Taking cues from the SEC’s Whistleblower Program, Canadian securities regulators in two jurisdictions separately launched landmark whistleblower programs of their own—but while one provides a financial incentive for those who come forward with information, the other does not.
Unlike the United States and most other countries, Canada has no national securities regulator. “The scope of jurisdiction over securities laws is somewhat more complicated in Canada than it is in other parts of the world, because each province has its own securities commission,” says Caitlin Sainsbury, a partner in the Toronto office of law firm Borden, Ladner, Gervais. Companies have one senior regulator to whom they report, depending on where they are headquartered, or for companies outside of Canada, the exchange on whom they trade upon.
Many multinational companies with operations in Canada list themselves on the Toronto Stock Exchange and, therefore, fall under the scope of the Ontario Securities Commission (OSC). For this reason, companies will want to take note of the OSC’s newly launched Office of the Whistleblower and Whistleblower Program.
The overall purpose of the OSC whistleblower program, which took effect July 14, is to encourage the reporting of potential securities-related law violations. “Our whistleblower program is a powerful addition to our enforcement arsenal and a game-changer for securities enforcement in Canada,” OSC Chair and CEO Maureen Jensen said in a statement.
But Ontario is not the only Canadian securities regulator that has launched a landmark whistleblower program. On June 20, the regulatory and oversight body for Québec’s financial sector—Autorité des marchés financiers (AMF)—also announced a newly launched whistleblower program of its own. According to the AMF, the overall intent of this program is “to better protect individuals who report wrongdoing and enable the AMF to gather information on offences committed under the laws and regulations it administers.”
Both the OSC and AMF whistleblower programs provide anti-retaliation and confidentiality protections for whistleblowers. The most significant difference between the two, however, is that the OSC will offer financial incentives for whistleblowers who come forward with information, representing the first and only whistleblower program of its kind by any Canadian securities regulator.
As Compliance Week previously reported, the OSC first began seeking feedback on its whistleblower program in February 2015, when it published its initial consultation paper. The final version now includes some important new changes.
Broadly speaking, the OSC defines a “whistleblower” as an individual who provides voluntary, original information regarding an alleged violation of securities law to the OSC. But the final version significantly expands the scope of who may qualify as a whistleblower.
“Our whistleblower program is a powerful addition to our enforcement arsenal and a game-changer for securities enforcement in Canada.”
Maureen Jensen, Chair and CEO, Ontario Securities Commission
In the final version, chief compliance officers, directors, officers, internal or external auditors, and in-house counsel may be eligible for a whistleblower award only under the following circumstances:
The whistleblower has a reasonable basis to believe that disclosure of the information to the OSC is necessary to prevent the subject of the whistleblower submission from engaging in conduct that is likely to cause or continue to cause substantial injury to the financial interest or property of the company or investors;
The whistleblower has a reasonable basis to believe the subject of the whistleblower submission is engaging in conduct that will impede an investigation of the misconduct; or
At least 120 days have elapsed since the whistleblower provided the information to the company’s audit committee, chief legal officer, CCO (or their respective functional equivalents), or the individual’s supervisor.
The ability of in-house counsel to qualify as whistleblowers has garnered pushback from those in the legal community. Many have expressed the concern whistleblower reports made by in-house counsel would likely be in breach of their confidentiality obligations under the Rules of Professional Conduct.
External counsel, on the other hand, are ineligible from receiving a whistleblower reward, “unless disclosure of that information would otherwise be permitted by a lawyer under applicable provincial or territorial bar or law society rules, or the equivalent rules applicable in another jurisdiction,” the policy states.
Another controversial section of the policy states that individuals complicit in the violation of securities laws may still be eligible for a whistleblower reward, although the degree of culpability would be factored into any potential reward. Those who have been criminally convicted will not be eligible.
“We fundamentally disagree that those who participate in an illegal act should be eligible for any compensation,” the Canadian Council of Chief Executives wrote in a comment letter. This would run counter to efforts by both governments and corporations to promote ethical business conduct.” Despite concerns, this section was approved.
Under the OSC program, eligible whistleblowers who voluntarily submit information to the OSC concerning a violation of Ontario securities law could receive a financial reward between 5 and 15 percent of the monetary sanctions or voluntary payments. Even this amount, however, does not come close to potential whistleblower awards under the SEC’s Whistleblower Program, which can range from 10 to 30 percent of the money collected when the monetary sanctions exceed $1 million. The SEC’s whistleblower program has awarded more than $85 million to 32 whistleblowers since the program’s inception in 2011.
INELIGIBLE VS. ELIGIBLE WHISTLEBLOWERS
Below is an excerpt from the Ontario Securities Commission’s Whistlleblower Policy explaining who is and is not eligible for a whistleblower award.
