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In December 2003, the Wise Persons' Committee (WPC), a federally appointed committee, released its report proposing a new structure for securities regulation in Canada. The WPC concluded that the regulation of capital markets in Canada had become a matter of paramount national concern. It recommended that the federal government, hopefully with the cooperation of the provinces and territories, create a single regulator to administer and enforce a federal securities law.

BACKGROUND

Canada's capital markets represent less than 3% of the world's capital markets. Despite their relatively modest size, Canada's capital markets are regulated by thirteen securities authorities that administer and enforce securities laws enacted by Canada's provinces and territories.

Several proposals have addressed the issue of multiple securities regulators in Canada. These have included:

• Various versions of a "passport system". The central concept of a "passport system" is that regulatory decisions made by an authority in one jurisdiction are recognized by the authorities in other jurisdictions. Under such a system, qualifying a prospectus, applying for registration or obtaining an exemption from prospectus or other legal requirements in one province or territory would accomplish the same outcome in all other provinces and territories. In effect, the successful applicant would be granted a "passport" that would be recognized in the other jurisdictions;
• Substantial harmonization of provincial securities laws, including the recent publication of uniform securities legislation (USL) by the Canadian Securities Administrators, which would require adoption by each province and territory;
• Creation of a single pan-Canadian regulator comprised of provincial representatives and deriving its authority from provincial and territorial laws;
• Enactment of a federal securities law and creation of a single, federally constituted, national securities regulator.

In early 2003 the federal Minister of Finance appointed seven people to constitute the WPC. Its mandate was to review the various proposals for structuring capital market regulation in Canada and to recommend the best model to be adopted.

THE PROCESS

The WPC began its deliberations by requesting submissions from the public. Over 90 were received and are available on the WPC's website at http://www.wise-averties.ca/submissions_en.html. The WPC also conducted interviews and heard oral submissions in nine days of consultations in various cities across the country, and met with key capital market participants and regulators in London, Brussels, Washington and New York.

The WPC also commissioned a series of research papers concerning fundamental issues. Based on these research papers and other published data, the WPC concluded that Canada's capital markets have evolved to the point where they have become a matter of national concern.

Finally, the WPC obtained three legal opinions from leading Canadian constitutional law experts in Quebec, Ontario and British Columbia. The opinions concluded that Parliament has the constitutional authority to legislate in the field of securities regulation. Ogilvy Renault was selected to provide one of these opinions. The Ogilvy Renault opinion is described under "The Constitutional Position" below.

Copies of the research papers and constitutional legal opinions are available at http://www.wise-averties.ca/report_en.html.

THE WPC REPORT

The WPC recommends the creation of a single, federally constituted securities regulator to administer a federal securities law and regulate the Canadian capital markets. To avoid perceived conflicts of interest, adjudicative functions would be the responsibility of a separate body. At the same time, the model recognizes the needs of regional capital markets and the sectoral expertise that has developed in various centres across Canada.

The WPC model contains the following features:

1. A nominating committee would be formed consisting of thirteen people. Ten would be selected by the Minister of Finance from names presented by the provinces (one from each province). The remaining three would be selected by the Minister of Finance as representatives of issuers, intermediaries and investors.
2. The nominating committee would present names to the Minister of Finance from which the Minister would select the commissioners of the Canadian Securities Commission (CSC). Two commissioners would be from each of Ontario and Quebec, one from each of British Columbia and Alberta, two from the other provinces and territories, and one would not need to have any particular provincial affiliation. The Chairman would be selected from among the commissioners by the Minister of Finance after consultation with the nominating committee.
3. The CSC would administer a single statute. The statute would be a federal act based on the USL, recently released in draft for public comment. Amendments to such a federal securities act would not be enacted if a majority of the provinces representing a majority of the population objected.
4. A Securities Policy Ministerial Committee would be formed involving the Minister of Finance and the provincial ministers of finance.
5. The CSC's head office would be located in the National Capital Region and would be responsible for policy development, the coordination of regional and district office activity, dealings with other Canadian financial sector regulators and international matters.
6. Strong, functionally empowered regional offices would be established in Vancouver, Calgary, Winnipeg, Toronto, Montréal and Halifax to review prospectuses and registration applications, grant exemptions, conduct compliance reviews and investigations and initiate enforcement proceedings, as well as contribute to policy development. Where necessary, there would be additional district offices to ensure effective and consistent issuer and investor treatment across Canada.

The WPC designed its model to allow for significant provincial involvement in virtually every aspect of the model: the origin of the statute, the nominating committee, the requirement that statutory amendments not be implemented if a majority of the provinces representing a majority of the population disapproves, the location of offices across the country, and the potentially very important Securities Policy Review Committee.

IMPLEMENTATION

Consistent with its emphasis on collaboration, the WPC invited both federal and provincial initiatives in implementing its recommended model:

We recommend that the federal and provincial governments implement our recommendation without delay. Canadians are seeking increased federal-provincial co-operation in addressing important public policy priorities. This is a vitally important issue for Canada and it provides an opportunity for both levels of government to come together and act in the national interest.

However, the WPC also stated that delay should not be tolerated if one or more provinces were reluctant to participate. In the WPC's view, the public interest requires that there be no further delay in establishing one federal securities regulator and warrants the federal government using its constitutional right to move forward on its own initiative, if necessary.

THE CONSTITUTIONAL POSITION

Ogilvy Renault provided one of the three legal opinions addressing the constitutional power of the Parliament of Canada to enact a federal securities act to be administered by a single securities authority. As instructed by the WPC, Ogilvy Renault's analysis addressed only the legal constitutional issues raised by the WPC and did not take any position on the recommended model.

Ogilvy Renault concluded that the general trade and commerce power under the Constitution Act provides a strong basis for enacting a comprehensive federal securities act. In support of this conclusion, Ogilvy Renault cited data prepared for the WPC showing that the operation of Canada's capital markets had become a matter of national economic concern.

In Ogilvy Renault's view, the provinces may cooperate in implementing a federal securities act. They may enact laws that incorporate the federal securities act by reference, dissolve their existing securities regulators, and delegate administrative powers to the CSC. The enactment of such provincial laws would be a valid exercise of the provinces' property and civil rights powers under the Constitution Act.

The WPC asked Ogilvy Renault whether Parliament could enact an express "paramountcy clause" that would preclude provincial securities laws in their entirety. The WPC anticipated that Parliament might have to enact such a clause if one or more provinces decided not to cooperate in implementing federal securities legislation and Parliament concluded that this failure to cooperate would jeopardize the operation of the federal securities act in other parts of Canada. Ogilvy Renault expressed the view that although such a clause would be novel and is untested in the courts, Parliament could validly enact a clause stating that Parliament intended to entirely occupy the field of securities regulation in Canada to the exclusion of provincial laws.

WHERE NEXT?

The WPC Report has been presented to the Minister of Finance of Canada. The report urges change without delay. However, the proposal to establish a single federal securities regulator in Canada is not a novel concept. It remains to be seen if the political will now exists at both the federal and provincial levels to move the WPC's recommendation forward. Furthermore, given that there is already opposition to the concept in at least three provinces, will the federal Parliament be willing to override such opposition to give effect to the WPC's recommendation?

The purpose of this document is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Ogilvy Renault or any member of the Firm on the points of law discussed.

©OGILVY RENAULT 2004 - All Rights Reserved

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