Increasingly, companies are expected to develop, implement and properly administer complaint handling and “whistleblowing” programs, especially in regulated industries and public companies. As we have written in previous publications, these programs, which should include protection for employees and third parties from retribution for bringing possible wrongdoing to the attention of responsible persons, play a crucial role in maintaining a “culture of compliance” within a business. Recently, capital markets and other financial conduct regulators have established rules and requirements for firms under their supervision, and some have set up their own regimes to help them uncover potential wrongdoing that can negatively impact markets and investors.
On October 28, 2015, the Ontario Securities Commission (Canada’s largest capital markets regulator) released its Notice and Request for Comment in connection to the OSC’s Proposed Whistleblower Program, Proposed OSC Policy 15-601, open for public comment for 60 days. This Proposed Program is the response to a 90 day comment period following the release of OSC Staff Consultation Paper 15-401 earlier in the year, which included a public Whistleblower Roundtable. The OSC reported that Staff received 17 letters on the Consultation Paper, including one from our firm.
The OSC’s Proposed Program would be the first of its kind in Canada, offering a “whistleblower reward” to individuals who report and submit to the OSC information on serious securities or derivatives related misconduct. Like the program contemplated in the Consultation Paper, the Proposed Program would safeguard complainant confidentiality subject to certain exceptions below, and focus on disclosure to the OSC that is voluntary (i.e. not compelled).
There are, however, some notable changes from the Consultation Paper, including the following:
- Exceptions to confidentiality have been reduced and modified to include the following circumstances:
- when OSC Staff is required to make disclosure of the whistleblower’s identity in connection with an administrative proceeding under s. 127 of the Ontario Securities Act (“Act”) or s.60 of the Commodity Futures Act (“CFA”) in order to permit a respondent to make full answer and defence; or
- when OSC Staff determines that it is necessary to accomplish the purposes of the Act or the CFA to disclose the information to any of the entities listed in s. 153 of the Act or s. 85 ofthe CFA.
- If the whistleblower provides information of meaningful assistance to Commission Staff that results in an order for monetary sanctions and/or voluntary payments totalling $1 million or more, he/she could be entitled to an award:
- between 5 and 15% of the total monetary sanctions imposed and/or voluntary payments made;
- up to a maximum amount of a whistleblower award to $5 million (increased from $1.5 million); and
- in which the specific “caps” awarded would be dependent on whether the sanctions were collected.
- Internal or external auditors, Chief Compliance Officers, officers, directors and in-house counsel are eligible for a whistleblower award in certain circumstances such as when at least 120 days have elapsed since the individual provided the information through the appropriate internal channels.
- Culpable whistleblowers are also now eligible for an award amount.
- Proceedings under s. 60 of the CFA are also eligible, with the same criteria as s. 127 proceedings under the Act.
While certain changes made from the Consultation Paper are responsive to some points raised in our comment letter, a number of concerns remain. For example, the program still does not require complainants to first pursue redress through a company’s own internal process, and the awards are limited to monetary sanctions ordered (and to an extent, collected).
We remain concerned that the Proposed Program could undermine the important role of designated compliance officials and their ability to support internal protocols by encouraging employees to sidestep or ignore internal protocols in favour of seeking financial reward by reporting directly to the OSC. The OSC Proposed Program responds to these concerns by encouraging whistleblowers who are employees to report potential securities law violations through established workplace protocols. However, the OSC stops short of making this a condition to receiving a whistleblower award under the Proposed Program, stating that extenuating circumstances may impede an employee’s ability to report through internal programs. We continue to take the view that eligibility to receive a whistleblower award should be dependent upon the individual’s recourse to internal compliance and/or compliance programs, except where it is demonstrated that this was not possible or desirable.
Also, as we have written previously, we are concerned that tying whistleblower awards to penalties reflects and perpetuates a misalignment with the traditional preventative and protective functions of Canadian securities regulators. In our view, the regulators should be focussed more on driving behaviours toward greater compliance rather than penalizing bad behaviour.
The revised whistleblower award program contemplated by the OSC, while apparently modelled on the whistleblower award program of the United States Securities Enforcement Commission, contains material differences. The first, and most obvious, is the absence of prescribed caps in the SEC regime. As well, the SEC program requires the money from imposed sanctions and settlements to be collected. By contrast, under the Proposed Program, uncollected sanctions are not necessary bars to recovery (although an uncollected sanction may impact quantum). To date, the SEC has paid more than $50 million to 18 whistleblowers, including a $30 million award in 2014.
As noted recently, the UK’s Financial Conduct Authority released new whistleblower rules for the banking and insurance industry, to take full effect in September 2016.
Those company personnel responsible for overseeing and managing internal complaint handling regimes, such as compliance and ethics officers, in-house counsel and Board members, need to keep abreast of evolving standards and regulatory expectations in respect of these matters. These expectations and standards should inform how individual firms address complaint handling and complainants.
The public comment period for the Proposed Program closes January 12, 2016.