Whistleblowers who are ineligible for a whistleblower award
15. (1) Subject to the exceptions in subsection (2), whistleblowers in one or more of the following categories will generally be considered ineligible for a whistleblower award:
(a) those who without good reason refused a request for additional information from Commission Staff under section 5 of the Policy;
(b) those who disclosed information provided to a whistleblower by Commission staff or of which the whistleblower becomes aware because of the whistleblower’s ongoing participation in the investigation of a matter, contrary to section 9 of the Policy;
(c) those who obtained information in connection with providing legal services to, or conducting the legal representation of, a client that is, or that employs, the subject of the whistleblower submission, unless disclosure of that information would otherwise be permitted by a lawyer under applicable provincial or territorial bar or law society rules, or the equivalent rules applicable in another jurisdiction;
(d) those who obtained information in connection with providing legal services to, or conducting the legal representation of, an employer that is, or that employs, the subject of the whistleblower submission, unless disclosure of that information would otherwise be permitted by a lawyer under applicable provincial or territorial bar or law society rules, or the equivalent rules applicable in another jurisdiction;
(e) those who obtained information in connection with providing internal audit or external assurance services to, or conducting an internal or financial audit of a client, or employer that is, or that employs, the subject of the whistleblower submission, unless disclosure of that information would otherwise be permitted by an auditor, under the applicable rules of professional conduct;
(f) those who obtained information while conducting an inquiry or investigation into psssible violations of law by a client or employer that is, or that employs, the subject of the whistleblower submission;
(g) those who were directors or officers of the entity that is, or that employs, the subject of the whistleblower submission at the time the information was acquired;
(h) those who had job responsibilities as Chief Compliance Officers (CCO) of or a functionally equivalent position at the entity that is, or that employs, the subject of the whistleblower submission at the time the information was acquired;
(i) those who are or were employed by an independent contractor for the Commission, another securities regulatory authority, an SRO or a law enforcement agency at the time the information was acquired;
(j) a spouse, parent, child, sibling or reident of the same household of an employee, former employee, or contractor of the Commission, another securities regulatory authority, an SRO or a law enforcement agency at the time the information was acquired;
(k) those who acquired the information from a person who is ineligible for a whistleblower award, unless the information is about a possible violation of Ontario securites law involving that person;
(l) those who have been convicted of a criminal offence in relation to the subject matter of the matter for which the whistleblower could otherwise recieve an award;
(m) those who, in in their dealings with the Commission, knowingly make statements or submit information that is misleading or untrue or does not state a fact that is required to be stated to make the statement not misleading
(n) those who make a frivolous, vexatious or meritless submission to the Program; or
(o) those who obtained or provide the information in circumstances which would bring the administration of the Program into disrepute.
(2) A whistleblower listed in paragraphs (1) (d) to (h) may be eligible for a whistleblower award if:
(a) the whistleblower has a reasonable basis to believe that disclosure of the information the Commission is necessary to prevent the subject of the whistleblower submission from engaging in conduct that is likely to cause or continue to cause substantial injury to the financial interest or property of the entity or investors;
(b) the whistleblower has a reasonable basis to believe the subject of the whistleblower submission is engaging in conduct that will impede an investigation of the misconduct; or
(c) at least 120 days have elapsed since the whistleblower provided the information to the relevant entity’s audit committee, chief legal officer, CCO (or their respective functional equivalents) or the individual’s supervisor, or at least 120 days have elapsed since the whistleblower received the information, in the circumstances the whistleblower received the information, the whistleblower became aware that one or more of those individuals were already aware of the information.
Source: Ontario Securities Commission
To be eligible for a monetary award under the OSC program, the whistleblower must provide “high-quality original information” that meaningfully aids the OSC investigation and where the OSC imposes total sanctions or settlement payments of at least $1 million.
The OSC program further “encourages,” but does not require, individuals to report potential violations of securities laws through their employers’ internal report mechanisms before approaching the OSC. This is another provision that has generated major concern among those in the business community.
“We believe that such internal reporting must be a requirement of any eligibility to qualify for a whistleblower award,” the Canadian Council of Chief Executives wrote in its comment letter. “Anything else is likely to undermine the rigorous reporting protocols that issuing companies have put in place to identify potential problems and take remedial measures.”
The maximum amount of the reward would be capped at $1.5 million—unless the OSC successfully collects or receives voluntary payments of at least $10 million. In such cases, and subject to certain conditions, eligible whistleblowers may be entitled to a maximum monetary reward of up to $5 million.
The OSC’s proposed whistleblower program originally set the maximum reward cap at $1.5 million. The OSC raised it, however, in response to stakeholder concerns that this amount was too low to adequately compensate executives who faced retaliation for reporting misconduct.
Both the OSC and AMF whistleblower programs provide anti-retaliation protections for individuals who report misconduct. Broadly speaking, employers are prohibited from terminating, demoting, disciplining, or harassing employees who report potential securities law violations.
