Stiff opposition to rewarding tipsters

The Ontario Securities Commission (OSC) has been considering a similar program for several years. In early February, the regulator finally proposed its own version of a whistleblower program, which would pay sources who provide information that leads to major enforcement cases.

It’s important to note that the research process for this year’s Report Card was just about to conclude before the OSC released its proposal, so the survey didn’t specifically address the model outlined by the OSC in its consultation paper. Rather, COs and financial services company executives were asked to share their opinions on the concept of rewarding whistleblowers, which has been under discussion in regulatory circles since the SEC adopted its policy in 2011.

Overall, the COs and company executives surveyed for this year’s Report Card were not in favour of such programs. Almost two-thirds of those who responded to the survey (64%) said they do not support a program that involves paying whistleblowers. Although the industry appears to be decisively opposed to rewarding tipsters, the responses indicate that the central issue for those surveyed is whether or not whistleblowers should be paid for their information.

Many survey participants had major concerns with this approach. In fact, among those who said they are opposed to the introduction of a whistleblower policy, two-thirds cited the idea of paying for tips as the source of concern.

In particular, some COs and company executives said such a policy would create perverse incentives and may lead to false reports as employees look to cash in by calling in tips on their employers. Other survey participants said that employees should report misconduct because it’s simply the right thing to do, not because they stand to benefit from it.

A CO with a Quebec-based investment dealer called the idea of monetary incentives “un-Canadian” and expressed concern about the problems it could create.

Similarly, a CO with an Ontario-based mutual fund dealer said: “I agree with everything except the compensation. You either act with integrity or you don’t. I worry about the incentives if people are getting monetary awards.”

Despite widespread concern about the merits of paying tipsters, the COs and company executives surveyed said they generally are strongly in favour of adopting some sort of whistleblower policy that provides protection for those who report wrongdoing.

“I agree 100% with implementing a whistleblower policy, except [tipsters] shouldn’t be compensated,” says a CO with a mutual fund dealer based in British Columbia. “They shouldn’t be persecuted, but there also shouldn’t be compensation. I say no because of the compensation part. If [regulators] remove that, then I’m a yes.”

Still, the OSC appears committed to the idea of tipster compensation even though many in the investment industry are concerned about it. In the OSC’s consultation paper proposing such a policy, the regulator indicates that it views the provision of financial incentives as the “most critical” aspect of its proposed policy.

Indeed, the practice of paying tipsters has come into vogue in the past few years as authorities look for new ways to flush out financial wrongdoing. The concept got its first high-profile chance with the SEC, but the Canada Revenue Agency also brought the model to Canada recently with the introduction of a program that pays for information in connection with major international tax-evasion cases.

The OSC has not yet adopted the model proposed in its consultation paper, which is out for comment until May 4 and makes clear that many of the details of the proposed program are up for discussion. The OSC paper sets out a model that would pay tipsters up to 15% of the monetary sanctions ordered in major cases that generate at least $1 million in sanctions, up to a maximum reward of $1.5 million.

Although such payouts are significant, these rewards wouldn’t be paid out until a case is fully concluded, including all appeals being exhausted. That means that it would probably be several years from the time a tip is submitted until any reward actually is paid out. There wouldn’t be any immediate reward for a prospective whistleblower.

Moreover, the OSC’s proposed program wouldn’t generate the massive awards that have occurred in the U.S. The SEC’s program can reward whistleblowers with 10%-30% of the money collected in an enforcement action that generates at least US$1 million in monetary sanctions – with no upper limit on those payouts.

According to the latest information from the SEC, the U.S. regulator has paid rewards totalling almost $50 million to 15 whistleblowers since the policy was adopted a few years ago – including a $30-million payout to one tipster, which represents the majority of the SEC program’s awards so far.

The OSC’s proposed program differs from the SEC’s in that the OSC model would have a lower limit on the awards paid out, both in percentage terms and in absolute terms. In addition, the OSC awards would be paid out of overall monetary recoveries or general revenue, not from the money recovered in a specific case.

The OSC proposal stresses that these potential payoffs are not intended to create a windfall for whistleblowers. Rather, the rewards are meant to help offset the financial consequences that can befall a whistleblower. According to the OSC’s paper: “Such a payment would recognize the personal and professional risks undertaken by speaking up about misconduct.”

Also, chief COs (CCOs) and other similarly situated company executives – such as those surveyed for the Report Card – would not be eligible for whistleblower awards under the OSC’s proposal. However, other compliance personnel could be eligible.

For example, in a situation in which a CO learns about misconduct and reports it internally, but the CCO doesn’t deal with it, the CO could be eligible for an award if he or she also reports the problem to the regulator.

The OSC paper indicates that the regulator expects that one of the central objections to its proposed policy will be the whistleblower program’s possible impact on firms’ internal compliance systems – namely, that the prospect of a financial payout could cause employees to skip their internal reporting process and take their information straight to the regulator.

None of the CCOs surveyed for this year’s Report Card cited that concern – and the OSC indicates this hasn’t been an issue in the U.S., as 80% of those who have received whistleblower awards from the SEC reported the misconduct in question to their firms first.

That said, the OSC has some work to do if it hopes to convince the investment industry’s CCOs and company executives that paying for enforcement tips is a good idea. Thus far, the idea appears to be getting a chilly reception.

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