SECURITIES REGULATION AND IR

On February 3, 2015, the Ontario Securities Commission (‘OSC’) published for comment Staff Consultation Paper 15-401 – Proposed Framework for an OSC Whistleblower Program (the ‘Whistleblower Program’), which proposes a financial incentive based whistleblower program that would be the first of its kind for securities regulators in Canada. 

The Whistleblower Program is one of a number of initiatives by the Enforcement Branch of the OSC aimed at resolving enforcement matters more quickly and efficiently. Currently, the OSC accepts tips about possible breaches of securities laws; however, no financial incentives are provided. Under the Whistleblower Program, eligible whistleblowers would be entitled to cash awards of up to $1.5 million in certain circumstances. 

Whistleblower Eligibility

The OSC requires that the information provided by whistleblowers meet three eligibility criteria. Firstly, the information provided must be of high quality, meaning the information must relate to serious misconduct in the marketplace; be timely, credible and detailed; have the potential to stop further harm from occurring; and be likely to save significant time and resources in conducting an investigation. Secondly, the information must be original, voluntarily provided and relate to serious violations of securities laws (misconduct that has recently occurred, is ongoing or is about to occur) of which the OSC does not already know. In addition, the information must not have been requested or compelled by the OSC, other securities commissions or self-regulatory agencies. Finally, the information must lead to the commencement of an OSC administrative proceeding resulting in an enforcement outcome, including a settlement, with a monetary sanction or a settlement amount of more than $1 million (excluding costs).

The Whistleblower Program proposes to accept information from individuals who have an element of culpability in the activity being reported. The level of culpability of the whistleblower would be a relevant consideration in determining whether a financial award is made to the individual and the amount of the award.

Awards

The United States Securities and Exchange Commission (the ‘SEC’) introduced a whistleblower program in 2011 whereby the SEC pays financial awards to whistleblowers who voluntarily provide original information to the SEC that leads to a successful enforcement action by the SEC and where the SEC obtains a monetary sanction totalling more than $1 million.

The SEC permits award amounts to be equal to 10% to 30% of the sanction recovered with no upper limit on the total. Under the Whistleblower Program, the whistleblower would receive up to 15% of either the total monetary sanction imposed in an OSC administrative proceeding or an agreed payment in a settlement before the OSC, where the imposed sanction or settlement payment is more than $1 million, exclusive of costs. The outcome would have to be final and no longer appealable before a payment could be made to a whistleblower. In cases where total sanctions exceed $10 million, the maximum award would be $1.5 million.

Unlike the SEC’s program, the award would not be contingent on the actual monies being recovered from the wrongdoers. The Whistleblower Program proposes a process for determining the awards, including criteria for determining the amount of awards based on factors such as the level of cooperation extended by the whistleblower, culpability and prior reporting of misconduct through internal mechanisms.

Confidentiality

The Whistleblower Program proposes to adopt a policy, which would provide that the OSC would use all reasonable efforts to keep the identity of a whistleblower confidential (and information that could be reasonably expected to reveal the identity of a whistleblower), subject to three express exceptions.

Such exceptions would be as follows:

• When disclosure is required to be made to a respondent in connection with an administrative proceeding to permit a respondent to make full answer and defence;

• When the relevant information is necessary to make the OSC staff’s case against a respondent; and

• When the OSC provides the information to another regulatory authority, a self-regulatory organization, a law enforcement agency or other government or regulatory authorities pursuant to Ontario securities laws.

The OSC would not generally require a whistleblower to testify as part of an administrative proceeding. However, for the reasons set out above, the OSC recognizes that complete anonymity may be impossible in every case and therefore, some potential whistleblowers may be deterred from providing information to the OSC under the Whistleblower Program.

Whistleblower Protection

In connection with the Whistleblower Program, the OSC would seek implementation of various legislative amendments to protect whistleblowers from retaliation by their employers.

Such legislative amendments would be:

• A provision making it a violation of securities law to retaliate against a whistleblower, thereby permitting OSC staff to prosecute the employer through an administrative proceeding;

• A provision giving a whistleblower a civil right of action against an employer who violates the anti-retaliation provision; and

• A provision to render contractual provisions designed to silence a whistleblower unenforceable.

One of the concerns about the Whistleblower Program is that it incentivises whistleblowers to report to the OSC rather than solely reporting through internal compliance systems, which should be a first line of action in promoting compliance with securities laws. The OSC points out that the SEC recently reported that of the whistleblower award recipients to date who were current or former employees, 80% reported internally first. Though this is an interesting comment about the U.S. experience, the Whistleblower Program does not require whistleblowers to report internally first nor is there a requirement to report internally first in order to be eligible for an award. 

The OSC is accepting comments on the consultation paper until May 4, 2015.