OTTAWA - A unanimous Supreme Court ruling striking down Ottawa's national securities regulator plan has left the process in limbo, with supporters scrambling for an alternative and opponents dancing on the project's grave.
Supporters of a single body overseeing company filings, broker licencing and stocks trading said they haven't abandoned the idea, and Finance Minister Jim Flaherty also appeared to leave the door open a crack.
"It is clear we cannot proceed with this legislation," Flaherty said in a statement, adding: "We will review the decision carefully and act in accordance with it."
But Quebec Finance Minister Raymond Bachand welcomed the "nice Christmas gift" and doubts Ottawa can revive the process.
"The decision given today closes the doors. It was a unanimous decision and there wasn't any opening in the decision," he said in Montreal.
Ontario's finance minister said there was no disguising the setback to the five-year process originated by Flaherty soon after the Harper government assumed power in 2006.
The federal minister championed the concept, appointed a blue-ribbon panel to advise him, drafted legislation and even created a transition office at the expense of time, staff labour and an investment of tens of thousands of dollars — perhaps hundreds.
"It's clearly a rejection of the approach the feds took," said Ontario's Dwight Duncan, representing the only province that officially supported Ottawa's position before the court.
York University Provost Patrick Monahan, a respected constitutional expert, called the decision historic, saying it was the first time in nearly half a century the Supreme Court blocked a major policy initiative from the federal government.
"On those types of issues the federal government has never lost in the last 50 years," he said.
The court's ruling Thursday was unanimous on all counts and appeared to hang on two key points — Ottawa did not show that the capital market system had changed so fundamentally that it is beyond the competence of provinces, and secondly, the bill as presented by Flaherty runs roughshod over long-established provincial powers.
"In sum, the proposed act overreaches genuine national concerns," the court said.
"While the economic importance and pervasive character of the securities market may, in principle, support federal intervention that is qualitatively different from what the provinces can do, they do not justify a wholesale takeover of the regulation of the securities industry."
Where Ottawa does have a legal interest, the court said, is in areas beyond provincial competence, such as systemic risk where failure by a market participant in one province can impact the system as a whole, and in setting minimum standards.
Analysts said a clear example of systemic risk occurred with the Lehman Brothers investment bank failure in 2008 in the United States — a bankruptcy that triggered the Wall Street financial crisis and global recession.
The court added that Ottawa can also seek a co-operative approach with the provinces, while recognizing that the day-to-day regulation of securities is essentially provincial.
For some industry players, the court left the door sufficiently ajar to let federal government walk through.
"We can now move quickly, we can accelerate the process ... both levels of government can now come together," said Ian Russell, president of the Investment Industry Association of Canada.
"There's a clear federal interest and clear federal jurisdiction, so we build from here," added Terry Campbell of the Canadian Bankers Association.
In Calgary, Alberta Finance Minister Ron Liepert, along with Quebec one of the two most active opponents of the federal bill, said he believes current "passport" system works well, although he did not rule out "listening" if Ottawa wants to talk about a voluntary system.
But co-operation is something Flaherty has struggled to find throughout the process. With the Supreme Court judgment in their back pocket, getting movement in the future will be even more difficult.
Ontario's Duncan said it's clear all the other provinces to varying degrees believe the passport system, "a mutual recognition" regime by which a prospectus or registration as a dealer in one province is recognized by all, functions well.
"Most provinces don't feel (a national regulator) is needed. Even the ones that didn't take a position at the Supreme Court have never been a big fan of the common securities regulator," Duncan said.
Arguing against the government before the Supreme Court were Quebec, Alberta, British Columbia, Saskatchewan, Manitoba and New Brunswick.
Flaherty and Duncan, as do industry participants and Canada's business community, still believe a national security regulator would be a major step forward in regulating the growing reach and power of financial markets.
Flaherty has also suggested that fraudsters such as financial promoter Earl Jones in Montreal or the perpetrators of the Bre-X Minerals fraud in the late 1990s — where investors lost billions of dollars on a gold mining scam — might have been caught sooner with better policing.
Skeptics countered that abuses have also taken place in single regulator countries such as the U.S., which has in recent years been rocked by ponzi schemes such as Bernie Madoff, creative accounting in the Enron collapse, and insider trading scandals, as well as the subprime mortgage fiasco that led to the collapse of the U.S. housing market.
Perhaps tellingly, there was little stock market reaction when the decision came down at 9:45 a.m. EST. The Toronto index was slightly up at the time and gathered momentum as the day went on, closing with its third straight daily gain.
Bank of Montreal economist Douglas Porter said it may indicate that markets considered a change to a national regulator an improvement, but only in the margins.
"Canada's financial markets held up as well as anybody during the financial crisis, so it's not as if that blind spot hurt us," he said.
The court made clear it did not see itself as the arbiter of whether a national regulator is superior to the current passport system. Its ruling was strictly on the law and on the legislation it was presented, it said.
"Legislation aimed at imposing minimum standards applicable throughout the country and preserving the stability and integrity of Canada's financial markets might well relate to trade as a whole," the court said.
"However, the proposed act reaches beyond such matters and descends into detailed regulation of all aspects of trading in securities, a matter than has long been viewed as provincial."
The federal bill, the court said, is not chiefly concerned with such overriding goals but with "the day-to-day regulation of all aspects of securities" that is under the "property and civil rights" purview of the provinces.
The federal power invoked by Ottawa under the "trade and commerce" clause does not give it sweeping powers to trample on provincial rights to oversee "local matters and industries within their boundaries."
Following two similar judgments by appeals courts in Alberta and Quebec, the latest ruling means that since Flaherty introduced the securities legislation in the spring of 2010, 19 justices have looked at the bill and 18 found it wrong in law.