I. Extra-provincial Impact of Provincial Securities Laws
Provincial securities legislation typically prohibits the advertisement or promotion of investment in certain security instruments, unless the investment opportunity has been properly registered with the province's securities commission or qualifies for an exemption under the province's securities legislation. This prohibition applies, regardless of whether the investment contract is intended to be completed within or beyond the borders of the province. But is such a prohibition consistent with the Constitution of Canada?
An analysis of recent decisions of the Supreme Court of Canada suggests that the answer is no. The Constitution prohibits the application of provincial law outside the boundaries of a province.
II. Supreme Court of Canada Precedents
Over the last five decades, the Supreme Court of Canada has had a number of opportunities to consider section 91(2) of the Constitution Act, 1867 and the authority it confers with respect to interprovincial trade.1 Taken together, the Court's decisions make it clear that the federal government alone has jurisdiction under the Constitution over the regulation of interprovincial trade in securities. For example, if the British Columbia government attempts to regulate the sale of securities in Alberta, such regulation will be outside the province's jurisdiction under the Constitution.
One of the first cases to reflect this application of the Constitution Act, 1867 was Carnation Company Limited v Quebec Agricultural Marketing Board, et at. 2 This case involved the Quebec Agricultural Marketing Board and its regulation of the price of the marketing and the sale of milk to be purchased by farms in Quebec. The Court ruled that the mandate of the Board was valid. In its ruling, the Court found that the orders of the Board were not directed at the regulation of interprovincial trade and "did not purport directly to control or to restrict such trade." 3 This left open the possibility that a provincial regulatory regime could succeed where it only has an incidental effect on interprovincial trade.
In Attorney-General for Manitoba v Manitoba Egg and Poultry Association et al. 4 the Court found that a proposed regulation and order governing the sale in Manitoba of all eggs, wherever produced, was invalid, as it contravened section 91(2) of the Constitution Act, 1867. The Court decided that where a provincial order limits "the free flow of trade between provinces," 5 that scheme will amount to the regulation of interprovincial trade. This decision was followed a few years later in Central Canada Potash Co Ltd et al v Government of Saskatchewan. In Central Canada Potash, the Court concluded that the Saskatchewan legislation in question was outside the Constitutional powers of the province. 6 The Court found that the legislation was aimed directly at the production of potash desired for export and had the intended effect of regulating the export price. Whether the law is directed at the sale of eggs, potash or securities outside a province, a province may not constitutionality control contracts beyond its borders.
In 1978, the Court also decided Reference re Agricultural Products Marketing, 7 where the Court was tasked with reviewing the newly enacted Agricultural Products Marketing Act8 and assessing the constitutionality of its objectives. The Agricultural Products Marketing Act proposed to give the federal government jurisdiction over a national egg marketing scheme by imposing quotas on the provinces. In rendering its decision, the Court affirmed the validity of most of the provisions in the legislation and concluded that such a regulatory scheme was within the constitutional powers granted to the federal government.
One of the most recent cases on this subject is Federation des producteurs de volailles du Quebec v Pelland. 9 This case involved section 22(3) of the Farm Products Agencies Act, 10 in which the federal and provincial governments entered into a regulatory scheme regarding the production and marketing of chicken in Canada. By the terms of the scheme, provincial governments were delegated the authority by the federal government to allocate and administer federal quotas. When a farmer in Quebec filed a complaint regarding Quebec's administration of his intra- and extra-provincial chicken quotas, the Court ruled that the province was within its jurisdiction to pass laws setting up such a quota system. This decision was contrasted with the Court's previous decision in Central Canada Potash, where the objectives of the legislation included the direct regulation of extra provincial trade. 11 The joint participation of both federal and provincial governments was crucial to the constitutionality of the Farm Products Agencies Act.
III. Canadian Securities Act Reference
The importance of a joint effort in the regulation of securities across provincial boundaries is apparent from the outcome in the 2011 Reference re Securities Act ("Reference"). 12 In the Reference, the Court held that the federal government's proposed Canadian Securities Act was constitutionally invalid. The purpose of the proposed legislation was to create "a single Canadian securities regulator," 13 as well as "to provide investor protection, to foster fair, efficient and competitive capital markets, and to contribute to the integrity and stability of Canada's financial system." 14 The Court ruled that the federal government could not enact such a scheme on its own through the powers conferred under the Constitution Act, 1867 and determined that the Canadian Securities Act was invalid with respect to its proposed "day-to-day regulation of all aspects of trading in securities and the conduct of those engaged in this field of activity." 15 The interprovincial aspects of the Canadian Securities Act were not in issue.
