The OSC is close to adopting a proposed final version of its previously-announced whistleblowing policy (the Program). The Program would award eligible whistleblowers up to $5 million for reporting serious securities- or derivatives-related misconduct that leads to significant enforcement or settlement outcomes.
We summarized the original OSC consultation paper in a previous article. The OSC received comments on the consultation paper and also hosted a stakeholder roundtable on the proposals. Reporting issuers will want to re-examine their internal compliance and reporting systems, codes of conduct and employment agreements in light of the proposed program. Key features are summarized below.
Financial Awards Increased up to $5 Million
The maximum whistleblower award has been increased to $5 million. If the sanctions imposed are in the $1 million to $10 million range, then the maximum whistleblower award would be capped at $1.5 million and would not be contingent on the successful collection of the monetary sanctions by the OSC. If the sanctions imposed are $10 million or more and the OSC actually collects the monetary sanctions from respondents, then the maximum whistleblower award would be capped at $5 million.
Factors that may increase the discretionary amount of a whistleblower award within the prescribed 5 to 15% range include the timeliness of the initial whistleblowing report, the significance of the information provided and whether the whistleblower reported the violations through an internal compliance and reporting mechanism before, or at the same time as, it reported to the OSC.
Factors that may decrease the amount of a whistleblower award within the 5 to 15% range include whistleblower culpability, unreasonable delay in reporting, refusal to provide additional information or assistance to OSC Staff after the initial whistleblowing report and interference with an OSC investigation or internal compliance and reporting mechanisms.
Eligible Whistleblowers May Include In-House Counsel, Auditors, Internal Compliance Staff, Directors and Officers
A whistleblower award would be available to:
- in-house legal counsel (unless the information is subject to solicitor-client privilege);
- auditors who obtained information in connection with providing internal audit or external assurance services, or conducting an internal or financial audit;
- individuals who obtained information while conducting an internal or external inquiry or investigation;
- individuals who were directors or officers of the entity at the time the information was acquired; and
- the Chief Compliance Officer or equivalent position at the time the information was acquired
provided that the whistleblower has a reasonable basis to believe that disclosure to the OSC is necessary to prevent substantial injury to the financial interest or property of an entity or investors, that the subject of the whistleblowing report is engaging in conduct that will impede an investigation, or at least 120 days have elapsed since the whistleblower reported the information internally.
Culpable whistleblowers are eligible for awards under the Program, though the OSC will consider the level of culpability when determining the amount of the award and may take enforcement action against a whistleblower for his or her role in the misconduct.
Considerations for In-House Counsel
While information that is subject to solicitor-client privilege or that was obtained in connection with the provision of legal advice to a client or employer is excluded, in-house counsel are eligible for awards under the Program in the narrow circumstances set out above. This is presumably because in-house counsel, in particular those acting as officers, may perform both legal and non-legal functions for their employer, and might become aware of award-eligible information while acting in a non-legal capacity.
This aspect of the Program raises particular challenges for in-house counsel and may be difficult to reconcile with professional responsibilities that lawyers owe their employers under applicable law society rules, which include broad and strict duties of confidentiality. In Ontario, for example, subject only to a few narrow exceptions, lawyers are required to hold in strict confidence all information concerning the business and affairs of the client acquired in the course of the professional relationship and are specifically advised against whistleblowing to the appropriate authorities regarding an employer’s proposed misconduct.
The OSC is requesting comments on whether in-house counsel should be eligible for whistleblower awards under the Program. Under the SEC’s program in the U.S., on which the OSC’s Program is largely modeled, in-house counsel are only eligible for whistleblower awards to the extent that their disclosures are consistent with their ethical obligations.
When Whistleblowing Awards Will Not Be Made
A whistleblower award would not be available in certain circumstances, including where the individual:
- discloses, other than to his or her own legal counsel, any of the information submitted to the OSC, the fact that a whistleblower report was made, or any information the whistleblower becomes aware of from OSC Staff as a result of ongoing participation in the OSC investigation;
- is external legal counsel (unless the disclosure of the information in question would otherwise be permitted by a lawyer under law society rules); or
- has been convicted of a criminal offence in relation to the subject matter.
The OSC promises “all reasonable efforts” to keep a whistleblower’s identity confidential, unless disclosure is required to permit a respondent to make full answer and defence or the Commission determines it is necessary under the Securities Act (Ontario) (the Act) to provide the information to another regulatory authority, a self-regulatory organization, a law enforcement agency or other government or regulatory authorities.
While the Commission will recommend that requests for information relating to a whistleblower’s identity made under the Freedom of Information and Personal Protection of Privacy Act be denied, the Commission cannot guarantee confidentiality, because the final decision with respect to access to such records resides with the Information and Privacy Commissioner of Ontario or a court of competent jurisdiction.
Employee Protection from Reprisals
The OSC expects that employers will not discipline, demote, terminate, harass or otherwise retaliate against a whistleblower who has made a report either “up the ladder” internally or directly to regulators. The OSC also expects employers not to take action, through contractual agreement (including confidentiality agreement) or otherwise, to impede a whistleblower from making a report to regulators.
Similar anti-retaliation protections are included in s. 77 of the draft Capital Markets Act, the proposed uniform provincial securities act to be adopted by those jurisdictions, including Ontario, which will participate in the proposed Cooperative Capital Markets Regulatory system for national securities regulation. Once in effect, theCapital Markets Act will replace the Act. In the interim, the OSC intends to pursue amendments to the Act aimed at protecting whistleblowers from employer retaliation.
Potential Impact of the Program on Internal Compliance and Reporting Procedures
The Program is not intended to undermine written or informal internal reporting and escalation procedures of market participants but the OSC has decided not to require individuals to report their concerns internally first. The Program allows direct communication with the regulator and creates no disincentive for submitting a report to the OSC simultaneously with an internal report.
A whistleblower would apparently become ineligible for an award if he or she were to disclose to anyone, other than to his or her own legal counsel, any of the information submitted to the OSC. This may be interpreted as an incentive for a whistleblower not to also report internally following a report to the OSC, which may be viewed as inconsistent with other securities law requirements that reporting issuers establish internal reporting procedures for employees, and with the proposal that a whistleblower award under the Program may be reduced if the OSC determines a whistleblower has undermined the integrity of internal compliance and reporting procedures. Whistleblowers remain eligible for awards even if their employer subsequently self-reports to the OSC.