In the second round of public comments on the Ontario Securities Commission's (OSC) proposed whistleblower program (Program), stakeholders expressed continued concerns that the Program, as outlined in OSC Policy 15-601 Whistleblower Program (Policy), would undermine internal reporting mechanisms and also expressed concerns about the amount and structure of the award payment.
The proposal to allow certain categories of individuals to receive monetary awards, such as issuer internal and external counsel, audit staff and employees who were involved in the wrongdoing, also attracted attention in comment letters.
Last month, the recently-appointed chair of the OSC indicated that the Program was expected to receive final approval in June and to be operational by early summer.
A detailed summary of the Program, which would be the first of its kind for securities regulators in Canada, can be found in our April 2015 Blakes Bulletin: Whistleblowers to be Rewarded, Protected Under OSC Proposal. A summary of previous stakeholder comments on the Program can be found in our July 2015 Blakes Bulletin: Issuers Apprehensive of OSC's Proposed Whistleblower Program. Our October 2015 Blakes Bulletin: Proposed OSC Whistleblower Policy Provides Greater Incentive for Employees to Report Misconduct to Regulator outlines the changes in the proposed Policy.
UNDERMINING INTERNAL REPORTING MECHANISMS
A wide variety of commenters reiterated the concern, initially expressed in the first round of comments on the Program, that the Policy did not require whistleblowers to use internal reporting and compliance mechanisms before reporting information to the OSC under the Program. Commenters pointed out that reporting issuers have mandated internal compliance and reporting mechanisms (including anonymous reporting channels) that are meant to identify and address issues in a timely manner.
Some commenters suggested that using internal reporting mechanisms should be a requirement for any reward under the Program or that, at the least, a whistleblower who does not report internally first should have the amount of his or her reward reduced.
Others suggested that the Policy should spell out more clearly in what types of "extenuating circumstances" it might be appropriate for a whistleblower to report directly to the OSC rather than to use internal programs and procedures. In responding to the first round of comments, in which many commenters advocated that internal reporting be mandatory for award eligibility, the OSC indicated that the Policy did not require internal reporting because "extenuating circumstances" might impede internal reporting.
Commenters also again raised the concern that if the Program did not contain a requirement that employees use internal mechanisms before reporting to the OSC, it would be creating an incentive for employees to breach their duties to their employer, since many employees are required to use internal reporting mechanisms.
AMOUNT AND STRUCTURE OF MONETARY AWARD
The Policy provides for the possibility of a greater monetary award than was proposed when the Program was initially outlined by the OSC.
Many commenters argued for changes to the structure of the award system to increase the number of awards and/or the amounts received by whistleblowers — for example by decreasing the threshold sanction from C$1-million, by increasing the percentage of the sanction that is eligible to be awarded and by increasing the cap on awards.
A number of commenters also took issue with the method of paying awards based on the size of a monetary sanction rather than the amount of money recovered. Rather than pegging only a portion of an award to actual recovery, these commenters maintained that the Policy should pay the awards only out of amounts recovered. This change would be beneficial, in their view, because it would avoid forcing compliant issuers and, ultimately, their shareholders to bear the costs of rewards under the Program.
LAWYERS' DUTY OF CONFIDENTIALITY
Widespread criticism was also directed at the Policy's provision that a lawyer or other person who obtained information in the course of providing legal services could report such information to the OSC under the Program and be eligible for an award if the disclosure was permitted for lawyers under their professional rules.
Commenters who opposed this provision noted that the professional rules for lawyers do not contain an exception that would permit a lawyer to provide information to the OSC under the Program and emphasized that Canadian courts have regularly recognized the importance of solicitor-client privilege. The Policy was criticized as a source of potential confusion for lawyers since it might be taken to suggest that disclosure of information could be permitted under professional rules, and it was suggested that the Program might be seen as creating a conflict of interest for lawyers.
CULPABLE WHISTLEBLOWERS ELIGIBLE FOR AWARD
Some commenters also worried that the Policy permits culpable individuals who provide information regarding misconduct to the OSC to receive rewards. While noting that the Policy would allow the OSC to reduce the amount of a reward for such an individual, a number of commenters argued this did not go far enough. A more appropriate response, said such commenters, would be to make individuals who were complicit in the misconduct ineligible for a reward.
AUDIT STAFF NOT EXCLUDED
The lack of a blanket exclusion for audit staff was opposed by a number of commenters who noted the importance of confidentiality to the relationship between an issuer and its internal and external auditors and the importance the professional rules for auditors place on maintaining confidentiality. The Policy, one commenter indicated, might create "an incentive that conflicts with the professional duties" of auditors.
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