John B. Laskin and Darryl Patterson, in their article "Moving Forward after the Securities Act Reference: The Future of Securities Regulation in Canada," point out that the decision in the Reference leaves open the possibility that a cooperative regulatory securities scheme can exist in Canada. 16 This is what the Court said on the subject:
Such an approach is supported by the Canadian constitutional principles and by the practice adopted by the federal and provincial governments in other fields of activities. The backbone of these schemes is the respect that each level of government has for each other's own sphere of jurisdiction. Cooperation is the animating force. The federalism principle upon which Canada's constitutional framework rests demands nothing less. 17
Furthermore, Professor Michael J. Trebilcock is of the view that the decision in the Reference "leaves significant scope for unilateral federal action in the field of securities regulation, relying on the general trade and commerce power and perhaps the interprovincial and international trade and commerce power." 18
The Court's clarification of the kind of regulatory scheme that will work, constitutionally, serves to emphasize the fact that the provincial securities laws cannot effectively regulate the advertising, promotion and sale of securities across provincial lines without the participation of the federal government.
IV. Overlapping Jurisdiction Unconstitutional
Some regulators take the position that issuers of securities must follow the provincial regulations that are the most restrictive in order to be on the correct side of the law. These regulators believe that the domicile of the investor is somehow relevant to the question of regulatory jurisdiction. This position is clearly inconsistent with the court authorities on the subject of extra-provincial application of provincial laws. Just one example demonstrates that this would be legally and constitutionally unworkable. If Alberta were to prohibit investments in certain securities in an amount less then $5,000.00 and British Columbia were to prohibit an investment in the same securities in an amount greater than $5,000.00, then all investment would be foreclosed. This is not what the Constitution contemplates.
Instead, the Constitution requires the legislative assemblies in each province to take care to limit the application of provincial laws to local matters within the jurisdiction of a province. Contracts that will be concluded outside the geographical boundaries of a province do not fall under the jurisdiction of that province.
In light of this understanding of the Constitution, an issuer could establish offices and bank accounts in each jurisdiction in which they choose to offer securities so that the issuer could take advantage of the less restrictive rules that may exist in the jurisdiction where an investor is located at the time an investment is concluded. Under this approach, issuers may choose the jurisdiction with the most advantageous rules, so long as the investor is prepared to be present in such jurisdiction at the time of investment in the securities offered.
This is in the best interest of market and investors. The Constitution provides for competition amongst provinces hoping to attract issuers in the same way that competition laws provide for competition amongst issuers hoping to attract investors.
A recent decision on point is that of Justice Campbell of the Nova Scotia in Trinity Western University v. Nova Scotia Barristers' Society, 2015 NSSC 25. In that case, Justice Campbell had to address the argument from the Barristers' Society that their jurisdiction to protect the public interest allowed the Barristers' Society to "require universities in other Canadian jurisdictions to comply with Nova Scotia law, even if that law conflicted with the law of their own province" (see paragraph 178 of the decision). Justice Campbell rejected that argument in its entirety. He was of the view that there were constitutional implications associated with such a position. More importantly, he found that the Barristers' Society had "no authority" to regulate a British Columbia law school, as the Legal Profession Act could not reasonably be interpreted to grant such statutory authority (see paragraph 181 of the decision).
Courts facing attempts by securities commissions to regulate securities transactions in other provinces should follow the approach favoured by Justice Campbell. It cannot be reasonable to conclude a provincial legislative assembly intends to regulate business transactions outside the constitutional jurisdiction of that legislature.
Footnotes
1.Constitution Act, 1867 (UK), 30 & 31 Vict, c 3, reprinted in RSC 1985, App II, No 5, s 91
2.[1968] SCR 238.
3.Ibid at 254.
4.[1971] SCR 689.
5.Ibid at 703.
6.[1979] 1 SCR 42.
7.[1978] 2 SCR 1198.
8.RSC 1970, c A-7.
9.[2005] 1 SCR 292, 2005 SCC 20.
10.RSC 1985, c F-4
11.Ibid at paras 39-41.
12.[2011] SCC 66, [2011] 3 SCR 837 [Reference].
13.Ibid at para 29.
14.Ibid.
15.Ibid at para 125.
16.John B Laskin & Darryl C Patterson, "Moving Forward after the Securities Act Reference: The Future of Securities Regulation in Canada" (2011) 1:1 Commercial Litigation and Arbitration Review 5. John Laskin and Darryl Patterson represented the Investment Industry Association of Canada as an intervener supporting the federal government's position in the Reference.
17.Reference, supra note 13 at para 133.
18.Michael J Trebilcock, "More Questions then Answers: The Supreme Court of Canada's Decision in the National Securities Reference" in Anita Anand, ed, What's Next for Canada? Securities Regulation After the Reference (Toronto: Irwin Law, 2012) 37.
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