The Ontario Securities Commission (OSC) is inviting comment on a proposed comprehensive whistleblowing program (Program) which would award eligible whistleblowers up to $1.5 million for reporting securities law misconduct that leads to significant enforcement or settlement orders.
Until May 4, 2015, the OSC will be accepting comments on the consultation paper and will host a roundtable with various stakeholders to discuss the proposals. Before any whistleblowing framework comes into effect, the OSC will first need to publish a final set of proposals, which would also be subject to a public comment period.
The Program has five key features:
- Financial award: A discretionary financial award of up to $1.5 million would be offered to eligible whistleblowers who provide quality information that leads to certain significant enforcement outcomes.
- Whistleblower eligibility: Whistleblower eligibility would be determined using defined criteria, including requirements regarding the type and quality of information reported.
- Program administration: The Program would be structured and run to encourage and facilitate whistleblowing and support more effective enforcement of securities laws.
- Confidentiality: The OSC would use all reasonable efforts to protect the identity of the whistleblower, but would not guarantee complete anonymity.
- Whistleblower protection: Statutory measures would be implemented to protect from retaliation employees who provide information to the OSC or internally to their employer.
1. Financial Award
Under the Program, an eligible whistleblower may receive an award of up to 15% of the total monetary sanctions imposed (or agreed to in a settlement), but only if the sanctions imposed on (or settlement payments agreed by) respondents other than the whistleblower exceed $1 million (exclusive of costs), and only if the outcome is final and no longer appealable. If the tip led to multiple proceedings before the OSC, the award would be based on the total sanctions imposed across all proceedings. The maximum whistleblower award would be capped at $1.5 million.
Unlike the whistleblowing framework of the U.S. Securities and Exchange Commission (SEC), on which the OSC's Program is largely modelled, OSC whistleblower awards would not be based on monies collected and would not be contingent on the successful collection of monetary sanctions. The OSC expects to fund the Program through payments to the OSC of administrative penalties, disgorgement and settlement amounts that are not otherwise paid to harmed investors.
The amount of a whistleblower award would be discretionary. An OSC Staff committee, which would include the Director of Enforcement, would recommend an amount,1 which would then be approved at the discretion of the OSC.
2. Whistleblower Eligibility
The Program would be aimed at "serious" securities law misconduct, including, for example, misleading financial statements, illegal insider trading and tipping/selective disclosure, market manipulation, illegal distributions, unregistered sales of securities, registrant misconduct and timely disclosure/misleading disclosure concerns.
To be eligible for a financial award, a whistleblower must be an individual and provide information that:
- is of high quality:
- relates to serious misconduct in the marketplace;
- is timely (misconduct that has recently occurred, is ongoing or about to occur);
- is credible and detailed, with well-organized supporting documentation;
- has the potential to stop further harm from occurring; and
- is likely to save significant time and OSC resources in conducting an investigation;
- is original, non-public information the OSC was not aware of;
- is provided on a voluntary basis, meaning the information was not requested or compelled by the OSC, any other Canadian securities commission or the SEC;
- relates to a possible serious violation of Ontario securities laws that has occurred, is occurring or is about to occur; and
- leads to the commencement of OSC administrative proceedings under s.127 of the Securities Act (Ontario) (Act) that result in an enforcement outcome, including a settlement, with an order or agreement to pay total monetary sanctions of more than $1 million (excluding costs), and the outcome would have to be final and no longer appealable.
A whistleblower award would not be available where the individual:
- provides information that is misleading or untrue, has no merit or lacks specificity;
- provides information that is subject to solicitor-client privilege;
- provides information obtained through the course of a financial audit when engaged to provide audit services;
- has or had job responsibilities as a Chief Compliance Officer (CCO) or equivalent position or is or was a director or officer at the time the information was acquired, and acquired the information as a result of an organization's internal reporting or investigation processes2 for dealing with possible violations of securities laws;
- is or was employed by the OSC, a self-regulatory agency or law enforcement, at the time the information was acquired; or
- obtains or provides the information in circumstances which would bring the administration of the Program into disrepute.
