The OSC is considering a whistleblower program as part of a broader initiative to boost the efficiency and effectiveness of its Enforcement Branch.
“Enforcement is the weak spot in securities regulation in Canada,” says Susan Han, a securities lawyer at Miller Thomson LLP in Toronto. “Our enforcement isn’t as successful, as tough or as fast as in the U.S., [and the OSC] wants to address that concern.”
The whistleblower program is modeled largely on the SEC’s, notes Bernard Pinsky, a partner at Clark Wilson LLP in Vancouver.
A key difference is how financial awards are structured. The SEC’s are 10% to 30% of monies collected on sanctions greater than $1 million. The U.S. regulator has discretion, so it can cap the amount. Still, the SEC has made some hefty payoffs. Last September, for instance, a whistleblower received a record $30-million award, more than double the previous high. In a consultation paper, the OSC proposes awards of up to 15% of sanctions exceeding $1 million, and payment would occur even if sanction monies weren’t collected. The maximum award would be $1.5 million; below that, the regulator has total discretion on the sum.
Read: When to blow the whistle
“People may have stars in their eyes and think they’re going to get a big payout on a $1-million fine,” Pinsky says. “In the United States, the chances of having a penalty over $1 million are infinitely greater than they are in most other jurisdictions, because they’ve got much bigger companies, rules they enforce more seriously, and tougher penalties.”
“The fact that [the OSC] put the number at [$1 million, like] the U.S., is probably not taking into account the differences between the two jurisdictions.”
The differences are stark. Considering only topline data, the OSC ordered just over $58 million in monetary sanctions for calendar year 2013. The SEC ordered $3.4 billion in fiscal year 2013. Simon Romano, a partner at Stikeman Elliott LLP in Toronto, says “on balance [the proposal] seems reasonably well-thought-out.” But he questions the $1-million hurdle: “[It] seems high for Canada.”
While awards aren’t contingent on sanction collection, they “would only be paid upon the final resolution of the matter, including any appeals,” notes the consultation paper.
Han suggests the program should be one more disincentive to potential wrongdoers, especially at the top of big firms. “All your employees will essentially be deputized to make sure you’re not breaching securities laws.”
Compliance departments may worry the program could lead employees to bypass company procedures for reporting dubious activity. The OSC acknowledges this concern, but won’t require whistleblowers to report internally before going to the regulator. The OSC simply encourages people to do so.
That may not be enough, argues Pinsky. “Say I’m a disgruntled employee and I know something’s wrong. If I tell someone up the ladder and they fix it, then I don’t have any chance of making money on that. But if I go straight to [the OSC] and blow the whistle […], then I have a chance of making some money.” He raises another possibility: “It’s possible that if you go up the ladder and nothing gets done, the employee can still go to the OSC, blow the whistle, and collect their money.” U.S. data suggests this concern may be misplaced. “The SEC has recently reported that of the whistleblower award recipients to date who were current or former employees, 80% reported internally first,” notes the paper.
To be considered for an award, whistleblowers must provide high-quality information. That means:
- it relates to serious misconduct in the marketplace;
- it’s timely (misconduct has recently occurred, is ongoing or is about to occur);
- is credible and detailed, with well-organized supporting documentation;
- it has the potential to stop further harm from occurring; and
- it’s likely to save significant time and staff resources in conducting an investigation.
The OSC gives examples of misconduct it’s targeting.
- Misleading financial statements Accounting personnel may report deceptive reporting practices, including earnings manipulation or reporting of non-existent revenues.
- Illegal insider trading and tipping/selective disclosure People who have knowledge of pending transactions, or material undisclosed facts, may become aware of illegal insider trading or tipping occurring prior to the information becoming public.
- Market manipulation People working within issuers may become aware of activities undertaken by people within the organization, or by others outside the organization, to manipulate share prices.
- Illegal distributions and unregistered sales of securities Salespeople from companies engaging in sales of securities without registration and without a prospectus may come forward as whistleblowers.
- Registrant misconduct Employees may report other employees who aren’t dealing fairly, honestly and in good faith with clients; are breaching their KYC and suitability obligations; are providing misleading or false information; and/or aren’t identifying and disclosing conflicts of interest.
- Timely and/or misleading disclosure Employees may report a reporting issuer’s failure to disclose material changes. Employees may also become aware of significant developments that have not been publicly disclosed on a timely basis, because the reporting issuer is deliberately withholding the information over concerns about the impact on the issuer’s share price.
The regulator says it wouldn’t turn away whistleblowers who participated in the improper conduct. “[T]he level of culpability will be a relevant consideration in determining whether a whistleblower award is made to the individual and the amount of the award,” notes the paper. “We specifically seek comment on this issue.”
The OSC adds that “participation in the whistleblowerpProgram by a culpable individual would not prohibit the OSC from taking enforcement action against the individual for his or her role in the misconduct.” But, the person could qualify for reduced charges and sanctions through the OSC’s credit-for-co-operation program.
Confidentiality and retaliation
Whistleblowers could keep their identities confidential. And there would be three exceptions:
1 when disclosure is required to be made to a respondent in connection with a s.127 administrative proceeding to permit a respondent to make full answer and defence;
2 when the relevant information is necessary to make Staff’s case against a respondent; and
3 when the Commission provides the information to another regulatory authority, a self-regulatory organization, a law enforcement agency, or other government or regulatory authorities pursuant to s.153 of the Securities Act.
Pinsky says that, practically speaking, the OSC’s proposed confidentiality protections “aren’t all that good.
Lawyers defending people undergoing an investigation will go to the courts and say, ‘We need to know who this person is because we’re not going to be able to mount a proper defense without knowing.’ And the courts are loath to prevent the accused from using all available defences.”
Adds Romano: “The exceptions look broad enough to drive a truck through.”
The OSC is also considering allowing whistleblowers to relay information anonymously. In that case, the whistleblower would need to communicate with the regulator through legal counsel. But, like confidentiality, anonymity protection would have limits.
Potential whistleblowers may worry about employer retaliation, so the OSC plans to ask the Ontario government to add a “meaningful deterrent against retaliation” to the Securities Act. The regulator will suggest:
1 a provision making it a violation of securities law to retaliate against a whistleblower, thereby permitting Staff to prosecute the employer through a proceeding under s.127;
2 a provision giving a whistleblower a civil right of action against an employer who violates the anti-retaliation provision; and
3 a provision to render contractual provisions designed to silence a whistleblower unenforceable.
Han notes the OSC also wants to pre-empt attempts by employers to have employment agreements that bar employees from blowing the whistle on wrongdoing.
One possibility, the consultation paper says, would be to include in proposed additions to the Securities Act a provision that would render unenforceable any employment contract that impedes or prevents employees from reporting securities law violations.
In a section of the OSC’s whistleblower consultation paper titled “Process for Determining Whistleblower Awards,” the regulator states:
“The commission would, in its discretion, approve, reject or modify the amount to the recommended award and, if applicable, authorize payment. The OSC would not give reasons for its determination.”
Simon Romano, a partner at Stikeman Elliott LLP in Toronto, notes there’s nothing unusual about the OSC giving itself total discretion on whether an award’s granted, and for how much. But, he questions the OSC’s remark that it won’t explain its decisions. “It is a fundamental principle of administrative law to give reasons for such judgments,” he says.
Compliance departments may worry the program could lead employees to bypass company procedures for reporting dubious activity.
Originally published in Advisor's Edge Report
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