Canada has neither a history nor, some say, a culture of paying for tips. This may be about to change, however, since the Ontario Securities Commission is considering implementing a whistleblower program (the “Whistleblower Program”) that would offer financial incentives to individuals to provide high-quality and original information about securities-related misconduct. OSC Staff Consultation Paper 15-401 sets out the proposed framework. The OSC is seeking comments on its proposal prior to May 4, 2015.
Why a Whistleblower Program?
The purpose of the Whistleblower Program is threefold:
- to motivate people with inside information relating to serious breaches of Ontario securities law, particularly in the areas of financial reporting, other disclosure, insider trading and market manipulation, to share that information with the OSC;
- to generate a larger number of complex cases for the OSC to investigate; and
- to motivate companies (i.e. issuers and registrants) to self-report misconduct by potentially precluding access to the OSC’s Credit for Cooperation Program if a whistleblower reports wrongdoing before the company self-reports.
The Whistleblower Program would be the first of its kind among provincial securities regulators. The only other regulatory whistleblower program in Canada that provides financial incentives is the CRA’s Offshore Tax Informant Program, which was implemented just last year. Other whistleblower programs, like the Competition Bureau’s, provide only non-monetary incentives such as immunity or leniency in proceedings.
While there is minimal Canadian precedent, OSC Director of Enforcement, Tom Atkinson, recently acknowledged that the OSC had been keeping a close eye on the SEC’s whistleblower program since it started in 2011. At the Capital Markets Regulatory Priorities conference in Toronto on January 27, 2015, SEC Associate Director Stephen Cohen described the SEC’s program as “highly successful”. The SEC has reported over 10,000 tips received from whistleblowers since 2011. The appeal of such abundant tips has not been lost on the OSC. Tom Atkinson candidly acknowledged at the same conference that the OSC should have more complex cases under investigation. In light of the SEC’s results, the OSC believes its own program will generate many new cases.
Elements of the Whistleblower Program
The OSC sets out five key elements for an effective program, each of which are discussed below.
1. Whistleblower Eligibility: Who Gets an Award? The program is only available to individuals. To be eligible, information provided to the OSC must: (a) be high quality; (b) be original; and (c) result in total monetary sanctions of more than $1,000,000 (excluding costs) through an order or settlement.
An individual would not be eligible to receive an award if:
- the individual was culpable in the conduct being reported (although the OSC is seeking specific comment on this point);
- the information provided is subject to solicitor-client privilege;
- the information provided is lacking in specificity or otherwise misleading;
- the individual has or had job responsibilities as a Chief Compliance Officer or equivalent position or a director or officer at the time the information was acquired, and acquired the information as a result of an organization’s internal reporting or investigation processes;
- the information was obtained or provided in circumstances which would bring the administration of the Whistleblower Program into disrepute.
The program also precludes auditors and regulators from availing themselves of the program if they discover evidence of misconduct in the course of their duties.
2. How Much is the Award?
If total monetary sanctions exceed $1 million (excluding costs), the proposed award would be up to 15% of the total monetary sanctions imposed in a proceeding (or agreed to in a settlement). The maximum amount payable would be $1,500,000. Note however that the OSC has discretion in making such awards (discussed below) and they would only be made after the proceeding is concluded (including any appeals).
These limits differ substantially from the SEC model which has no cap on the total and offers up to 30% of the total monetary sanctions collected. Recently, one whistleblower in the U.S. received a payment of $30,000,000. The OSC payment cap would avoid what some see as “unjust enrichment” to a whistleblower if such large amounts are paid.
However, while the proposed OSC model has a cap of $1,500,000, awards are not contingent on collection of the monetary sanctions. This means a whistleblower can be paid even if the OSC has not collected from the respondent in question. That is not the case under the SEC model.
