Canada is one of the few industrialized countries without a national securities regulator, despite various attempts by the federal government to centralize the regulation of securities across Canada. Currently, the securities regulation framework is comprised of 13 independent provincial and territorial regulators. However, on November 9, 2018, the Supreme Court of Canada (the “SCC”) unanimously decided that the federal government’s proposed Cooperative Capital Markets Regulatory System (the “Cooperative System”), which seeks to harmonize securities regulation across Canada, is constitutional. This decision will likely facilitate the establishment of a national securities regulator for Canada.
Under the current regime, each province and territory of Canada represents a distinct jurisdiction with a unique securities regulatory body, which regulates securities transactions pursuant to its own set of rules and regulations. The provincial and territorial securities regulators, with the exception of the securities regulatory body for the province of Ontario, coordinate with one another through the “passport system”. Under the passport system, a company applies to its principal securities regulator, which is determined by the jurisdiction in which the company’s head office is located or by the jurisdiction with which the company has the most significant connection. Upon receiving a favorable decision from its principal securities regulator, the company may utilize the decision as a “passport” to conduct the approved securities transaction in another jurisdiction of Canada. The passport system allows companies to access markets in other Canadian jurisdictions by dealing only with one securities regulator.
While the passport system provides a cooperative approach among the securities regulatory bodies in Canada, maintaining 13 separate securities regulators is costly and leads to a lack of coordination and unnecessary delays, especially when addressing national developments in Canadian capital markets. In an effort to address the deficiencies of the passport system, the federal government and the governments of Ontario, British Columbia, Saskatchewan, New Brunswick, Prince Edward Island, and Yukon have signed a memorandum of understanding in September 2014 to formalize the terms of the Cooperative System and create a single national regulator.
The main components of the Cooperative System include provincial and territorial securities legislation, federal securities legislation, a national securities regulator, and a council of ministers responsible for overseeing the national securities regulator. Participating provinces and territories would enact uniform securities legislation that addresses the day-to-day aspects of regulating capital markets. Meanwhile, the federal government would enact legislation to address criminal matters and systemic risk across the country.
Under the Cooperative System, a national securities regulator would be responsible for administering the legislation, as well as monitoring activity in the Canadian capital markets. Moreover, the national securities regulator would have regulatory, enforcement, and adjudicative authority with its own independent tribunal.
The SCC recently upheld the constitutionality of the Cooperative System in the decision of Reference re Pan-Canadian Securities Regulator. The SCC found that Canada’s constitution authorizes the implementation of a single securities regulator and the draft federal legislation for the implementation of the Cooperative System does not exceed Parliament’s jurisdiction over trade and commerce. The Cooperative System ensures that participating provinces and territories have the sole authority to enact and amend their respective securities laws since any proposals to change the legislation remains subject to legislative approval, and therefore, the Cooperative System does not represent an improper delegation of law-making authority. However, the SCC noted that the implementation and successful operation of the Cooperative System would require a significant commitment from the participating provinces and territories, including dissolving their current securities regulatory bodies, enacting legislation that mirrors the model act, and merging certain administrations. Additionally, once the Cooperative System is implemented, it would be difficult for the participating provinces and territories to extricate themselves at a later date. These political and practical implications, although irrelevant to the constitutional issues, will likely present a significant barrier to the implementation of the Cooperative System across Canada.
While the SCC’s decision declaring the constitutional validity of the Cooperative System is a positive step towards creating a harmonized securities regulatory system across Canada, there are still many outstanding issues in connection with implementing the Cooperative System in Canada. For example, there are seven provinces and/or territories that have not agreed to the implementation of the Cooperative System including Alberta and Quebec, which have historically been opposed to the implementation of a national securities regulator. The federal government will need to clarify how the Cooperative System will operate with these non-participating provinces. Moreover, the decision making and governance structure for the new regulator will need to be set out in its enabling legislation, which has not yet been published by the federal government. The enabling legislation for the securities regulator will need to be drafted in a manner that respects the boundaries between federal and provincial authority, otherwise it may result in further constitutional challenges.
The implementation of the Cooperative System would mark an important change in securities regulation in Canada that would affect every process from registering a prospectus to enforcement of securities laws. Nevertheless, provincial support and further clarity on the proposed structure of the Cooperative System will be critical before Canada’s national security regulator can be established.