Extra-territorial Regulation: Sharp v. Autorité des marchés financiers, 2023 SCC 29

A fairly frequent problem in Canadian law is the application of regulatory statutes to individuals or businesses resident or established in another province. Think of a BC brokerage advising (badly) on mortgage transactions in Quebec, an Albertan providing inside information to a Manitoban in respect of stocks traded in Ontario or an online portal based in Nova Scotia taking orders for the delivery of faulty contact lenses in Saskatchewan by a manufacturer from New Brunswick. 

Surprisingly enough, the Supreme Court of Canada had not until yesterday authoritatively established the test to apply to determine the circumstances in which a provincial regulator will have the authority to sanction conduct with an out-of-province aspect. Appellate courts had generally relied on Unifund Assurance Co. v. Insurance Corp. of British Columbia, 2003 SCC 40, [2003] 2 SCR 63, a decision relating to the scope of provincial insurance benefits scheme. In its decision in Sharp v. Autorité des marchés financiers, 2023 SCC 29, the Supreme Court confirmed that the Unifund criteria should be applied.

Here, regulatory proceedings were brought in Quebec against British Columbia residents who were accused of engaging in a ‘pump and dump’ scheme that manipulated stock prices in La belle province and caused financial harm to Quebec investors. The majority of the Supreme Court (Wagner CJ and Jamal J) applied Unifund and concluded that the proceedings were within the authority of the Quebec regulator (AMF) to prosecute before the province’s securities tribunal (FMAT). Much of their analysis concerns the (in)applicability of the provincial civil code to administrative tribunals. But having found that the relevant provisions of the code did not grant the regulator the necessary authority, the majority concluded that the provincial securities statutes did provide sufficient authority, as long as there was a sufficient connection between the targets of the proceedings. 

The power to adjudicate regulatory breaches flows from provincial legislation:

in this case the FMAT’s adjudicatory jurisdiction flows from the province’s prescriptive legislative jurisdiction….Section 93 of the Act respecting the Autorité des marchés financiers stipulates that the FMAT shall exercise jurisdiction under the Securities Act. Since the Quebec legislature has decided that the FMAT shall adjudicate alleged breaches of the Securities Act and the appellants’ alleged conduct has a real and substantial connection with Quebec, the FMAT necessarily has jurisdiction over the appellants in respect of their alleged contraventions. The special legislation, properly interpreted, thus provides for the FMAT’s adjudicatory jurisdiction (at para. 93).

In simple terms, if someone does something that contravenes a provincial regulatory statute, they are potentially liable to enforcement by the provincial regulator.

The next question is whether there is a sufficient connection between the province and the target of enforcement action. Sufficient connection depends on the application of the factors set out by Binnie J in para. 56 of Unifund:

1. The territorial limits on the scope of provincial legislative authority prevent the application of the law of a province to matters not sufficiently connected to it;

2. What constitutes a “sufficient” connection depends on the relationship among the enacting jurisdiction, the subject matter of the legislation and the individual or entity sought to be regulated by it;

3. The applicability of an otherwise competent provincial legislation to out-of-province defendants is conditioned by the requirements of order and fairness that underlie our federal arrangements;

4. The principles of order and fairness, being purposive, are applied flexibly according to the subject matter of the legislation. [Emphasis in original; para. 56.

Wagner CJ and Jamal J confirmed that the Unifund factors are to be applied to determine when provincial regulatory legislation can be applied with extra-provincial effect (at para. 102). This is not a question of the validity of the provincial legislation (which will typically fall under the capacious provincial power to legislate in respect of property and civil rights in the province) but rather of its applicability: its scope, not its lawfulness. These factors therefore determine whether enforcement action can be taken in the province against out-of-province actors (or where there is some other extra-provincial aspect). The analysis in Sharp itself is quite useful:

[129]                     Applying the first two Unifundprinciples, there is a sufficient connection between Quebec and the out-of-province appellants, all of whom allegedly participated in a fraudulent securities manipulation scheme with important ties to Quebec. The appellants allegedly used Quebec as the “face” of their alleged pump-and-dump scheme by promoting Solo’s mining activities in Quebec. They participated in marketing or financing efforts and partly targeted Quebec residents. Solo, the company through which the appellants operated their scheme, was a reporting issuer in Quebec, and Solo’s director was a Quebec resident. There was thus a clear connection between Solo and the appellants, on the one hand, and the province of Quebec on the other. In the circumstances, it would defeat the purpose of the cross-border nature of modern securities regulation to allow the appellants to escape the reach of Quebec’s regulatory oversight.

