Securities Reference: the power of one

There’s no good reason to believe a single regulator is better than two, or three, or ten


If you’ll pardon an off-the-cuff reaction to the Supreme Court’s securities-regulation finding: the federal government tried to argue that the right number of securities-regulating bodies for our country is, eternally and as a matter of Euclidean certainty, “one”. The counter-argument is that the optimum number might be higher than that: it might be one, or two, or three, or ten. Leaving aside the actual constitution, and going only from first principles, you could only support the federal reference if you believed no answer but “one” was ever, under any circumstances, appropriate for a country.

Ten systems seems unlikely to be a sensible choice, of course, but then, the SCC’s decision doesn’t obligate us to keep ten (or 13) systems running in parallel; it leaves the provinces free to devise cooperative arrangements between themselves if they perceive no benefit in the independent exercise of that constitutional power. It is not really difficult to imagine a collaborative process that leaves us with one regulator in the medium term (or maybe two, CPP/QPP-style), the moreso since the efficiency argument for one regulator is ostensibly strong. (Let us note that Alberta has had a change of government, a change that looks increasingly radical with each passing week, since this whole brawl started.)

What, then, has been lost by this decision? As I see it, a finding in favour of the federal government would have closed off one future path permanently, and ended the debate; the finding we got leaves any overall arrangement for securities regulation attainable. That seems like a positive feature.

Emmett Macfarlane says this in an awkward way in his piece for us, but it should be reiterated that no comparison or parallel with the Supreme Court’s evidence-driven finding in the Insite case is really appropriate. Insite involved a dilemma where there were good, solid, historically-founded constitutional arguments on both sides, and the Court hardly had any choice but to improvise. The securities reference was a matter of a federal government flinging a Hail Mary and trying to reverse generations of pretty-much-unanimous precedent.

The stated reason for attempting this is that financial intermediation has somehow changed in nature over recent decades, and is no longer reasonably subject to the “property and civil rights” heading in the BNA Act. I’m inclined to just say “Aw, foofaraw” to this. Excuse the inside baseball, but I’m reading Dumas Malone’s six-volume biography of Thomas Jefferson these days, and like any good work of history, it provides a very instructive reminder of how little has changed. The “advanced financial instruments” that Alexander Hamilton devised, and that Jefferson objected to as being inherently dubious, were crude by the standards of 2011. But those two were carrying on the same debate that is going on now, and a time-traveller from the past would need surprisingly little instruction to understand our tussles over the nature of finance.

The idea that mutual funds and hedge funds and derivatives and credit-default swaps are qualitatively new entities, demanding essential change to anybody’s constitutional structure—that just strikes me as a load of ahistorical balderdash. The Fathers of Confederation knew a thing or two about wily schemes for expanding credit beyond the limits of physical production in the economy; for many of them, such schemes were the consuming passion of their lives.

What I do notice, surveying the world scene, is that centralized regulation, which certainly is the norm in the rest of the world at the country scale, has not fared well in the current financial crisis. It’s amazing the federal government had time to demand such a change, given how busy they are the rest of the time in trumpeting Canada’s financial regulation as the globe’s finest, a rock of confidence in a sea of troubles. Is there really that much benefit in putting all the laziness and corruptibility in one place, that it may more readily be exploited by a Bernie Madoff? It’s practically a law of history that the regulators will always be one step behind the ambitious quants, loophole-wrigglers, and sheer fraudsters. (The converse is that in regimes where this is not true, where the Jeffersonian hatred of financial speculation prevails, much injury to credit, growth, and innovation will be done along with the good.)


Securities Reference: the power of one

  1. In the meantime, new companies, talent and capital continue to move to more predictable jurisdictions

    • Companies, talent and capital move for a great number of reasons.  Which bureaucracy staffs the regulatory office doesn’t rank particularly high, IMO. 

    • What is your evidence for that assertion, Steve?  Last year, the TSX Group led the planet in the number of new mining company listings.

  2. “The stated reason for attempting this is that financial intermediation has somehow changed in nature over recent decades, and is no longer reasonably subject to the “property and civil rights” heading in the BNA Act. I’m inclined to just say “Aw, foofaraw” to this.”

