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The Supreme Court has unanimously declared Ottawa's proposed national Securities Act unconstitutional, siding with provinces that insisted the day-to-day regulation of securities markets does not belong in federal hands.
Finance Minister Jim Flaherty had asked for the court's opinion on the constitutionality of the proposed law, arguing that the lack of a uniform national body to regulate securities trading was a glaring weakness in Canada's financial system.
Ontario, where the majority of Canada's securities trading takes place, was the only province to side with Ottawa's approach.
Several other provinces argued that the existing system -- in which individual regulators work together to ensure common national standards -- is enough to protect investors and the Canadian economy.
In its opinion -- which is not a judgment because it was simply asked by Ottawa to clear up the question of constitutionality -- the Supreme Court notes that it is not weighing in on whether a national security regulator would be a better option in terms of public policy.
"The courts do not have the power to declare legislation constitutional simply because they conclude that it may be the best option in terms of public policy," the court states.
The Supreme Court's decision marks the third time courts have ruled against Ottawa in this case. Appeals courts in Quebec and Alberta previously came to the same conclusion.
Canada's argument that -- in light of lessons learned from the 2008 economic crisis -- a national regulator is needed to prevent systemic risk to the financial system appears to have found some sympathy among the judges, but not enough to sway the final decision.
"Aspects of the [proposed federal Securities Act], for example those aimed at management of systemic risk and at national data collection, appear to be directly related to the larger national goals which the Act proclaims are its raison d'être. However, important as these elements are, they do not, on the record before us, justify a complete takeover of provincial regulation," the court states.
Ottawa had argued that the federal Constitutional power over trade and commerce trumped the provincial constitutional authority over the regulation of securities markets. Provinces outside of Ontario successfully argued that securities regulation falls under their constitutional authority over the regulation of property and civil rights.
Still, the court suggests there may still be room for a federal law that recognizes these provincial powers over securities regulation - but also the need to address some aspects nationally.
"It is not for the Court to suggest to governments of Canada and the provinces the way forward by, in effect, conferring in advance an opinion on the constitutionality of this or that alternative scheme," the court states, noting that other federations are able to resolve such governance questions via "cooperative solutions."
"Cooperation is the animating force. The federalism principle upon which Canada's constitutional framework rests demands nothing less."