[130]                     The appellant Sharp argues that the FMAT and courts below failed to analyze the AMF’s specific allegations against him, which relate only to the purchase and sale of securities outside of Quebec. We do not accept this submission. The AMF alleges that he participated in one or more stages of the appellants’ securities manipulation scheme, that he was closely implicated by buying or selling securities, and that the scheme had important links to Quebec. Under Unifund, that connection suffices to apply Quebec’s securities regulatory scheme to him.

…

[133]                     Applying the Quebec regulatory regime is fair to the appellants. The appellants chose to enter Quebec’s securities marketplace (see Unifund, at para. 77), and they promoted the Quebec mining prospects of Solo, a reporting issuer in Quebec. Because the appellants made Quebec the face of their securities manipulation operation, their entrance into Quebec’s market was not accidental or irrelevant, but rather was an integral part of the scheme.

[134]                     In addition, applying Quebec’s securities regulatory scheme to the appellants does not offend the principle of order or the related concept of interprovincial comity. Given the cross-border nature of securities manipulation and securities fraud, regulators from multiple jurisdictions may exercise jurisdiction over the same scheme. As noted by the intervener the Ontario Securities Commission, this is “a feature, not a flaw” of modern securities regulation (I.F., at para. 15). “It promotes the seamless coverage of regulatory protection and the imposition of public interest remedies across the territories affected by a single, unlawful scheme” (para. 15). We also agree with the AMF: [translation] “. . . nothing precludes such a multiplicity of proceedings because each of the proceedings constitutes a legitimate exercise of the jurisdiction of the state concerned. . . . [T]he application of the sufficient connection test is not a zero‑sum game” (R.F., at paras. 81 and 87).

The Unifund factors are seen as a principle of statutory interpretation (at paras. 113-114), essentially a device for finding that a particular type of transaction or action which would be regulated if done in the province by a provincial resident, is in fact outside the authority of the provincial regulator. Here, as the majority’s analysis explains, the factors did not weigh against provincial regulation. 

I note also the Court’s explicit approval, at para. 135, of the need for a flexible and purposive approach when determining the territorial scope of regulatory legislation: “Because contemporary securities manipulation and fraud are often transnational and extend across provincial and national borders, courts and tribunals must take a flexible and purposive approach when applying the principles of order and fairness in the securities context. In our view, it is consistent with the principles of order and fairness for the FMAT to have jurisdiction over the appellants”. This is of a piece with the Supreme Court’s relatively hands-off approach to the Charter compliance of regulatory legislation designed to protect the public (albeit, of course, that the characterization of such legislation is controversial, as it often has anti-competitive effects that favour market incumbents).

Although the Supreme Court does not address this point, a corollary is that in many scenarios more than one provincial regulator might have the authority to sanction conduct. In practice, these overlaps are addressed by provincial legislation (see e.g. McLean v. British Columbia (Securities Commission), 2013 SCC 67, [2013] 3 SCR 895) or soft-law cooperation (see e.g. the Canadian Securities Administrators and, especially, its Standing Committee on Enforcement). 

The standard of review featured too, of course. The parties did not dispute that the applicability of regulatory legislation to out-of-province actors had to be determined on a correctness standard. Even though the analysis is context-sensitive and fact-heavy, the Supreme Court confirmed that this is a constitutional question requiring correctness review to ensure uniform answers (see also Northern Regional Health Authority v. Horrocks, 2021 SCC 42).

In addition, the question of the relevance of the civil code to regulatory jurisdiction was said to be of central importance to the legal system and also requiring correctness review. This one was also, it is fair to say, as pure a question of law as can be imagined.

Indeed, the issues here transcended the securities sphere and was relevant to any provincial regulatory scheme and, accordingly, judicially imposed consistency was required to ensure uniformity. These are paradigm examples of the narrow correctness categories set out in Vavilov, as they relate to situations where deviation from the norm by even one regulator would undermine the coherence of the legal system.

All in all, I think this is a useful decision. The Unifund criteria are helpful in addressing difficult questions relating to out-of-province actors, as lower courts have found in previous years, and they provide a framework for regulators to cooperate on enforcement matters.

This content has been updated on November 18, 2023 at 22:39.