Significantly, the OSC would not automatically disqualify tipsters with some culpability and would accept information from individuals who provide information on matters in which they actively and improperly participated. The OSC will consider the level of culpability when determining whether a whistleblower award is made to a tipster and the amount of the award. The OSC would not be prohibited from taking enforcement action against a whistleblower for his or her role in the misconduct.
3. Program Structure
The Program would be structured and run to encourage and facilitate whistleblowing and support more effective enforcement of securities laws. Administrative features of the Program would include the following:
- Segregation of whistleblower function
- A separate intake unit would be set up within the OSC's Enforcement Branch to deal with whistleblower submissions and Program administration.
- Communications with whistleblowers
- If no further action is to be taken on a whistleblower's information, or if a decision is made not to proceed with the matter, OSC Staff would communicate that decision to the whistleblower.
- If the information leads to an investigation, this fact would not be communicated to the whistleblower, unless the whistleblower was made aware of the investigation due to continued whistleblower co-operation in the matter.
- After a public announcement of a notice of hearing, statement of allegations or settlement agreement is issued, communication with a whistleblower would be in the discretion of OSC Staff, but no further communication with a whistleblower would be required or permitted until a final determination was made whether to make a whistleblower award.
The OSC would use "all reasonable efforts" to keep a whistleblower's identity confidential, unless:
- disclosure is required to permit a respondent to make full answer and defence in a s.127 administrative proceeding;
- the information is necessary to make OSC Staff's case against a respondent;
- the OSC finds it is in the public interest to provide the information to another regulatory authority, a self-regulatory organization, a law enforcement agency or other government or regulatory authorities;
- a hearing panel of the OSC orders OSC Staff to disclose the information; or
- the information must be disclosed under applicable freedom of information legislation.
Whistleblowers under the Program would not generally be required to testify as part of a s.127 administrative proceeding.
The OSC is also considering allowing a whistleblower to remain anonymous to the OSC, at least for a period of time after providing information, if the whistleblower is represented by legal counsel and anonymously reports the information to the OSC through legal counsel.
5. Whistleblowing Protection
The OSC is of the view that anti-retaliation protections should be available to both individuals who report possible violations of the Act "up the ladder" internally and individuals who report directly to the OSC.
The OSC intends to pursue amendments to the Act aimed at protecting whistleblowers from employer retaliation. Specifically, the following three provisions might be added to the Act:
- a provision making it a violation of securities law to retaliate against a whistleblower; this would allow OSC Staff to prosecute the employer through a proceeding under s.127 of the Act;
- 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.3
Potential Impact of the Program on Internal Escalation Procedures
Market participants such as public companies and registered securities businesses often have written or informal procedures for escalating the handling of situations that may involve inappropriate or unlawful conduct. Some of these provisions make allowance for the possibility of a whistleblower who is not getting satisfaction from the escalation process going to senior people within the market participant to describe and invite action on the problem at hand.
The Program is not intended to undermine internal escalation procedures, and the OSC encourages individuals to report their concerns internally first, in appropriate circumstances. Yet the OSC proposals create a direct communication channel with the regulator that may not only pre-empt the internal escalation process, but also inhibit the market participant from getting credit for co-operating with regulators. The OSC warns that if issuers and registrant firms do not promptly and fully report serious breaches of Ontario securities law to OSC Staff after employees reported them internally, or if they continue the inappropriate conduct and fail to correct the problems, credit for co-operation might be unavailable. Depending on the circumstances, a market participant's failure to self-report and correct may also be considered an aggravating factor in OSC Staff's sanctions recommendations.
1 OSC Staff will determine the amount of the award with reference to a number of factors, including the role that the whistleblower played and the extent to which the information led to a completed enforcement outcome.
2 The OSC notes that not all those who learn of possible misconduct through an internal reporting process or investigation would be ineligible for whistleblower status. Compliance department staff who are aware of misconduct and observe a failure by the CCO to address it would be able to provide information to the OSC and be considered for an award, subject to meeting the other eligibility criteria.
3 The OSC cites with approval a 2014 statement by Sean McKessy, Chief of the Office of the Whistleblower of the SEC, warning in-house counsel against preparing agreements containing provisions designed to silence whistleblowers without providing exceptions for regulatory reporting. The SEC statement suggested that the U.S. regulator could enforce this position by using its power to bar lawyers from practising before it.
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