Canada: OSC Whistleblower Program Explained

Last Updated: April 27 2018
Article by Anna Markiewicz

On July 14, 2016 the Ontario Securities Commission (the "OSC" or the "Commission") launched the Office of the Whistleblower, which administers the Whistleblower Program (the "Program"), the first paid whistleblower program by a securities regulator in Canada. The Program is intended to encourage whistleblowers to report serious securities and derivatives-related misconduct to the OSC, with the goal of increasing the OSC's effectiveness in enforcing Ontario securities laws. Individuals who meet certain eligibility criteria and who voluntarily submit information to the OSC are eligible for compensation of up to $5 million.1 The OSC has indicated that it sees the Program as an opportunity for reporting issuers and registrants to review and enhance their compliance systems and to foster an environment where internal reporting of misconduct is encouraged. It is therefore more important now than ever for companies to take proactive steps to detect and manage internal problems before they become the subject of a tip reported by a whistleblower through the Program's hotline.

Award Eligibility

In order to be eligible for an award, information provided by the whistleblower must be of meaningful assistance to the OSC in investigating a matter and obtaining an order in an administrative proceeding2, which imposes monetary sanctions and/or a voluntary payment to the OSC of $1 million or more. In addition, both the information provided and the whistleblower must meet the eligibility criteria within the OSC's whistleblower policy.

In instituting the Program, the OSC has indicated that it is looking for tips with respect to serious offences or serious potential offences the OSC would otherwise not uncover, and the kinds of securities laws violations that the OSC often targets in its enforcement actions, such as misstatements in accounting and disclosure violations.3 The whistleblower's eligibility for an award is not explicitly limited by the type of securities law violation reported, other than that the information provided must be with respect to a serious violation of Ontario securities law. Examples of the types of violations targeted that have been provided by the Office of the Whistleblower include insider trading or tipping, fraud, misleading corporate disclosure or financial statements and trading related misconduct. Regardless of whether the information results in a whistleblower award, the OSC may use it for other purposes in carrying out its mandate.

However, the information submitted must meet specific criteria in order to qualify for an award. Primarily, the information provided must be original, in that it is not already known to the OSC from any other source, and the whistleblower has obtained it through either independent knowledge4 or independent analysis5. Secondly, it must also be voluntary, having been submitted before receiving a request from the OSC, another securities regulator, a recognized self-regulatory organization ("SRO") such as the Investment Industry Regulatory Organization of Canada or the Mutual Fund Dealers Association, or a law enforcement agency. The information is not considered to be voluntarily reported if it is provided in connection with pre-existing reporting obligations. Finally, the information provided by the whistleblower must be timely, specific and credible.

Where possible, whistleblowers who are employees of an entity that is the subject of their concern are encouraged to report the misconduct through their employer's internal compliance and reporting mechanisms first, before submitting a report to the Office of the Whistleblower. Although internal reporting is not a mandatory requirement to filing a report with the Program or being eligible for an award, not undertaking this step can negatively affect the quantum of any award to which the whistleblower may be entitled. Whistleblowers who report internally must also submit a Whistleblower Submission Form to the OSC within 120 days of the internal reporting to be eligible for an award.

The whistleblower providing information to the Program must also meet certain eligibility criteria in order to qualify for an award. A whistleblower can be an individual or a group of individuals acting jointly.6 Potential whistleblowers include employees, former employees, suppliers, contractors, clients and others. Individuals with roles in compliance, investigation, or audit functions (including officers, directors, chief compliance officers, and auditors) are not generally eligible for an award, however, exceptions exist7.

Controversially, individuals or groups of individuals who were involved in the misconduct are not foreclosed from being whistleblowers who receive an award. However, provision of information by a culpable whistleblower does not preclude the OSC from taking enforcement action against that whistleblower for the whistleblower's role in the violation of Ontario securities law. The degree to which the whistleblower is complicit in the violation of Ontario securities law is likely to be taken into consideration in assessing the quantum of any award to which the culpable whistleblower may be entitled.

Ultimately, eligible whistleblowers may receive an award of between 5 and 15 percent of the total monetary sanctions imposed and/or voluntary payments made, up to a maximum of $5 million. For awards up to $1.5 million, the award is not contingent on collections. However, awards of between $1.5 million and $5 million are only paid if a sanction amount of $10 million or more is collected. Following recommendations from OSC Staff, the Commission will determine the whistleblower's eligibility and award amount on the basis of factors such as timeliness and significance of the information provided, degree of cooperation, internal reporting efforts and culpability in misconduct.

Protection for Whistleblowers

The Program offers a number of whistleblower protections, including confidentiality, the option to report anonymously and anti-reprisal measures. These protections apply even if the information provided to the OSC by the whistleblower does not result in enforcement action or does not meet the eligibility criteria for an award.

