Federal Finance Minister Jim Flaherty decided in the spring a year ago, while the feds busied themselves laying the groundwork for the national regulatory regime, to refer the proposed Securities Act to the Supreme Court of Canada for a ruling on whether it falls within federal jurisdiction.
In March 2011 the appeal courts in both Alberta and Quebec ruled that the proposed federal legislation was unconstitutional.
Following the handing down of the Quebec decision on March 31 I received an email from a Quebec political insider: "After all, I guess you were quite right." He was referring to a column I had written and posted almost a year ago on RickardsRead.com headed "A national securities regulator? Maybe not" in which I refused to join the (then) chorus of 'experts' predicting federal victory.
The Supreme Court of Canada had set aside two days last week for hearing arguments from federal and provincial government lawyers. These included not just those representing Quebec and Alberta but also B.C., Saskatchewan, Manitoba and New Brunswick. Some of the latter group were not so much opposed to the proposed federal law as worried that it would create a troubling precedent for provinces by giving Ottawa de facto jurisdiction over insurance.
It will likely be several months before the Supreme Court issues its decision on the proposed federal securities legislation but it seems an appropriate point at which to repeat the comments on the subject I made almost a year ago, especially since the 'experts' featured in so many of the media reports back then who were confidently asserting a federal judicial victory have fallen silent. They now seem to have retreated quietly into the bushes, a good place for those who wish to be able once the SCC decision is handed down to foster some appearance of wisdom even if after the fact.
From RickardsRead.com, May 30, 201o:
Federal Finance Minister Flaherty (a former Ontario Treasurer) has announced Ottawa's intention to introduce legislation to create a national securities regulator, the long desired (by Ottawa) securities czar favoured by Ontario but opposed by several provinces and still strongly opposed by Alberta and Quebec.
Flaherty has wisely decided to first seek an opinion from the Supreme Court about whether or not the federal government has the authority under the constitution to undertake this change -- even with the current proposal allowing provinces to opt out. Why wisely? Because it is far from certain that the Supreme Court will validate the feds' approach in terms of pushing aside the provinces in the securities field.
The Globe and Mail's Report On Business approached the subject (May 27, 2010) with its usual pro-federal, breathless business angle declaring that "most legal experts believe the country's highest court will approve Ottawa's request."
Perhaps these include the same 'legal experts' who were sure that the banks' challenge to provincial insurance jurisdiction was bound to succeed once it landed before the Supreme Court. A Globe editorial (May 28, 2010) considered whether the proposed federal Securities Act would be found to be acceptable to the Supreme Court and, of course, decided that "probably it will say it is". But then the Globe's editorial logic is not always water tight.
I argued for many years in articles, editorials, speeches, life insurance industry committees and internal company memoranda that if the insurance jurisdiction of the provinces over agency matters was challenged by the feds, or by the federally regulated banks as it related to their insurance activities as banks, that the Supreme Court would side with the provinces as had been the case with the House of Lords decision which had forced Ottawa to come up with the federal insurance legislation of 1932.
I confess that I longed for the big banks to indulge their happy combination of arrogance and ignorance and challenge provincial jurisdiction vis-a-vis bank insurance activity. They did so in B.C. but in a case which did not really focus on the core jurisdictional/regulatory issue -- and won. Then, bless their high-priced 'legal experts', the big banks made the fundamental error (in an Alberta case) I had awaited for years involving a clear cut question of provincial jurisdiction: the Canadian Western Bank v. Alberta. Much to the surprise of many pro-federal power and pro-bank 'experts' the 2007 decision of the Supreme Court was a victory for the provinces.
Mr. Flaherty at least has apparently noted the provinces' jurisdictional victory in the Alberta case and is seeking a Supreme Court opinion on the securities issue. In this he is being opposed by none other than Alberta and by Quebec. It's all very well for the federal spin in this mater to rabbit on and on about how Canada, today's model for the western world on how to operate a financial system safely, needs to complete this state of regulatory perfection with a national securities regulator.
It is an appealing argument in some quarters but ignores certain realities involving provincial powers already so recently decided by the Supreme Court of Canada (SCC) in the Western Bank (CWB) case.
Here are, for example, two excerpts from the 2007 SCC decision which are relevant to federal legislation governing securities as financial services or an activity (as distinct from the structure of a federal securities commission):
1. The SCC decision said that the CWB "cannot plausibly argue that the banks are immune from provincial laws of general application in relation to any financial service, as this would not only render inapplicable elements of the Insurance Act but potentially render inapplicable provincial laws relating to mortgages, securities and many other services as well".[paragraph 65]
2. The SCC made it clear that "banks are not exempt from provincial law ... it was held by the Quebec Superior Court that a bank is subject to provincial securities laws. Accordingly, the mere fact that the banks now participate in the promotion of insurance does not change the essential nature of the insurance activity, which remains a matter generally falling within provincial jurisdiction". [paragraph 81]
In the absence of provincial securities legislation the federal government might have a case. However, if the federal securities law or related regulation proposed by Minister Flaherty is made applicable to the segregated fund contracts [i.e., annuity policies] of insurers governed by existing provincial insurance laws (provided the guarantee in the seg fund policy is 75% or more) then the provinces have a strong case. (Doubtless the bank-owned life insurance companies will want seg funds to be overseen by a federal securities regulator.)
If those provinces opting for a federal/national securities regulator wanted to continue to have securities authority over individual segregated fund annuity policies with a guarantee less than 75% or over group seg fund contracts, they would need a provincial securities law. Consequently there would not be an absence of provincial securities legislation in these provinces. In such circumstances the federal government's case would be extremely weak. The same would be true if provincial securities legislation were kept for the licensing of securities representatives at the provincial level.
While I do not have quite the same strength of opinion in this federal vs provincial securities matter as I did with the issue of provincial jusrisdiction involving insurance decided in the Western Bank case, I think it would be unwise to bet the ranch on a federal victory in the reference to the Supreme Court. Indeed I would go further: an SCC endorsement of Ottawa's view of the creation of a national securities regulator vis-a-vis provincial government authority is very, very far from a dead bang certainty.
And do not be misled by reports in this instance, as so many were in the insurance case appealed to the Supreme Court, by media reports of what 'most experts' think. When it comes to financial services matters the so-called experts have been wrong or just plain blind too much of the time -- since before the onset of the west's financial system crisis.
This crisis is the same event now being cited by Ottawa as a reason to challenge provincial authority in securities regulation. But there is a delightful little inconsistency in the feds' argument in this matter: Ottawa prides itself on how well Canada's wonderfully regulated financial system came through the crisis in comparison with the U.S. -- and as I have noted frequently OSFI, the Office of the Superintendent of Financial Institutions, did a great job. But Canada didn't have a national securities regulator while the Americans did.
But let's not spend time picking nits.
by Alastair Rickard