Supreme Court of Canada affirms jurisdiction of securities commissions over out-of-province parties

In Sharp v Autorité des marchés financiers, 2023 SCC 29, the Supreme Court of Canada provided further guidance about when provincial schemes to regulate securities can apply to individuals outside of that province. Because securities manipulation and fraud often transcend national or provincial borders, the Court reaffirmed that provincial securities regulators should be given latitude to take jurisdiction over issues that have a connection to their province. In this case, parties from British Columbia were subject to Quebec’s security regulation regime because they promoted and sold securities in Quebec.

Several individuals based in British Columbia were alleged to be engaging in a “pump-and-dump” scheme, which involved selling holdings at inflated prices. This scheme was alleged to have injured investors in Quebec. In response, The Autorité des marches financiers (“AMF”), a provincial administrative agency that regulates Quebec’s financial sector, sought relief before the Financial Markets Administrative Tribunal (“FMAT”), a provincial administrative tribunal. The alleged fraudsters argued that these provincial entities did not have jurisdiction over them, since they were not based in Quebec.

The FMAT, the Superior Court of Quebec, the Quebec Court of Appeal, and now the Supreme Court of Canada, all held that the FMAT had jurisdiction over the case. The various treatments by Quebec’s courts raised interesting questions about the rules and jurisdiction established by the Civil Code of Quebec, but the Supreme Court of Canada’s final determination of the matter was not rooted in the Code.

Despite the long discussions of the specific role of the Code, the final determination was based on the Court’s previous decision in Unifund Assurance Co. v Insurance Corp. of British Columbia, 2003 SCC 40, a case that had originated in Ontario. Unifund provided a test about when a provincial scheme can have extraterritorial effect:

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.

In Sharp, neither Quebec’s Securities Act or the Act Respecting the Autorité des marches financiers explicitly say that the FMAT has jurisdiction over parties in another province. To evaluate whether these statutes can apply, the Court applied the test from Unifund. The Court said that the Unifund test “allows a statute to be interpreted to apply to an out-of-province defendant in certain circumstances without having an extraterritorial effect” that would cause constitutional issues.

Notably, the Court clarified that the “real and substantial connection” test in Club Resorts Ltd. v Van Breda, 2012 SCC 17 does not apply in this case. The test in Van Breda set out a “real and substantial connection” test, but it was in the context of tort claims at common law and does not apply in Quebec. In Sharp, the question before the Court was whether Quebec’s securities regulatory scheme could apply to out-of-province parties, and so the Unifund test was appropriate, rather than the test from Van Breda.

The Court held that the “sufficient connection” analysis in the context of securities regulatory schemes must recognize the “transnational nature of modern securities regulation and the public interest in addressing international market manipulation”. In this case, there was a sufficient connection with Quebec because the securities were marketed in Quebec, and the company through which the scheme was operated was a reporting issuer in Quebec with a Quebec resident as its director. The entrance into Quebec was not accidental or irrelevant, since the fraudsters “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”.

Because contemporary securities manipulation and fraud are often transnational and extend across borders, the Court held that it was consistent with the principles of order and fairness for the FMAT to have jurisdiction over the parties who engaged in the scheme.

Justice Côté provided a spirited dissent, where she argued that the jurisdiction of the FMAT is determined by the comprehensive treatment of private international law within the Civil Code of Quebec, and the relevant sections of the Code do not give the FMAT jurisdiction in these circumstances. However, the rest of the Court concurred that the FMAT had jurisdiction over the matter following the Unifund test.

This case reaffirms that provincial security regulators may have jurisdiction over out-of-province entities. Anyone who promotes or markets securities in another province should be wary that they may find themselves subject to that province’s authorities even where, as was at issue in Quebec, the relevant provincial statutes are unclear or silent about the jurisdiction of securities tribunals in such situations.