection 91(2) of the Constitution Act, 1867 (“Constitution Act”)?

A majority of the Quebec Court of Appeal answered both questions in the negative. The Government of Quebec subsequently appealed this ruling to the SCC. In its ruling on the appeal from the decision of the Quebec Court of Appeal, the SCC held that:
• Question 1 should be answered in the affirmative; and,
• Question 2 should be answered in the negative.

The SCC held that the Constitution Act authorizes the implementation of pan-Canadian securities regulation under the authority of a single regulator in accordance with the terms set out in the Memorandum. The CCMR, as set out in the Memorandum, does not purport to — and in any event, cannot — improperly fetter the legislatures’ sovereignty. The CCMR does not entail an impermissible delegation of law-making authority.

The SCC also held that the proposed Draft Federal Act is intra vires; as it falls within the general branch of Parliament’s trade and commerce under the Constitution Act. The pith and substance of the Draft Federal Act is to control systemic risk having the potential to create material adverse effects on the Canadian economy and the federal government’s role in regulating capital markets under the Draft Federal Act is limited to the detection, prevention and management of risk to the stability of the Canadian economy, as well as to the protection against financial crimes.

The concept of systemic risk is specifically invoked throughout the Draft Federal Act as a means of limiting the scope of federal regulatory powers. According to the SCC, systemic risk can be understood as having three constituent elements: the risk must represent a threat to the stability of the country’s financial system as a whole; it must be connected to the capital markets; and it must have the potential to have a material adverse effect on the Canadian economy.

The intention of the Draft Federal Act on the face of the legislation is to address economic objectives that are considered to be national in character. The preservation of the integrity and stability of the Canadian economy quite clearly has a national dimension, and one which lies beyond provincial competence.

Lastly, the SCC held that the manner in which the Draft Federal Act delegates the power to make regulations accords with Parliament’s constitutional powers. The delegation of administrative powers in a manner solicitous of (or even dependent upon) provincial input is in no way incompatible with the principle of federalism, provided that the delegating legislature has the constitutional authority to legislate in respect of the applicable subject matter in the first place.

For the full text of the SCC decision please see:

For more information, please call Barbara Hendrickson at BAX Securities Law (416) 601 -1004.
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