The Ontario Securities Commission (OSC) proposed a whistleblower program last week to pay up to $1.5 million (Canadian dollars) to individuals who help the regulatory authority catch violators of its securities laws. The program is largely modeled on the SEC program created following Dodd-Frank, with awards of up to 15 percent of monetary penalties exceeding C$1 million for original and high quality information.
On February 3, 2015, the OSC published the consultation paper soliciting feedback on the proposal from issuers, advisors, investors, market participants and potential whistleblowers. The paper is available at http://www.osc.gov.on.ca/documents/en/Securities-Category1/rule_20150203_15-401_whistleblower-program.pdf. The OSC will be receiving comments about the proposal for 90 days, ending on May 4, 2015.
Since the United States started paying rewards for information about corporate misconduct to tax and securities whistleblowers, a few different countries have considered adopting their own programs, including Great Britain and Australia. Canada was the first nation to do so, however. Just over a year ago, the Canada Revenue Agency launched the Offshore Tax Informant Program to pay whistleblowers for information about offshore tax evasion.
In the United States, the use of whistleblower rewards has been more popular than it has been internationally. Approximately 30 states and the District of Columbia already have a state version of the False Claims Act to reward whistleblowers. Following Dodd-Frank, Utah also adopted its own reward program for securities whistleblowers. The Securities Fraud Reporting Program Act was signed into law in Utah in 2012 and paid out its first reward for a tip in 2014.
Canada’s System of Securities Regulation
If you are not familiar with the regulation of securities in Canada, you may be wondering the impact of this proposal. Canada and the United States do not regulate the capital markets in the same way. In the United States, most regulation happens on the federal level. The Securities and Exchange Commission is the primary agency responsible for policing securities misconduct. When the misconduct involves commodities or derivatives, the Commodity Futures Trading Commission is responsible for regulation and enforcement. States may also impose additional regulations on entities within their jurisdiction.
There is no federal regulatory authority for securities in Canada. Instead, each of the 10 provinces and 3 territories has its own securities law and regulatory enforcement authority. An umbrella organization, the Canadian Securities Administrators, seeks to harmonize regulation of the capital markets between the various parties.
The OSC is the largest securities regulator in Canada. It dates back to 1928 when it was called the Security Frauds Prevention Board. It regulates the Toronto Stock Exchange, as well as public companies and investment funds. Its mandate is “to provide protection to investors from unfair, improper or fraudulent practices and to foster fair and efficient capital markets and confidence in capital markets.”
The OSC Proposal
The measure is one of several that the OSC is currently considering in order to streamline and strengthen the enforcement of its securities laws. The OSC is considering both allowing no-contest settlements and clarifying the process for self-reporting, which would include disclosing the credit it grants for cooperation by the entity under investigation.
The whistleblower proposal calls for the creation of a separate intake unit within the Enforcement Branch to administer the program and maintain the confidentiality of informants. The information provided would be communicated to enforcement staff, who would be responsible for the investigation of the tip and any enforcement action.
Confidentiality & Anonymity
The OSC would generally maintain the confidentiality of their whistleblower’s identity and information that could reasonably be expected to reveal their identity unless required in connection with an s.127 administrative proceeding, necessary to make the case or when providing information to another regulatory or government authority. The Commission expects that it would not ordinarily be required to reveal their identity.
The OSC is considering allowing anonymous tips initially. This would provide whistleblowers with additional protection against disclosure. If the Commission does allow them, the individual would need to obtain counsel and communicate through counsel. If receiving a financial award, the whistleblower would have to reveal their identity in order to ensure eligibility for the award.
The proposal envisions anti-retaliation protections that can be enforced by either the agency through an administrative proceeding or by the whistleblower through a civil action. The Commission recommends that both internal “up the ladder” reporting and external reporting to the government should receive protection.
One problem with this aspect of the proposal is that implementation of the anti-retaliation protections might require legislative action, whereas the program under consideration will be implemented by adoption of an OSC policy.
Another aspect that the OSC is struggling with is the need for a policy against confidentiality and disparagement agreements or clauses within employment or separation agreements. The list of consultation questions specifically seeks information regarding what pre-emptive measures should be taken to prevent employers from silencing their employees.
The OSC does not want to undermine the internal reporting process but, similar to the SEC, does not want to force employees to go through internal processes before they can reach out to the agency. The proposal suggests that the Commission may take measures, such as higher awards, for employees who report internally first.
In part to prevent problems with the internal compliance process, the Commission has proposed making ineligible the Chief Compliance Officer, as well as directors or officers, if they acquire the information through an internal report or the company’s investigative processes.
Funding for Awards
The Commission is currently proposing payment of rewards from an account referred to as the Funds Held Pursuant to Designated Settlements and Orders. This contrasts with the SEC and CFTC approach, where there is a specific and separate fund established to pay rewards for whistleblowers. The problem, noted by the paper, is that the first priority of the OSC is to return money to harmed investors and this policy might limit the amount available as rewards. Additionally, the OSC is considering paying when the fine or penalty is ordered rather than when it is collected.
Communication with the Whistleblower
Section 9.4 of the consultation paper is an area of concern. It provides for limited communication with whistleblowers following a submission. Staff would only disclose an investigation if continued cooperation of the whistleblower was needed. Otherwise, the whistleblower would only hear about a decision not to proceed or a public announcement of an action. This sounds similar to the IRS policy on the situation, which has been regularly criticized.