On February 3, 2015, the OSC issued Staff Consultation Paper 15-401. The Consultation Paper calls for comments from the industry on its proposed framework for an award-based whistleblower program. The program would offer cash incentives to whistleblowers totalling up to $1.5-million, which the OSC says will “motivate those with inside knowledge or information that relates to possible serious breaches of Ontario securities law to come forward and share that information with the OSC”. The goal of enhancing Canada’s ‘white collar’ enforcement capabilities is important and supportable, and we have written previously about the challenges faced by authorities in pursuing wrongdoing in the area (see e.g. Regulators Continue to Face Challenges Pursuing Insider Trading; Difficulties Continue with Prosecuting Cases Involving Chains of Tipper-Tippee Misconduct). But for the OSC’s proposed whistleblower program, whether the ends of motivating employees to come forward justify the bounty-based means set out in the Consultation Paper is a question that ought to attract considerable attention over the coming months. As the experience with the Dodd-Frank Whistleblower Program south of the border demonstrates, whistleblower programs can lead to increased successful enforcement activity but may also result in heightened pressure on a business’s internal compliance programs and a proliferation of frivolous claims.
The OSC’s proposed framework for the whistleblower program contemplates the following key elements:
- Eligibility to become a whistleblower: in order to be eligible as a whistleblower, one must have credible and detailed information which the OSC does not currently have, and that information must lead to the commencement of an OSC proceeding. Chief Compliance Officers are specifically excepted from eligibility.
- Financial incentives provided to eligible whistleblowers: this key factor in the success of the program provides that if the information provided by an eligible whistleblower leads to a conviction or settlement agreement of more than $1-million, that whistleblower may be awarded a bounty of up to 15% of the total sanction up to a total award of $1.5-million, subject to a number of limitations. This stands in contrast to the U.S. Dodd-Frank Whistleblower Program, which directs the SEC to make awards to eligible individuals in an amount equal to 10% to 30% of the sanction collected, with no cap on the total amount of the award.
- Confidentiality of the identity of whistleblowers: the OSC notes that it intends to use all reasonable efforts to keep confidential a whistleblower’s identity, unless such disclosure is required to allow the respondent to make full answer or defence or to allow OSC Staff to make a case against the respondent (among other exceptions). Given the breadth of the exceptions listed above, it will be interesting to see in what instances the OSC is able to maintain a whistleblower’s identity confidential, and to what extent this risk affects participation in the program.
- Protection of whistleblowers: as a complement to the confidentiality protections, the OSC notes that in order to protect whistleblowers from retaliation, similar to the SEC and its ability to bring a whistleblower retaliation suit, certain legislative amendments will be required, including provisions specifically prohibiting retaliation, granting a civil right of action against an employer by a whistleblower who has experienced retaliation, and rendering unenforceable contractual provisions designed to silence whistleblowers.
Concerns about Cash Rewards to Whistleblowers and the U.S. Experience
As we outlined in an earlier blog post (SEC Brings First Whistleblower Retaliation Suit), there has been increased pressure for regulators to act, notwithstanding limited resources. These circumstances no doubt place greater emphasis on the desirability for businesses to self-report misconduct, and for company insiders to proactively identify and report suspicions of wrongdoing within their enterprises. Many in the Canadian business community, and their advisors, have expressed concerns about a U.S.-style, incentivized whistleblower program of the kind the OSC has proposed in its Consultation Paper. Among the most significant concerns is the potential that issuers’ internal procedures and controls – themselves a key focus of the OSC in recent years – could be undermined or circumvented by employees stepping outside of mandated internal reporting processes and contacting the OSC directly in the hopes of obtaining a lucrative reward. This problem may be compounded by the program’s contemplated denial of credit for cooperation for those issuers accused of misconduct that is first reported to the OSC by a whistleblower. In other words, an issuer may be denied the ability to obtain credit for cooperation from the OSC that it could have otherwise received had the whistleblower reported the problem to the issuer’s compliance department rather than to the OSC directly. While the OSC says it will encourage employees to report internally first, there is no requirement that they do so in order to be eligible for an award. All of that said, as the OSC notes in Consultation Paper 15-401 and as the SEC indicated in its 2014 Annual Report on the Frank-Dodd Whistleblower Program, of the whistleblower award recipients to date in the U.S. who were current or former employees, 80% of those recipients reported internally first.
Employees in the U.S. have blown the whistle in large numbers since Dodd-Frank was implemented in 2011. According to the SEC’s 2014 Annual Report referred to above, the SEC has received a total of 10,193 whistleblower tips since August 2011, and the number of tips received has increased every year. As the business pages around the world reported, the SEC authorized a staggeringly large award in September 2014 – more than $30-million was paid to an anonymous tipster in connection with a major fraud. This award proved correct U.S. commentators who predicted that the SEC’s October 2013 award of $14-million – itself a massive payment – was simply the first in a flow of large whistleblower awards to issue from the Dodd-Frank pipe. The sheer size of these awards has struck many observers as unseemly, and the OSC appears to have taken note, capping the total amount available to whistleblowers at $1.5-million. However, unlike the SEC program, the OSC program would pay awards to whistleblowers even if the OSC cannot successfully recover the fine or penalty. Given the comparatively small size of penalties imposed by the OSC in recent years, whether a whistleblower under the Commission’s program awards will approach the $1.5-million limit remains to be seen.
Notwithstanding concerns expressed, regulators are increasingly considering sponsored whistleblower bounty systems. They raise unique challenges and different types of risks that need to be properly addressed and managed within business enterprises. Public comment on the proposed policy is open until May 4, 2015.