3. Is Confidentiality Protected? All reasonable efforts would be made to keep a whistleblower’s identity confidential subject to three exceptions: (a) if disclosure is legally required in a proceeding against the respondent; (b) if the relevant information is necessary to make Staff’s case against a respondent; and (c) when the OSC provides the information to another government, regulatory authority or law enforcement agency pursuant to the Securities Act. The OSC is considering whether it should permit a whistleblower to remain anonymous even to the OSC for at least a period of time after providing the information. One way to do so would be to allow whistleblowers to communicate anonymously with the OSC through legal counsel. Of note in the U.S., SEC Associate Director Cohen said that many whistleblowers now make tips through counsel and provide detailed briefs of information, sometimes including documents. When credible tips can be lucrative, one can see the incentive for whistleblowers to prepare a detailed outline of facts and possibly evidence. If this development also comes to Canada, it would have major implications for internal compliance for companies.
4. Whistleblower Protection from Retaliation The OSC will consider seeking legislative amendments to the Securities Act to protect whistleblowers from retaliation by employers, including: (a) a provision making it a violation of securities law to retaliate against a whistleblower; (b) giving a whistleblower a civil right of action against an employer who violates the anti-retaliation provision; and (c) making contractual provisions that would silence a whistleblower unenforceable. Anti-retaliation is a critical component in the U.S. system. SEC Staff pay close attention during an investigation to the interests of whistleblowers and to any company conduct that suggests retaliation is taking place.
5. Program Administration
A separate intake unit within the Enforcement Branch would deal with whistleblower submissions. Financial awards would be based on recommendations from Staff and approved by the Commission. Award decisions would be entirely discretionary. No reasons would be provided and no appeal would exist.
What Would the Impact Be?
A key question is "will employees ignore internal compliance programs in favour of seeking a reward?" This question caused heated debate in the U.S. before the SEC program started. Many argued against the SEC program, concerned that financial incentives would encourage individuals to circumvent a company’s internal compliance programs and undermine internal controls and remediation. While the OSC has acknowledged these concerns, it has also challenged their validity. The OSC quotes from a study, directed at similar financial incentive provisions in the U.S. False Claims Act, which concluded that there was “no negative impact whatsoever on the willingness of employees to utilize internal corporate compliance programs or report violations to their managers”. The OSC Staff Consultation Paper also cites the SEC’s experience to date, which is that 80% of whistleblower award recipients reported internally first (albeit the sample size of actual award recipients is small). In his recent speech, SEC Associate Director Cohen observed that “the vast majority” of whistleblowers report internally first, only coming to the SEC after they felt the company failed to respond.
At this stage, the OSC does not appear to be willing to require potential whistleblowers to report internally first in order to be eligible for the Whistleblower Program. The OSC expressly argues that such a prohibition might not be appropriate where an individual has serious concerns about the efficacy of internal reporting procedures or fears retaliation. However, the OSC does suggest that the failure to report internally prior to going to the OSC might be considered in assessing the quantum of any award.
On the issuer and registrant side of the equation, the OSC makes it clear that the failure of a company to self-report and/or implement corrective measures after receiving information of misconduct might result in no credit for cooperation when the issuer or registrant is ultimately brought to account for the misconduct.
What Should Companies Do?
If implemented, the Whistleblower Program will impact issuers and registrants. U.S. experience shows a very high volume of tips resulting from the SEC’s program. The OSC expects its program would substantially increase the number of investigations and it anticipates more complex cases as a result.
If the Whistleblower Program proceeds, companies will, at minimum, want to carefully review their internal reporting procedures and culture of compliance to encourage and support “internal first” reporting of compliance concerns. It will also be critical to ensure no retaliation is taken against whistleblowers. Companies without an adequate “anti-retaliation” policy and education process will need to address this. Finally, companies must be willing and able to investigate internally when complaints are received. Disgruntled whistleblowers are more likely to go to a regulator and we can expect that the regulator will hold companies strictly accountable for failure to act on a valid complaint.
Companies may wish to provide comments to the OSC before the May 4, 2015 deadline. Gowlings would be pleased to help assess or prepare responses. We can also advise and assist with internal reporting procedures and conduct independent investigations where serious complaints warrant independent review.