Wendy Berman and Lara Jackson are partners in the securities litigation group of Cassels Brock & Blackwell LLP.
The Ontario Securities Commission's new Office of the Whistleblower opens for business on Thursday. The recently announced program mimics the regime established by the U.S. Securities and Exchange Commission several years ago, and will pay out substantial awards for credible, actionable, original information that leads to convictions and/or the recovery of funds from wrongdoing in Canadian capital markets.
The OSC program promises to pay whistle-blowers up to $5-million for tips. To be eligible, a tip must lead to sanctions of at least $1-million or more. Controversially, "culpable whistle-blowers" are eligible. The OSC news release announcing the program refers to "strong incentives" that will act as a "game-changer."
At first blush, these high expectations may be warranted: The SEC has received more than 15,000 tips and has paid more than $85-million (U.S.) in awards to 32 whistle-blowers since it introduced its rewards-based program in 2011. However, while the SEC's awards can be significant (the three largest to date are $30-million, $17-million and $14-million), it is a very small percentage of tippers who actually receive payouts.
The OSC program is not without criticism and concern from public companies and their advisers. There is concern that it creates an incentive for those who might otherwise report conduct within their own companies to "go rogue" and circumvent internal compliance regimes (now standard corporate governance best practice) in order to provide "original" information to the OSC.
This lure may functionally rob companies of their ability to investigate and remediate potential issues before an OSC investigation. It may also affect a company's opportunity to self-report wrongdoing and avail itself of the full range of reduced sanctions and other options available under the OSC's no-consent settlement and credit for co-operation regimes.
(According to the SEC's self-reported statistics in its 2015 annual report, approximately half of whistle-blowers who were entitled to a reward were current or former employees of the relevant company, and 80 per cent of those reported internally prior to reporting to the SEC, which suggests that such fears are misplaced.)
Another significant risk is for "tag-along" civil class actions that often piggyback on the commencement of regulatory investigations: In the United States, a number of class actions have been commenced in reliance on whistle-blower allegations and SEC disclosures investigations, resulting in significant settlements.
A reward-based program may also incentivize individual whistle-blowers to submit tips that fall short of the "high-quality, original information" sought by the OSC, potentially overburdening the agency and simultaneously creating reputational and financial risks. It seems unlikely that the OSC will be resourced like the SEC, which launched its well-funded program after the 2008 financial crisis and numerous financial scandals.
There is also the issue of whistle-blower vulnerability. Considering how few tips will ultimately lead to rewards, the OSC has introduced measures to ensure that whistle-blowers are protected. Whistle-blowers represented by counsel may remain anonymous throughout the investigation and enforcement process, and are required to give identifying information to the OSC only when it comes time for payment.
The OSC also plans to prosecute retaliation under the Ontario Securities Act or the Commodity Futures Act, and to deem unenforceable any contractual provisions that aim to silence whistle-blowers.
It remains to be seen whether the Office of the Whistleblower will truly be a game-changer, but one hopes for sufficient transparency to track its usefulness.