Canada’s largest securities regulator continues to move to implement its whistleblowing program, and investors and market participants should take note. The experience of whistleblowing initiatives at the SEC, required by the post-meltdown Dodd-Frank Act, should provide some guidance and insights.

As previously written, the Ontario Securities Commission unveiled its current proposal for a Whistleblower Program last month, which aims to encourage reporting of securities law violations and enhance securities enforcement efforts. The regulator aims to have the program, which would be the first of its kind in Canada, in place for Spring 2016. The proposed Whistleblower Program reflects changes made to a previous version of the proposal after consideration of public comments, including comments from Osler. Released on October 28, 2015, the OSC’s current proposal is still in its draft form and is open for public comment for 60 days.

The SEC, in its 2015 Annual Report on the Dodd-Frank Whistleblower Program submitted to Congress on November 16, 2015, announced record amounts of tips received from and awards paid out to whistleblowers. In the fiscal year 2015, the SEC received almost 4,000 total whistleblowing tips, an over 8% increase since the fiscal year 2014 and an over 30% increase since the fiscal year 2012. However, there was a slight decrease in the number of foreign tips received; in the fiscal year 2015, 421 tips were received from whistleblowers outside the United States, representing a 6% decrease since the fiscal year 2014. After the United Kingdom, Canada represented the largest foreign source of whistleblowing tips to the SEC’s program.

Record award payments were made in the fiscal year 2015, with the SEC paying out more than $37 million in awards to eight whistleblowers. This represents over two-thirds of the total value of payments made by the SEC since the whistleblowing program came into effect in August 2011. Since then, over $54 million has been paid to 22 whistleblowers. The SEC recently suggested that it will limit awards for whistleblowers who wait before coming forward, and that higher awards should be given to whistleblowers who report without delay.

Notably, the SEC paid over $30 million to a single overseas whistleblower in the fiscal year 2015, the largest amount the regulator has ever paid to a single whistleblower - and more than all other awards combined paid out by the SEC’s program since its launch. The spectacularly large payout proved correct concerns that an October 2013 award for $14 million - the highest amount awarded previously - was an omen predicting massive payments to whistleblowers in the future.

The OSC’s proposed program seeks to avoid payments of this magnitude by imposing a $5 million cap on whistleblower awards. The SEC’s program, by contrast, has no cap on amounts awarded. The OSC also proposes a lower payout scale than the SEC’s program; for monetary sanctions or voluntary payments in excess of $1 million, the OSC proposes paying out between 5 and 15% of sanctions or payments as an award to the whistleblower, as opposed to the SEC’s award scale of between 10 and 30% .

While more circumscribed than the SEC’s program, tying the award at all to penalties imposed may put additional pressure on Canadian regulators to alter their traditional approach to securities enforcement, which is protective and preventative, as opposed to penal.

There is also concern that the proposed policy could undermine the OSC’s efforts to encourage compliance and internal reporting of securities law violations. Since eligibility for awards under the OSC’s current proposal does not require whistleblowers to first report misconduct through appropriate internal channels, this creates an incentive for whistleblowers to forego internal reporting and go straight to the regulator in the hope of securing monetary rewards. While the largest Canadian regulator says that it will encourage employees with knowledge of securities law wrongdoing to report internally first, its proposed Whistleblower Program does not make this a requirement, citing extenuating circumstances that may hinder an employee reporting misconduct through internal channels.

We, as well as other commenters, take the view that reporting internally should be a requirement to receive a whistleblower award, except where good reasons are given as to why this was not feasible. We feel that this would both address the OSC’s concern and help enhance a corporate culture of compliance.

The OSC proposal remains out for public comment until January 12, 2016.