THE ONTARIO SECURITIES Commission‘s (OSC) proposed policy of paying financial rewards for tips about industry misconduct has broad support. However, some securities industry participants still have concerns about the regulator’s ability to ensure that awards will be paid and that whistleblowers will be protected, two conditions that would be essential to the program’s success.
Late last year, the OSC revised its proposed whistleblower policy, which would pay financial rewards to tipsters who come forward with original information that leads to substantial enforcement penalties. Compared with an earlier version of the proposed policy, the revised proposal increases the limit on the possible rewards (in certain circumstances) and expands the pool of prospective whistleblowers to include auditors, in-house counsel and directors (among other changes).
In general, the revised policy is being applauded as a way of bolstering enforcement. “This new policy will be a game-changer for securities regulation in Canada and is a significant step in protecting investors,” notes the OSC’s independent Investor Advisory Panel’s comment on the proposals. “[The proposal] sends an important signal to industry that management behaviour that puts investors at risk will not be tolerated.”
These sentiments are echoed in many of the comments submitted on the proposal (the comment period on the new version of the proposal ended in mid-January), although there still are concerns flagged in some comments about the impact of the program on companies’ internal compliance systems, and whether the program would encourage employees to take issues straight to the regulator in the hope of receiving a big payout.
Submissions from other stakeholders suggest that the OSC needs to do more to ensure that the program is a success – by bolstering protection for prospective tipsters and increasing the likelihood that they will receive financial compensation for alerting the OSC to possible misconduct.
For example, the Toronto-based Canadian Advocacy Council (CAC) for the Canadian CFA Institute Societies’ comment argues that the proposed $1-million threshold (the minimum sanction a case must produce before an award would be paid) should be lower. The CAC comment suggests that $500,000 might be a better level, particularly where smaller firms are concerned, and also recommends that the OSC consider paying out a higher percentage of the sanctions to the whistleblower. (The OSC is proposing to pay 5%-15% of the total sanctions.) “A higher percentage could be paid out in the event of a smaller monetary sanction to provide sufficient financial incentive for potential whistleblowers to come forward,” the CAC’s comment suggests.
Law firm Osler Hoskin & Harcourt LLP (OHH) goes a step further. The firm’s submission recommends that the OSC divorce the payment of whistleblower awards from the size of any monetary sanctions that result. OHH’s comment suggests that tying the size of an award directly to the sanctions that are handed down in a particular case risks pulling Canadian regulators away from their traditional role of preventing future harm and into the role of punishing past misdeeds. This, the law firm’s comment notes, is more of a U.S.-style approach to securities regulation.
OHH’s comment states that the OSC’s proposal, which is modelled on a similar program introduced by the U.S. Securities and Exchange Commission (SEC), “too closely reflects the SEC regime by placing undue emphasis on the imposition of monetary sanctions, transforming the role of the commission from a traditional policy-making body into a law enforcement agency.”
OHH’s submission also points out that whistleblowers could provide the OSC with valuable information that leads to “protective” sanctions – such as the imposition of “cease trade” orders and market bans – and thus whistleblowers should be able to be rewarded for this type of information, not simply for tips that result in large financial penalties.
“If the proposed policy is to be effective,” the OHH comment states, “it should not be exclusively tied to monetary sanctions ultimately imposed by the commission.”
Similarly, the comment from TI Canada, the Canadian arm of the global anti-corruption group, Transparency International, suggests that whistleblowers should also be able to receive rewards for information that leads to quasi-criminal prosecutions: “It appears contradictory to incentivize whistleblowing through the payment of awards, but to withhold the payment of an award in the most serious of cases,” then adds that the policy puts a potential whistleblower in the “impossible situation” of trying to predict how the OSC might proceed.
Echoing the concerns raised in the comments from the CAC and FAIR Canada, TI Canada’s submission argues that a whistleblower would be unable to predict whether his or her information will lead to at least $1 million in sanctions. Thus, TI Canada’s comment suggests, the OSC should reconsider whether a minimum is necessary, and whether there should be a cap on the size of awards that can be paid out.
The submission from the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada), takes a similar position to that of the CAC, but adds that without a legal backbone, “Ontario’s whistleblower program will not have the impact it otherwise could.”
FAIR Canada’s comment recommends that the regulatory policy be accompanied by legislative changes to ensure that “all required elements of an effective whistleblower program – confidentiality for the whistleblower, anti-retaliation provisions and financial compensation – have full legal effect.”
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