Staff of the Ontario Securities Commission (OSC) has released for public comment a consultation paper on a proposed whistleblower program (Program), under which whistleblowers would be eligible for a financial reward of up to C$1.5 million.
The Program, outlined in OSC Staff Consultation Paper 15-401 – Proposed Framework for an OSC Whistleblower Program (Consultation Paper), has five major components: the financial incentive, eligibility criteria for whistleblowers, confidentiality for whistleblowers, protection of whistleblowers and program administration.
The Consultation Paper comment period ends on May 4, 2015.
PURPOSES OF THE PROGRAM
The primary objective of the Program is to motivate individuals with inside knowledge or information relating to possible serious breaches of securities law to share such information with the OSC. The OSC also hopes that the Program, by providing the OSC with high-quality information from knowledgeable individuals, will increase the “number and effectiveness of complex securities law cases investigated and brought forward by the OSC.”
The OSC indicates that the Program is one of a number of initiatives aimed at resolving enforcement matters more quickly and efficiently, including no-contest settlements, enhanced disclosure of credit for co-operation and clarification of self-reporting.
The Program is aimed at misconduct that could be subject to an administrative proceeding by the OSC using its public interest jurisdiction in section 127 of the Ontario Securities Act (Act). Examples of the types of misconduct identified by the OSC as targeted by the Program include misleading financial statements, illegal insider trading or tipping, market manipulation and misconduct by registrants.
COMPONENTS OF THE PROGRAM
The OSC views the financial incentive as the most critical element for the success of the Program. As proposed, the Program would permit the OSC to provide a financial reward of up to 15 per cent of the total monetary sanctions—to a maximum of C$1.5 million—to a qualified whistleblower whose information led to OSC administrative proceedings that resulted in an administrative penalty or settlement with an order or agreement to pay more than C$1 million in monetary sanctions. The reward to whistleblowers would be dependent on the size of the penalty or settlement and not on the amount actually recovered.
The amount of the reward would be determined by the OSC on its staff’s recommendation, which would be based on, among other factors, the contribution of the information to the outcome, the cooperation of the whistleblower and the level of culpability of the whistleblower in the conduct reported.
To be eligible for a reward under the Program, a whistleblower would have to voluntarily provide high-quality, original information that leads to an OSC hearing or a settlement under section 127 of the Act. The OSC considers information to be of high quality if it: (1) relates to “serious misconduct”; (2) relates to conduct that has recently occurred, is ongoing or is about to occur; (3) is credible and detailed; (4) can help stop further harm from occurring; and (5) will likely save significant time and resources in conducting an investigation.
Certain individuals would be excluded from eligibility for an award under the Program, including those who: (1) provide information that is misleading or untrue or lacks merit or specificity; (2) provide information that is subject to solicitor-client privilege or was obtained through the course of a financial audit when engaged to provide audit services; or (3) served as an officer, director or chief compliance officer of a company and acquired the information as a result of the organization’s own internal reporting or investigation process.
A proposed criterion for eligibility is also a declaration by the whistleblower that the information provided had not been requested by another securities commission or a self-regulatory organization and that the individual is not ineligible to receive a reward under the Program.
The OSC specifically invited comments on whether an individual who has some culpability in the securities law violation reported should be eligible for the Program.
Under the Program, the OSC would, at the whistleblower’s option, take all reasonable efforts to keep the whistleblower’s identity confidential, including by generally not expecting the whistleblower to testify in an administrative proceeding. These efforts to protect confidentiality would be subject to certain exceptions, including if the OSC decides to provide information to another regulatory authority, a self-regulatory organization, a law enforcement organization or another government or regulatory authority.
The OSC also specifically invited comments on whether a whistleblower should be able to remain anonymous to the OSC. If such a framework were adopted, the OSC expects that whistleblowers wishing to remain anonymous would have to report information through legal counsel.
Protection for Whistleblowers
The OSC has indicated that it views provisions protecting whistleblowers from retaliation as important to the functioning of the Program. To this end, it foresees the addition of three new provisions to the Act. These provisions would: (1) make it a violation of securities law to retaliate against a whistleblower; (2) provide the whistleblower with a civil right of action against an employer violating the anti-retaliation provision; and (3) render unenforceable contractual provisions designed to silence whistleblowers.
If the Program is instituted, the OSC intends to create a separate intake unit within the OSC’s Enforcement Branch to help ensure confidentiality of whistleblowers.
EFFECT ON INTERNAL COMPLIANCE PROGRAMS
The Consultation Paper indicates the OSC wants to ensure that the Program does not undermine internal reporting systems and encourages whistleblowers to report concerns using internal reporting systems when appropriate. In certain circumstances, it will therefore consider a report made pursuant to an internal reporting system as an “original” report for eligibility purposes.
IMPLICATIONS FOR MARKET PARTICIPANTS
Given the U.S. Securities and Exchange Commission’s recently instituted whistleblower program has provided publicized sizeable financial rewards to some whistleblowers, it will be interesting to see whether changes to the financial rewards under the Program are proposed, and whether the rewards will be sufficient to encourage a significant degree of “whistleblowing.” The introduction of the Program will incentivize public market participants to ensure that they have robust internal reporting systems and that concerns arising from such processes are addressed promptly.