The Ontario Securities Commission (OSC) recently announced that it will be hosting a roundtable to explore the issues raised in its proposal to implement a whistleblower program. The OSC first published details of the proposed program (the Program) under Consultation Paper 15-401 Proposed Framework for an OSC Whistleblower Program, (the Paper), which outlines the main components of the program, how OSC staff envision it would work, as well as possible issues raised.
The Program is intended to encourage individuals to report breaches of Ontario securities laws and would provide an incentive of up to 15% of the total monetary sanctions imposed on wrongdoers (up to a maximum of $1.5 million) to eligible whistleblowers who provided the OSC with information that leads to administrative proceedings resulting in sanctions of more than $1 million. The Program would also protect whistleblower confidentiality and include anti-retaliation measures to deter employers from acting against employees.
Eligibility of Whistleblower
Under the proposal, the program would be restricted to individuals and require whistleblowers to provide information that meets certain criteria, including that it is timely, credible and related to serious misconduct in the marketplace. Misconduct that could qualify includes cases involving misleading financial statements, market manipulation, illegal distributions and unregistered sales of securities, registrant misconduct and insider trading, tipping or selective disclosure.
Certain individuals, however, would not qualify for the program, including directors, officers and Chief Compliance Officers (or equivalent) who acquired the information as a result of an organization’s internal reporting or investigation processes.
Individuals who participated in the misconduct could be eligible for the Program, depending on the particular circumstances of the case. However, amnesty is not currently being considered and, while leniency may be afforded, at this stage it is proposed that staff would still consider enforcement against the whistleblower for the misconduct. The level of culpability would also be a relevant consideration in determining whether to make a whistleblower award and the amount of the award.
Potential sources include employees of a market participant, as well as individuals who uncover possible misconduct by a market participant through their own independent analysis. However, to be eligible the information must also be “original,” meaning that it is not already known to the OSC and not publicly available. Nevertheless, critical analysis of publicly available facts may be considered original information if the analysis brings to light serious misconduct not previously known. Further, the information must be provided on a voluntary basis and cannot have been compelled under the Securities Act or requested or compelled by another securities commission or a self-regulatory agency.
Payment of awards
In a departure from how the program works at the SEC, payment of the award to a whistleblower would not be contingent on collection of the sanction monies but would only be paid upon final resolution of the matter, including any appeals. Acknowledging that in certain cases this could take years to resolve, OSC staff reiterate that a final decision with the imposition of sanctions or payment would be needed before an award could be made to a whistleblower. The OSC proposes to fund the program through payments to the OSC of administrative penalties, disgorgement and settlement amounts that are not otherwise paid to harmed investors. Given that payment regardless of recovery could result in less funds available for other OSC initiatives, it is a policy that OSC staff will continue to consider.
Reporting under internal compliance channels
The Report notes that individuals could be hesitant to report misconduct internally due to a fear that the individual would lose whistleblower status should someone else in the organization subsequently report to the OSC. Therefore, the OSC’s proposal would not require that individuals report internally before reporting to the OSC. Not to undermine and recognizing the importance of internal compliance programs in discouraging misconduct, and to continue to encourage internal reporting, the OSC would consider the timing of an individual’s initial internal report in determining who reported information first and was eligible.
Notably, if a whistleblower reports misconduct through internal channels, failure by issuers and registrant firms to promptly and fully report serious breaches to staff, or continuance of the inappropriate conduct or failure to correct the problems, may result in no credit for cooperation when the issuer or registrant is ultimately brought to account for the misconduct. In light of this, the OSC also encourages issuers and registrant firms to review their internal reporting processes to ensure they are robust and effective.
To encourage whistleblowers to come forward and protect them from retaliation, the OSC proposes three distinct and new measures:
- making it a violation of securities law to retaliate against a whistleblower (thereby permitting OSC Staff to prosecute the employer through a proceeding under s.127 of the Securities Act);
- providing the whistleblower with a civil right of action against an employer who violates the anti-retaliation provision; and
- rendering contractual provisions designed to silence a whistleblower unenforceable.
The Report notes that similar anti-retaliatory prohibitions are found under provincial labour and employment laws, as well as under both provincial and federal public sector whistleblower legislation, the Criminal Code and the Competition Act. It further notes that while victims may have the right to file a complaint with the Ontario Labour Relations Board (the OLRB), they view deterrence to be greater where enforced by enforcement staff under the Securities Act.
Addressing a somewhat contentious issue in the US, under the Program, staff notes that the anti-retaliation protections should available to both individuals who report possible violations of the Securities Act “up the ladder” through their employer’s internal compliance reporting system in addition to those who report directly to the OSC. It remains to be seen, however, whether the actual provisions enacting the protective measures will go far enough to codify this expansive view, an issue that has been the subject of litigation both in the US and in Canada.
Lastly, the OSC will also attempt to deal with measures implemented by an employer that are designed to silence whistleblowers, such as confidentiality agreements, separation agreements and employment agreements that contain confidentiality clauses or disparagement clauses. To this end, the OSC is considering whether the proposed anti-retaliation provisions should expressly provide that contractual restrictions designed to impede or discourage whistleblowers from reporting possible violations of securities laws to the authorities are not enforceable.
Under the Program, the OSC would use “all reasonable efforts” to keep an individual’s identity confidently subject to some significant exceptions, including where required under a s.127 administrative proceeding to permit a respondent to make full answer and defence, to make staff’s case against a respondent and where information is provided to another regulatory authority, a self-regulatory organization or law enforcement agency.
The OSC is also considering whether to adopt a policy that would enable a whistleblower to remain anonymous to the OSC. This would be the case at least for a period of time after providing information in order to encourage individuals to come forward knowing they can remain anonymous until they learn whether the information has resulted in an administrative proceeding.
Request for Comments
The OSC first announced that it was considering a whistleblower program in 2011, the same year that such a program was adopted by the SEC. The Report notes with respect to the SEC program, that over 50% of the tips received by the SEC in 2014 comprised of cases involving sophisticated players, raising complex issues, and being difficult to uncover without the assistance of a whistleblower, such as corporate disclosure and financial statements, insider trading, market manipulation and unregistered offerings.
While the Program would be a first for securities regulators in Canada, similar programs are already in place with the Investment Industry Regulatory Organization of Canada (IIROC), the Competition Bureau and, most recently, the Mutual Fund Dealers Association (MFDA). Similar provisions are also contained in the proposed Provincial Capital Markets Act as part of the federal government’s latest initiative to develop a cooperative capital markets regulatory regime.