OSC releases further changes to proposed whistleblower program

On October 28, 2015, the Ontario Securities Commission (OSC) released further changes to its proposed whistleblower program. The main changes relate to eligibility of whistleblowers, financial incentives, and the role of internal whistleblower programs.

Background

On February 3, 2015, the OSC released its Staff Consultation Paper on the Proposed Framework for an OSC Whistleblower Program. In response, the OSC received comment letters and obtained feedback through a public roundtable discussion. After considering this feedback, the OSC has now issued a draft Whistleblower Policy and a request for further comments. The draft Whistleblower Policy differs from the Staff Consultation Paper in three primary areas: whistleblower eligibility, financial incentives, and the role of internal whistleblower programs.

Whistleblower eligibility

The Staff Consultation Paper excluded from whistleblower eligibility auditors, directors and officers, chief compliance officers, and others who learned of the misconduct as a result of the company’s internal process or investigation. The draft Whistleblower Policy provides that these persons may be eligible:

• when the whistleblower believes the disclosure is necessary to prevent substantial injury to the company or investors;
• when the whistleblower believes the company is engaging in conduct that will impede an investigation; or
• when at least 120 days have elapsed since the whistleblower provided the information through the appropriate internal channels.

The Staff Consultation Paper also proposed to exclude culpable whistleblowers. The draft Whistleblower Policy changed this position, and permits these persons to receive whistleblower awards. However, the level of the culpable whistleblower’s involvement in the conduct is a factor that may decrease the amount of the award. In addition, the OSC will not grant immunity to culpable whistleblowers.

Financial incentives

The Staff Consultation Paper originally provided a cap for the financial award of $1.5 million. The feedback recommended an increase to the cap, noting the need to provide adequate incentive for whistleblowers to report information to the OSC. As a result, the revised Whistleblower Policy provides a $1.5 million cap where monetary sanctions or voluntary payments exceed $10 million and a $5 million cap where the OSC collects monetary sanctions or voluntary payments in excess of $10 million.

Based upon the requirement for collection (rather than mere sanction) to exceed the $1.5 million cap, an award over $1.5 million would be exceedingly rare and therefore, the OSC Whistleblower Policy may not be sufficient to encourage reports of wrongdoing by senior officers in a corporation.

Role of internal whistleblower programs

The OSC received numerous comments respecting encouragement and support of internal whistleblower programs. In response, the OSC made changes in the draft Whistleblower Policy:

• The Whistleblower Policy expressly encourages internal reporting, although it is still not mandatory for eligibility;
• A whistleblower that reports internally can still be eligible under the OSC program, in certain circumstances. For example, where a whistleblower reports internally, and then the company provides the information to the OSC, the whistleblower may be eligible, provided the whistleblower reports the same information to the OSC within 120 days of the initial internal report; and
• Reporting to the internal whistleblower program is a factor in assessing the amount of the whistleblower award.

Unfortunately, the proposal does not require whistleblowers to report internally or justify why they failed to do so as a condition of qualifying for a reward. While requiring an internal report may not be appropriate in all cases, the implementation of robust internal compliance systems and reporting mechanisms should be encouraged. To allow whistleblowers to bypass established internal reporting mechanisms that permit anonymous reporting may disqualify registrants and reporting issuers from being able to self-identify, self-remediate and self-report in order to qualify for credit for cooperation.