In response to the OSC’s call for comments, Osler has submitted a comment letter to the OSC setting out certain concerns with regards to the proposed Whistleblower Program as set out in the OSC Staff Consultation Paper 15-401 : Proposed Framework for an OSC Whistleblower Program.
As set out the comment letter, Osler has some significant concerns that a program of this nature will have negative consequences on the ability of a market participant to establish and enhance a meaningful ‘culture of compliance’. While Osler agrees with the desirability of certain initiatives that encourage persons with relevant information about possible wrong-doing to come forward to regulators in certain unique circumstances without fear of retribution, there are some substantive issues with the proposed program, as noted below.
As we have written in a previous blog post , the proposed program contemplates the following key elements:
- Eligibility to become a whistleblower: in order to be eligible as a whistleblower, one must have credible and detailed information which the OSC does not currently have, and that information must lead to the commencement of an OSC proceeding. Chief Compliance Officers are specifically excepted from eligibility.
- Financial incentives provided to eligible whistleblowers: this key factor in the success of the program provides that if the information provided by an eligible whistleblower leads to a conviction or settlement agreement of more than $1-million, that whistleblower may be awarded a bounty of up to 15% of the total sanction up to a total award of $1.5-million, subject to a number of limitations. This stands in contrast to the U.S. Dodd-Frank Whistleblower Program, which directs the SEC to make awards to eligible individuals in an amount equal to 10% to 30% of the sanction collected, with no cap on the total amount of the award.
- Confidentiality of the identity of whistleblowers: the OSC notes that it intends to use all reasonable efforts to keep confidential a whistleblower’s identity, unless such disclosure is required to allow the respondent to make full answer or defence or to allow OSC Staff to make a case against the respondent (among other exceptions). Given the breadth of the exceptions listed above, it will be interesting to see in what instances the OSC is able to maintain a whistleblower’s identity confidential, and to what extent this risk affects participation in the program.
- Protection of whistleblowers: as a complement to the confidentiality protections, the OSC notes that in order to protect whistleblowers from retaliation, similar to the SEC and its ability to bring a whistleblower retaliation suit, certain legislative amendments will be required, including provisions specifically prohibiting retaliation, granting a civil right of action against an employer by a whistleblower who has experienced retaliation, and rendering unenforceable contractual provisions designed to silence whistleblowers.
As noted above, Osler has significant concerns with regards to the framework in the proposed Whistleblower Program, especially as it relates to internal compliance programs.
Circumventing Internal Compliance
In order to encourage an organization to maintain and continuously improve its ‘culture of compliance’, eligibility to receive a whistleblower award must be dependent on satisfactory proof that individuals sought to fully avail themselves of the internal compliance and complaint procedures of the organization, or proof that there were compelling reasons why it was not possible to do so. Without this preliminary recourse to the internal compliance procedure of the organization, the Whistleblower Program would significantly diminish the important role internal compliance and complaint programs play in promoting compliance with securities law. Indeed, rather than encouraging effective complaint handling and diligent responses to allegations of malfeasance by incentivizing whistleblowers to go directly to the Regulator, the Whistleblower Program may impose a difficult burden on officials to properly design and operationalize a “best in class” compliance culture within their respective organizations.
Eligibility Based on Monetary Conviction Too Narrow
In order to be eligible for an award under the Whistleblower Program, the whistleblower must provide information that leads to a sanction or a settlement agreement of more than $1 million. Given the OSC’s breadth of tools used in addressing misconduct, whistleblowers who provide information leading to significant conduct bans, voluntary payments to investors, or meaningful changes to business processes and internal controls, should be eligible to receive a whistleblower award, regardless of whether a monetary sanction is imposed, given that the OSC has various tools at its disposal to address violations of securities laws. Indeed, tying incentives solely to financial sanctions is misguided in the Canadian context where the OSC’s enforcement tools are broader that merely levying fines for misfeasance.
The OSC will host a roundtable discussion in early June to further explore the issues raised by the Whistleblower Program.