OSC raises maximum whistle-blower reward to $5-million

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The Ontario Securities Commission has raised the maximum payout for whistle-blowers to $5-million under a groundbreaking new program that will reward people who come forward with tips about securities crimes.

New guidelines unveiled on Wednesday include several changes to the OSC's original design for a whistle-blower program, including a move to boost the maximum payout to $5-million from the original proposal of $1.5-million. The change comes after critics said $1.5-million is not enough to induce many senior people to risk their careers by revealing wrongdoing.

The OSC is the first securities regulator in Canada to create a program to pay for tips. The U.S. Securities and Exchange Commission launched a whistle-blower program in 2011 and has said it is working better than hoped, generating 3,600 tips last year alone and paying out more than $50-million (U.S.) to tipsters by the end of last year.

"The OSC recognizes that whistle-blowers are an incredibly valuable source of information," OSC chair Howard Wetston said in a statement. "We are providing strong incentives for them to come forward."

The OSC's new proposed policy would allow payments of 5 to 15 per cent of the total penalties imposed in a case when tips have resulted in successful prosecutions that lead to total fines or penalties of at least $1-million.

Payouts will continue to be capped at $1.5-million in cases where penalties total less than $10-million, but the OSC said the funds will be paid even if fines are not paid by the wrongdoers.

However, the OSC has introduced a new rule saying payouts could rise to as high as $5-million when total penalties exceed $10-million and when the OSC collects fines of at least $10-million.

Securities lawyer Kelley McKinnon, a former chief litigation counsel at the OSC, said whistle-blowers often find that their work environment becomes "untenable" after exposing wrongdoing, and many face career damage.

"I suspect the OSC said that to really get significant tips from senior people, $1.5-million was too low," she said. "I think the OSC is looking at this as something that may give them more significant tips on more significant potential violations."

Kelly Gorman, deputy director of enforcement at the OSC, said the new program is aimed at getting information about crimes that are particularly difficult to detect, such as insider trading, market manipulation, accounting fraud and disclosure violations.

"This program is really aimed at identifying cases that are rarely uncovered or detected without the assistance of a whistle-blower," she said.

The OSC also said it will allow payments to be made to people who are involved in the wrongdoing, but the OSC said it will consider the degree to which the whistle-blower was complicit in the crime.

Securities lawyer Mindy Gilbert said she disagrees with providing payments to people involved in crimes, saying it feels "inherently wrong" to reward them.

Ms. Gilbert also said the program should require people to report internally first before they can go to the OSC so that companies are alerted to wrongdoing.

"Boards of directors would find it most offensive that employees can go off and talk to the commission about these wrongdoings, and while the commission is investigating the alleged wrongdoing it really allows it to continue during this investigation," she said.

But Mike Savage, leader of fraud investigation services at Ernst & Young, said an OSC program is preferable to having a whistle-blower spread information publicly throughout social media.

"I think issues would come out one way or the other, and this just provides another channel which is slightly more controlled than social media but still somewhat separate from the company," he said.

Mr. Savage said the new OSC policy should spur companies to update internal whistle-blower policies, and consider expanding them to cover not just employees but also suppliers, business partners and customers who could contact the OSC with concerns. Companies and boards of directors should also develop contingency plans to ensure that they know how to respond if the OSC contacts them, he said.

The OSC said some people will generally be ineligible for the whistle-blower program – including lawyers, auditors, chief compliance officers, corporate directors and officers – but there could be exceptions, such as cases where nothing is done internally after wrongdoing is reported.

The commission has also created a "no-retaliation" provision in its new rule, saying it "expects" employers will not discipline or retaliate against whistle-blowers. The provision does not specify penalties, but Ms. Gorman said the OSC could bring a case against a company under its broad powers to protect the public interest.

The proposed rules are open for public comment until Jan. 12 and the OSC said it aims to have the program in place by next spring.