The public comments on the Ontario Securities Commission (OSC)’s proposed whistleblower program (Program) evidence considerable concern that the Program could undermine issuers’ internal reporting and compliance programs, create conflicting duties and incentives for employees, and prevent issuers from disciplining employees for wrongdoing.
While the comment letters from issuers, law firms, industry associations, academics and investor advocates were in large part supportive of the goals of the Program, many identified causes for concern as to specific aspects of the Program as outlined in OSC Staff Consultation Paper 15-401 – Proposed Framework for an OSC Whistleblower Program (Consultation Paper). In addition to the items noted above, commenters also flagged the size and structure of the proposed financial incentive, the Program’s proposed funding structure, the perceived lack of clarity of the types of behaviour to be targeted by the Program and the eligibility for rewards of an organization’s chief compliance officer (CCO), directors and officers as potentially troubling.
The proposal has five major components: a financial incentive, eligibility criteria for whistleblowers, confidentiality for whistleblowers, protection of whistleblowers and program administration. For a more detailed summary of the proposal, please see our April 2015 Blakes Bulletin: Whistleblowers to Be Rewarded, Protected Under OSC Proposal.
UNDERMINING INTERNAL COMPLIANCE PROGRAMS
Many commenters, including issuers, industry associations and law firms, expressed concern that because the Program would not require whistleblowers to report wrongdoing through internal compliance processes before providing information to the OSC, it would undermine internal reporting and compliance procedures.
In particular, commenters worried that the financial incentive could tempt employees to bypass a company’s internal compliance mechanisms and instead report violations directly to the OSC. Many commenters expressed concern that this could prevent issuers’ internal compliance systems from functioning properly.
Although commenters acknowledged that the OSC’s proposal included provisions intended to encourage use of internal compliance processes (for example, by considering the date of internal reporting as the report date for the purposes of eligibility for the Program), many commenters indicated that they considered it appropriate for the OSC to require potential whistleblowers to have reported through internal compliance programs before providing information to the OSC under the Program. Some pointed to the U.S. Securities and Exchange Commission (SEC)’s whistleblower program, which requires that a period of time pass following internal reporting before a whistleblower can provide information to the SEC, as an appropriate model.
Some investor-advocacy groups, however, expressed the view that internal reporting should not be required for eligibility under the Program.
CREATION OF CONFLICTING DUTIES AND INCENTIVES
Commenters warned that the financial incentive under the Program might lead employees to take actions that were in conflict with their duties to their employers — for example, by breaching obligations of confidentiality or their duties to use internal reporting mechanisms.
Issuers and other commenters also cautioned that the possibility that a financial award under the Program might incentivize potential whistleblowers to engage in further misconduct or to delay reporting misconduct to ensure that, once reported, the misconduct would be sufficiently serious to meet the Program’s criteria. The financial incentive might in this way exacerbate rather than deter the type of misconduct targeted by the Program.
Issuers generally called for greater exclusions relating to culpable conduct and expressed opposition to permitting those who engaged in the misconduct to profit from it as a result of the Program. Some law firms suggested that providing immunity or leniency to culpable whistleblowers would be more appropriate than making a financial award.
Supporters of this aspect of the OSC proposal contended those engaged in misconduct should not be excluded from eligibility because such participants would often be best placed to provide reliable information about the misconduct and therefore would be some of the most valuable whistleblowers.
PROTECTING WRONGDOERS THROUGH ANTI-RETALIATION PROVISIONS
Issuers and industry groups also generally warned that the Program’s anti-retaliation provisions might prevent issuers from appropriately disciplining employees who engaged in misconduct or did not comply with internal policies. Commenters worried that, faced with the knowledge that an employee had engaged in misconduct, issuers would be hamstrung in dealing with such an employee by the anti-retaliation provisions.
A further concern raised about the proposed anti-retaliation provisions focused on the OSC’s lack of expertise in enforcing such provisions. The enforcement of any anti-retaliation provisions, it was suggested, should be left to a court or specialized tribunal rather than the OSC.
Certain investor groups, on the other hand, advocated strengthening the anti-retaliation provisions by, for example, specifying that whistleblowers who chose to use internal reporting mechanisms would also benefit from the Program’s anti-retaliation provisions.
INAPPROPRIATE STRUCTURE AND SIZE OF FINANCIAL INCENTIVE
The Prospectors and Developers Association of Canada (PDAC)’s comment letter was notable for its outright opposition to the provision of a financial incentive. PDAC argued that the financial incentive model was inappropriate in the Canadian context given the relatively small size and fragmented regulatory framework of the country’s capital markets. As discussed above, many commenters also raised concerns about the potential negative effects that providing a financial incentive could have on companies’ internal compliance systems.
On the other hand, a number of commenters, including investor advocacy groups, academics and investors’ law firms, submitted that, given the reputational and economic risk involved in whistleblowing, the C$1.5 million cap on awards was too low to provide a sufficient incentive for whistleblowers to share information with the OSC.
To address this perceived deficiency, some commenters suggested that an eligible whistleblower should be able to receive a percentage of any amount collected by the OSC in addition to a capped award to be paid regardless of the amount recovered.
FUNDING THE PROGRAM
Certain industry groups expressed concern about the OSC’s proposed method of funding the Program. These groups commented that, if the financial incentives were not dependent on the recovery of monetary sanctions, the cost of the Program might be borne by all market participants — through, for example, higher participation fees — rather than by wrongdoers.
DESCRIBING BEHAVIOUR TARGETED BY PROGRAM
A number of commenters indicated that, in their view, the OSC’s proposal did not sufficiently identify the types of behaviour that the Program was intended to target and encouraged the OSC to more specifically define the types of serious misconduct the Program aims to uncover and prevent.
ALLOWING ELIGIBILITY OF CCOS, DIRECTORS AND OFFICERS
The OSC’s proposal contemplated excluding an organization’s CCO and any director or officer who learned of misconduct as a result of the organization’s internal reporting or investigation process from eligibility for a financial award under the Program, and the OSC specifically asked for comments on whether an organization’s CCO should be excluded from eligibility.
Commentary on this question generally acknowledged that a CCO should, in practice, nearly never be eligible, but was divided on whether the Program should allow a CCO to be eligible in certain exceptional circumstances.