Courts mulling

Jim Flaherty, the Finance Minister, is pushing for a single national
regulator.

Chris Wattie, Reuters Files

Julius Melnitzer, Financial Post

Wednesday, January 20, 2010

There was a time when constitutional references to the country's high courts
had an air of sanctity about them. Not so the fight brewing over the
decision by Jim Flaherty, the Finance Minister, to create a national
securities regulator, which has spawned three court references over the
constitutionality of the federal government's proposed move.

There's something neat, clean and inherently attractive about a transparent
process ideally resolved in a neutral forum. But with three references out
there, what are the chances of that outcome?

To begin with, there's the proposed federal reference to the Supreme Court
of Canada. We don't know for sure what the terms of that reference will be
and won't know until the Canadian Securities Transition Office comes up with
proposed legislation that can be the subject of a reference.

It's likely the proposed legislation will closely emulate the draft
Securities Act attached to the January 2009 Final Report of the Expert Panel
on Securities Regulation. The key provisions of the draft contemplate
federal legislation that would allow provinces to opt out of the scheme. It
would also allow those from opt-out provinces to voluntarily subject
themselves to the federal regime to the exclusion of provincial regulation.
Federal securities legislation would make provincial securities acts, in
whole or in part, inapplicable to federal registrants.

Certainly the Quebec government believes the Transition Office's draft will
reflect the expert panel's report. So certain of this is the provincial
government that in November it framed its own constitutional reference to
the Quebec Court of Appeal based on the draft Securities Act, Jean-Yves
Bernard of Bernard, Roy & associes is counsel to Quebec.

The federal government, represented by Claude Joyal of Justice Canada, has
moved to suspend the case until the federal reference is heard. Alberta,
represented by David Tavender and Brian Foster of Fraser Milner Casgrain,
has intervened in that case. The Barreau du Quebec, represented by Raymond
Doray and Loic Berdnikoff of Lavery, de Billy, and the Canadian Bankers
Association, represented by Mahmud Jamal and Eric Prefontaine of Osler,
Hoskin & Harcourt have applied to intervene. These applications will be
heard on March 26.

Meanwhile, Alberta announced in December it would launch its own challenge
against a national securities regulator in the Alberta Court of Appeal.
Again, the terms of the Alberta reference are yet unknown, but the
government has said that it will launch the challenge because the federal
challenge could take too long. This suggests that the Alberta reference will
not wait for the Transition Office, but will also mount an attack on the
expert panel's version.

Bearing in mind, however, that the judgment of both provincial courts of
appeal can be appealed to the Supreme Court, what's the point of the
provincial references?

"By starting references, Alberta and Quebec have really raised the stakes,"
says one veteran securities lawyer who spoke on condition of anonymity. "The
great dance that is going on relates to the questions that the courts will
be asked to answer because the nature of the questions and the potential
outcomes will affect every-one's bargaining position. And what's not clear
is whether either or both of the provinces involved are adamantly opposed to
a national regulator or whether they're just playing a very tough poker
game."

Although the federal government has not indicated at any point that it would
seek approval for a unilateral power to impose a national securities
regulator, the aggressiveness of the provinces in starting their own
references may make it tempting to do so -- particularly because the Quebec
reference brings the issue to the fore by asking the court to decide the
constitutionality of an "express paramountcy" that would render inoperable
part of all of the securities legislation in provinces that do not opt in.

"The federal government is reluctant to ask the hard question because the
court's answer could effect a wholesale recalibration of federal and
provincial powers and the nature of the economic federation in this
country," the source says. "You've also got to wonder whether [Prime
Minister Stephen] Harper wants to be the guy to nuke Quebec. Still, the
feds' ultimate leverage remains in the possibility of the Supreme Court's
approving the feds' unilateral imposition of a national securities regime."

Many constitutional experts believe a federal securities regime, either in
opt-in or unilateral form, would be constitutional. The federal power to
regulate trade and commerce is most frequently cited as the justification.

Indeed, no less an authority than Brian Dickson, former Chief Justice of the
Supreme Court, gave his blessing to a federal regulator in his 1982 majority
judgment in Multiple Access v. McCutcheon, which upheld the validity of
provincial securities legislation.

"I should not wish by anything said in this case to affect prejudicially the
constitutional right of Parliament to enact a general scheme of securities
legislation pursuant to its power to make law in relation to interprovincial
and export trade and commerce," Justice Dickson said.

"This is of particular significant considering the interprovincial and
indeed the international character of the securities industry."

Professor Sujit Choudhry, who teaches constitutional law at the University
of Toronto, says Chief Justice Dickson's remark in that case was "a
throwaway line," and not key to that ruling. "But there's also no doubt that
the Court made the comment knowing there was a lot at stake."

The expert panel solicited opinions from Ogilvy Renault's Yves Fortier,
Torys' John Laskin and the late Allan McEachern, former Chief Justice of
British Columbia and then associate counsel at Fasken Martineau Dumoulin.
All concluded the opt-in scheme was valid under the general branch of the
federal trade and commerce power, which they said clearly authorized a
comprehensive securities regime.

But their opinions differed on whether Parliament could enact an "express
paramountcy" clause. Mr. Fortier and Mr. Laskin concluded Parliament could
enact such a clause and it would negate provincial legislation. Mr.
McEachern said it was "extremely unlikely" such a clause, even if validly
enacted, could render provincial securities legislation inoperable "for all
purposes."

Professor Poonam Puri, who teaches securities law at York University's
Osgoode Hall Law School, says the current state of capital markets provides
ample evidence of the need for a comprehensive securities regime, which
exists in all major developed countries other than Canada.

"The feds' case is very strong because capital markets have globalized in
significant ways over the last several decades," she says. "Issuers,
investors and capital are all quite fluid, making a national body that is
responsible for enforcement very important because the nature of the
misconduct that occurs commonly spans provincial and national borders."

Prof. Choudhry agrees. "As international activity in capital markets becomes
ever more pervasive, the view that securities regulation is solely a
provincial matter becomes ever more anachronistic," he says. "Bear in mind
that Justice Dickson's comments in Multiple Access came almost 30 years
ago."

Neil Finkelstein, a veteran litigator at McCarthy Tetrault who has studied
the scope of the trade and commerce power, is even more emphatic.

"The case for the constitutionality of a federal regulator is powerful and
overwhelming," he says. "It will be very difficult to argue the other side."

Indeed, the federal government, known to have a powerful in-house
constitutional law legal team that rarely requires outside assistance, has
pulled out all the stops by retaining former Supreme Court Justice Frank
Iacobucci; Blake, Cassels' & Graydon's scholar-in-residence, prominent
constitutional scholar and former Osgoode Hall dean Peter Hogg; and
University of Toronto Professor Michael Trebilcock, who holds the Faculty of
Law chair in law and economics, to assist with issues relating to the
proposed legislation.

It remains to be seen whether the issues will be resolved by verdict or by
settlement. In either case, it's important that there be no loose ends.

"Market participants need assurance about the stability of any new regime,
and to understand the rules governing the relationship between participating
and non-participating jurisdictions if some provinces choose not to opt in,"
says Jeremy Fraiberg a securities lawyer at Osler Hoskin.

Absent such clarity, no doubt, sanctity becomes largely irrelevant.