    So sweet how the Harper govt is using this arguement of convenience. Of course when it suits some other political purpose not one jot or title of the sacred BNA act should be subject to the requirement of historical revisionism.
    Still, cognative dissonance like political opportunism has universal appeal; no doubt the libs will be all over this defending the sacred rights of the provinces enshrined in BNA. I know it’s politics, but is a little intellectual consistency too much to ask for?   

    “Let us note that Alberta has had a change of government, a change that looks increasingly radical with each passing week, since this whole brawl started.)”

    Do you have some inside stuff on Redford CC? I know there’s a school of thought that says AB may have sort of chosen its first ever Liberal Premier [ ok i may be the only one thinking that really] but did you have something else in mind? I thought the other lady was in charge of the radicals.

    • I definitely would never claim Redford was Alberta’s “first Liberal premier” even as a metaphor, since there have been three.

      • Good one.

        Hmmm, That would be presumably Loughheed, Stelmach and who? 

         Getty?[ although i only vaguely recall him as a bungler] Or even Ralph; he really wasn’t all that conservative – just a clown[ at times anyway]

        Isn’t that four excluding Redford?

        • Rutherford, Sifton and Stewart.  The first three.  Google them.

          • Damn that google, just can’t outsmart it. I never thought of going that far back at all.
            I still think Lougheed was a liberal. So do a good many modern Tories :)

  3. I suspect you’re right that I should have elaborated more on the Insite comparison. The point is the Court has, in less than 30 years, dramatically expanded the scope of the Charter’s section 7 rights, far beyond what was intended. If the Court held to its 1985 precedent on the scope of section 7 (not to mentioned the even more circumscribed meaning the framers originally intended), the outcomes in Morgentaler just a few years later, or the Chaoulli health care case in 2005 or Insite would not have been possible. The fact that the federal powers over ‘trade and commerce’ is subject to “generations of pretty-much unanimous precedent” shows a completely different, less flexible approach to federalism cases – some of which, as I write, is justifiable.

    Now, you might *like* that the JCPC quite radically expanded provincial powers and constrained federal ones in shaping our Canadian federalism in those first decades, but that doesn’t make those precedents any more correct than the very early Charter cases that have been largely abandoned.

    You may also be correct that one national securities regulator is no better than 2, 3 or 13. But, as Geddes rightly points out, the policy issue is besides the point. The real question is constitutional – what does “trade and commerce” mean? The JCPC precedent you think the Court is right to faithfully adhere to decided to depart from the “literal interpretation”. I think that was a mistake – and just because a mistake is really old doesn’t mean it’s worthy of greater deference than a mistake in constitutional interpretation that’s only a few years old.

    • I think it does mean something very much like that. At every scale of the law, an “incorrect” state of affairs that has been allowed to endure long enough eventually becomes a correct one. And when it comes to division-of-powers questions, continuity and foreseeability issues are very important relative to the actual answer to “Which level?”  (Moreover, when a country or nation-state is in conflict with a subsidiary unit, the smaller community will always be more sensitive to capricious alterations of its rights, especially “ancient and undoubted” ones, even if the original acquisition of those rights was improper or illogical. This practically mandates a double standard in favour of the sub-unit, doesn’t it?)

      • A slight quibble of which you are probably aware: an incorrect state of affairs that has endured long enough because of constant tsting and reference will eventually become the correct one, one which has basically lain dormant for a lengthy period and clearly reflects a state of affairs we’ve passed on from could very well be ripe for the picking. 

        Regardless, it’s sensible that broadly classifying one legal approach as “broad” or even “innovative” shouldn’t in itself be an invitation to be broad or innovative in a different area of law, even if both are constitutional.

  4. Colby, “Canada’s financial regulation” is even more heterogenous than our securities regulators are (much more). In fact, I think our regulation of financial institutions (led by OSFI) has been excellent, while our securities regulators have lagged that performance badly. 

    That Canada has rightly taken great credit for its regulation of its banks and FIs is a tick in favour of a single national regulator, not against it.

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