The Alberta Court of Appeals has ruled that the Government of Canada does not have the constitutional authority to enact a federal securities code for the entire country. In looking at the Government’s draft Canadian Securities Act , the appeals court said that a federal takeover of the securities industry cannot be justified as being ancillary to the general economic management of the Canadian economy. The two are constitutionally distinct functions. The securities industry has historically been regulated by the provinces using their jurisdiction over “property and civil rights in the province,” said the court, and the involvement of the federal government in the securities industry has historically been
minimal. ...
The proposed federal securities legislation represents the intrusion of the federal government into an area long occupied by the provincial governments. The provinces are not incapable of regulating the securities industry, said the court, indeed they have been successfully regulating it for decades.
In the US, states have been successful at regulating corporate governance. As I understand the pre-1933 history, they were less successful at regulating securities through their blue sky laws. But see Roberta Romano's The Advantage of Competitive Federalism for Securities
In any case, the argument against federal intrusion would make policy--if not necessarily constitutional--sense in the US as applied to corporate governance. See my article The Creeping Federalization of Corporate Law, which argues that:
No one seriously doubts that Congress has the power under the Commerce Clause to create a federal law of corporations if it chooses. The question of who gets to regulate public corporations thus is not one of constitutional law but rather of prudence and federalism. In this essay, I advance both economic and non-economic arguments against federal preemption of state corporation law. Competitive federalism promotes liberty as well as shareholder wealth. When firms may freely select among multiple competing regulators, oppressive regulation becomes impractical. If one regulator overreaches, firms will exit its jurisdiction and move to one that is more laissez-faire. In contrast, when there is but a single regulator, exit is no longer an option and an essential check on excessive regulation is lost.
Back to Hamilton:
More to the point, there is no indication why this is a matter of general trade and commerce. “Systemic risk” is not a constitutional head of power, said the court. To the extent that the proposed federal legislation addresses systemic risk, merely because it does so at the national level does not make it federal.
Likewise, the proposed federal legislation does not regulate capital flows as suggested by the Government of Canada. No securities legislation manages capital flows, be it the existing provincial acts or the proposed federal act. The proposed federal code is orthodox traditional securities legislation, said the court, it mandates full disclosure, but does not control investing.
The power over “trade and commerce” given to the federal government in the Constitution Act is, on its face, very widely stated. In other countries an equivalent grant of jurisdiction has been used to give the holder of that jurisdiction wide ranging power over every aspect of the economy. But that has not been the Canadian constitutional tradition. In Canadian constitutional law it was recognized early on that too wide an interpretation of the trade and commerce power would render meaningless provincial power over property and civil rights.
A very great pity that the US Supreme Court decided otherwise. As far as securities and the economy in general are concerned, once Wickard v. Filburn went on the books, the USA ceased to be a constitutional federation and became a unitary state in which local regulation persists at the whim of Washington. Unfortunately, as I demonstrated in my article, Dodd-Frank: Quack Federal Corporate Governance Round II, federal intervention in corporate governance typically has made things worse rather than better.
So kudos to the Alberta court for letting Canada dodge that bullet ... for now.