“Individuals who want to give us certain information but have hesitated for fear of reprisals can now turn to the AMF’s Whistleblower Program,” Louis Morisset, AMF president and CEO said in a statement.
Furthermore, under the AMF whistleblower program, employees who come forward with information about potential securities law violations have immunity from potential civil lawsuits—an incentive the AMF said it will explicitly rely upon for individuals to report misconduct, as opposed to the financial incentives offered under the OSC program.
“We are convinced that this protection, combined with anti-retaliation measures, as part of a structured, well-publicized program, will have a definite impact on the quantity and quality of wrongdoing reports made to the AMF, without the need for a reward,” Jean-François Fortin, executive director of AMF enforcement said in a statement. “Our no-rewards approach also corresponds to that adopted by other regulators and organizations around the world and in Québec that have set up whistleblower lines.”
The AMF said it reached this conclusion after closely analyzing the rewards-based whistleblower programs offered by the OSC and the U.S. Securities and Exchange Commission, and the non-rewards whistleblower programs offered by the U.K. Financial Conduct Authority and the Australian Securities and Investments Commission.
“The study’s findings showed that it cannot be established with certainty, based on specific data, that a financial incentive generates more quality whistleblowing,” the AMF stated. “Instead, the AMF’s research and analysis highlight that the protection of confidentiality is what primarily motivates whistleblowers to report incidents.”
“To strengthen the program’s effectiveness, the AMF intends to work with the Québec government to propose additional anti-reprisal measures in financial sector legislation,” the AMF stated.
Under the OSC’s whistleblower program, a new section has been added to the policy, referencing a new anti-retaliation provision added to the Ontario Securities Act (OSA), effective as of June 28. Under the OSA, employers are prohibited from retaliating against employees who report securities law violations to their employer, the OSC, a self-regulatory organization, or a law enforcement agency.
This new anti-retaliation provision in the OSA renders void certain contractual provisions in an employment agreement designed to silence employees from reporting securities law violations, or from cooperating or assisting with an investigation or a judicial proceeding. This provision effectively means confidentiality or non-disparagement clauses would be unenforceable.
“Our program provides significant incentives for whistleblowers to come forward and offers robust protections,” Kelly Gorman, chief of the Office of the Whistleblower, said in a statement. “These protections apply even if the information provided to the OSC does not result in enforcement action or does not meet the criteria for an award.”
The OSC whistleblower program means that companies must tread carefully when dealing with an employee who may have engaged in misconduct.
The OSC whistleblower program does not provide for a civil right of action against employers who violate anti-retaliation provisions under the OSA, as initially indicated by the proposed whistleblower program.
Both the OSC and AMF have said they will take all reasonable efforts to protect the confidentiality of whistleblowers. The U.S. SEC whistleblower program similarly protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity.
Most companies have fairly mature whistleblower reporting systems and do a reasonable job at handling complaints that come through various reporting channels. It is the seemingly off-the-wall and dubious claims, or those from employees that have a spotty employment history where real legal troubles lurk.
“For most companies, I’m not sure they can do a great deal more than what they’re already doing,” says John Tuzyk, a partner at law firm Blakes in its Toronto office. The type of employees who are most likely to approach a securities regulator are those who know they’re on the verge of being terminated for performance-related reasons, so they invoke their anti-retaliation rights as a last resort to keep their job. “The employer then has the burden to establish that the employee did not make a complaint to the regulator in good faith, which could be difficult to do,” he says.
In other instances, employees may report an issue to securities regulators in good faith, but the complaints turn out to be unfounded because the whistleblower wasn’t aware of all the facts, or all the intricacies of the rule or regulation under which the complaint was made, Tuzyk adds. As a result, companies may need to be prepared to spend a lot of additional time and resources dealing with regulators, as opposed to an employee who reports a potential issue directly to the company’s internal reporting mechanisms, he says.
Although it might be difficult to prevent every baseless whistleblower claim, companies are not without any defenses at all. Making internal reporting mechanisms easily accessible, for example, is one way to foster a speak-up culture.
“Start by reviewing and updating policies and procedures,” Sainsbury says. Make sure employees know where and with whom to report concerns. Also, consider providing an alternative reporting mechanism, such as an internal ombudsman, in the event that their manager or supervisor is the one engaging in the potential securities law violation, she says.
What also gives companies a leg up is having in place a structured, dedicated, well-trained team to focus on the investigation of whistleblower claims. “It’s also helpful if a particular process for conducting those kinds of investigations is reflected in your policies and procedures,” Sainsbury says.
If the company does need to make a report to a securities regulator, make sure you have the appropriate documentation, and responds to those reports in a timely manner. In the event of an anti-retaliation claim, in particular, employers need to document the steps they took, the reason for taking them, and when they were taken.
The most important step supervisors and managers should take is getting back to the individual who made the complaint, rather than potentially doing more damage by either ignoring the report, or exacerbating it through retaliation. Employees need assurance that they’re being taken seriously.