Although the confidentiality of whistleblowers cannot be guaranteed, the OSC has indicated that it will make all reasonable efforts to protect that confidentiality. For example, the OSC will not share a whistleblower's identity, or information that could reasonably be expected to reveal the whistleblower's identity, with another regulator or law enforcement agency without the whistleblower's explicit consent. However, the identity of a whistleblower may be disclosed if the information provided by the whistleblower is used as evidence in an OSC tribunal proceeding or if its disclosure is necessary to permit a respondent to make full answer and defence. The information could also be disclosed pursuant to a Freedom of Information and Personal Protection of Privacy Act request.8

Whistleblowers can report anonymously if they are represented by a lawyer, in which case the lawyer would submit the necessary Whistleblower Submission Form to the OSC. Anonymity can be maintained throughout the investigation and enforcement process. However, identifying information would have to be provided to the OSC before an award payment could be made to the whistleblower so that eligibility for an award could be confirmed.

It is an offence under the Ontario Securities Act (the "Securities Act") to take reprisal against an employee who reports or plans to report potential violations of securities laws. A reprisal is any measure taken against an employee that "adversely affects" that employee's employment, including disciplining, demoting or suspending the employee, or threatening to do so, terminating or threatening to terminate them, intimidating them and imposing or threatening to impose a penalty relating to their employment. The OSC can consequently take enforcement action against employers who retaliate against whistleblowers. Any person or company who is guilty of an offence is liable on conviction to a fine of up to $5 million, imprisonment of up to five years, or both.

The Securities Act also voids certain contractual provisions between employers and employees which are construed as being designed to silence whistleblowers from reporting securities related misconduct. Such provisions include confidentiality provisions in employment contracts that preclude or purport to preclude employees from such reporting. The reprisal provisions of the Securities Act apply regardless of whether misconduct is reported internally to the employer, to the OSC, to an SRO, or to a law enforcement agency.

An employee who has faced reprisals may also seek certain civil remedies through the court system. In addition, in its 2017 Budget, the Ontario government has revealed that one of its legislative initiatives will involve amendments to securities law to create a civil cause of action for whistleblowers where a reprisal is taken against them contrary to securities or commodities futures law. The civil cause of action is intended to accompany and enhance the anti-reprisal protections discussed above.

Best Practices

Upon its implementation, Maureen Jensen, Chair and CEO of the OSC called the Program "a powerful addition to [the OSC's] enforcement arsenal and a game-changer for securities enforcement in Canada". If the Dodd-Frank Whistleblower Program operated by the U.S. Securities and Exchange Commission (the "SEC"), which was implemented in 2011 and on which the Program is based, is any indication, the volume of tips received should increase significantly.9 Indeed, a month and a half after the rollout of the Program, the OSC reported that the Office of the Whistleblower had received more than 30 tips reporting potential violations of securities laws.10 Furthermore, in its 2017 Annual Report, the OSC stated that, since its launch, the Office of the Whistleblower has received "several credible tips and high quality information".

It is not clear whether tips received by the OSC pursuant to the Program have resulted in more formal investigations or enforcement proceeding being commenced, and it is still too early to tell whether they will result in more sanctions being imposed. However, one of the Program's main criticisms has been that it creates an incentive for those who might otherwise report conduct within their own companies to circumvent internal compliance regimes in order to provide "original" information to the OSC. Such actions could prevent companies from internally investigating and fixing potential issues before an OSC investigation is commenced or from self-reporting wrongdoing to avail themselves of full range of reduced sanctions and other options available under OSC's settlement and credit for co-operation regimes.

It is therefore critical for companies to have in place strong controls and a corporate culture which create a credible alternative to external whistleblowing. If employees are encouraged to report misconduct and concerns internally without fear of retaliation, and are assured that their complaints will be taken seriously and dealt with confidentially, potential problems can be detected as early as possible, decreasing the risk of regulatory action.

Footnotes

1 OSC Policy 15-601 Whistleblower Program

2 The Program does not apply to matters pursued via criminal and quasi-criminal proceedings. It does, however, include approvals of settlements in administrative proceedings.

3 Speech by Maureen Jensen to Toronto Regional Board of Trade on September 27, 2016.

4 To be obtained through independent knowledge, the information must be derived from a whistleblower's experiences, communications and observations in employment, business, or social interactions.

5 Independent analysis involves the critical analysis of publicly available information or data that reveals additional insight that is not generally known or available to the public.

6 Businesses or organizations cannot be whistleblowers. If multiple whistleblowers independently report information relating to the same conduct, they will be placed in line for awards, based on the timing of their report submissions. The first fully eligible whistleblower in line may receive an award, provided they meet all eligibility criteria. For individual whistleblowers who jointly submit a report, the OSC will consider various factors, including the amount and effectiveness of the assistance provided by the whistleblowers, to determine how the award is divided between multiple whistleblowers.

7 See Section 15(2) of OSC Policy 15-601 for the exceptions.

8 Although the OSC maintains that it would argue for the denial of such disclosure.

9 The volume of tips received by the SEC has risen dramatically since the inception of its Office of the Whistleblower, with more than 15,000 whistleblower tips received since the introduction of the rewards-based program in 2011. However, it is notable that the SEC program does not have an award cap and allows award amounts of between 10 and 30 percent.

10 Speech of Maureen Jensen to Toronto Regional Board of Trade on September 27, 2016.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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