Recent Court Decisions Focus on the Powers Available to Regulate Capital Markets

The Alberta Provincial Court recently released two decisions that considered and confirmed the constitutionality of certain investigative and enforcement powers used by securities commissions to regulate capital markets. R. v. Reisner¹ and R. v. Kirk² highlight the broad authority vested in the provinces to regulate capital markets through the exercise of investigation and enforcement powers. This review of the scope of securities regulatory authority is particularly noteworthy in light of current Ontario initiatives that focus on potential changes to Ontario’s investigation and enforcement regime.

Reisner: Investigative Powers in the Securities Act

In Reisner, the Court considered the constitutionality of certain investigatory powers afforded to the Alberta Securities Commission (ASC) under Alberta’s Securities Act (ASA). In the context of a regulatory investigation, the ASC is afforded the same powers as a court to compel witness testimony and the production of documents. It was argued that these provisions of the ASA are unconstitutional because they allow the ASC to exercise unfettered discretion to search and seize private records, which constitutes a violation of the constitutionally protected right against unreasonable search and seizure.

The Court held that the impugned investigatory provisions of the ASA are constitutional. The Court relied on a distinction between statutorily authorized seizures for regulatory purposes that do not engage Charter rights and seizures for quasi-criminal, investigatory purposes that engage Charter rights and therefore require prior judicial authorization. The impugned provisions in this case were held to relate to the former type of seizure. Moreover, the Court reasoned that individuals who choose to "become involved in the sale and trade of securities also choose to consider and become bound by the 'rules of the game,'" including the investigatory regime under the ASA.

Kirk: Penal Provisions in the Securities Act

In Kirk, the issue for the Court was the constitutionality of ASA provisions that make it an offence, punishable by fines and/or imprisonment, to engage in certain prohibited conduct, such as making misrepresentations or otherwise acting in a manner intended to improperly influence the market for securities or defraud market participants. The defendants argued that the impugned provisions of the ASA were ultra vires the Province of Alberta because (a) their pith and substance is criminal law, which properly falls under federal jurisdiction and (b) in the alternative, the impugned provisions conflict with the fraud provisions of the Criminal Code, rendering them inoperative.³

The Court held that the impugned provisions fall neatly within provincial jurisdiction because their pith and substance is the regulation of the securities market, which is a matter of provincial jurisdiction. In particular, the purpose of the provisions is to regulate the conduct of persons who trade in securities in order to cultivate a fair and efficient market and to ensure that the investing public receives a particular level of information. The Court also held that the impugned provisions of the ASA do not conflict with the fraud provisions of the Criminal Code. First, the provisions serve different purposes. Whereas the purpose of the fraud provisions of the ASA is to encourage members of the public to make investments, the only purpose of the fraud provisions of the Criminal Code is to punish people for fraud or false statements. Second, compliance with the impugned provisions would not require a person to breach the Criminal Code, thereby rendering the impugned provisions of the ASA inoperative.

Significance of Regulators’ Investigation and Enforcement Powers

Taken together, the Alberta decisions confirm the broad powers available to securities commissions to regulate the capital markets through the exercise of their investigation and enforcement powers. The decisions are also in line with Ontario initiatives to focus on potential policy and legislative changes to its investigation and enforcement regime.

Ontario’s 2013 budget sets out certain proposed amendments to Ontario’s Securities Act (OSA), including amendments geared at strengthening investor protection: permitting the Ontario Securities Commission (OSC) to share investigative information with other regulatory and law enforcement authorities; adding new offences to the OSA for attempted market manipulation and attempted fraud; changes to expand and clarify the OSA’s insider trading provisions; increasing the scope of OSC compliance reviews; and broadening the availability of orders to freeze assets of alleged wrongdoers. Details of the proposed amendments are not yet available. Separately, the OSC has proposed and sought comments on new enforcement initiatives aimed at resolving enforcement matters more quickly and effectively, and will be convening a hearing on June 17 at which these initiatives will be addressed.⁴

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¹ 2013 ABPC 103.

² 2013 ABPC 130.

³ Under the Rule of Federal Paramountcy, when federal legislation directly conflicts with provincial legislation, the federal legislation will prevail and the provincial legislation is rendered inoperative.

⁴ Request for Comments on Proposed Enforcement Initiatives, OSC Notice 15-704 (21 October 2011).