The recent approval of new whistleblower bounty rules by the United States Securities and Exchange Commission has brought attention back to how the Dodd–Frank Wall Street Reform and Consumer Protection Act will affect Canadian companies.
The latest rules, approved by the SEC on May 25, give whistleblowers the chance for a windfall of 10 to 30 per cent of the funds regulators recover through original information that leads to the recovery of more than US$1 million.
Cross-border lawyers have warned Canadian companies for a while that the sweeping changes stemming from Dodd-Frank would affect them. That’s the case primarily for Canadian companies listed on U.S. exchanges, but other Canadian entities could feel it too if they do any U.S.-related business.
“Whistleblower risks are a new reality for U.S. public companies and Canadian companies regulated in any way by the SEC,” says John Keefe, a partner at Goodmans LLP. “It is important that Canadian corporate counsel understand these regulations and implement systems to respond to these new risks.”
Keefe adds Canadian companies should be aware the new regulations just enacted by the SEC to implement Dodd-Frank may increase their exposure to SEC investigations and prosecutions for securities fraud and anti-bribery violations.
The Association of Corporate Counsel clearly opposes the new bounty rules. The largest organization representing in-house counsel in the U.S. says it favours the use of internal reporting structures before information is passed directly to the SEC by potential whistleblowers. The new rules mean the internal reporting structures can be bypassed.
The ACC, which also has a presence in Canada with chapters in Ontario and Quebec, sent two letters to the SEC, noting its objections. They were part of the more than 1,500 comments the American securities regulator received before it passed the cash-for-whistleblowers new rule.
“The SEC’s bounty rule is a Pandora’s box that, when opened, is likely to create new and even unanticipated harms rather than promoting better reporting of potential problems,” says ACC general counsel Susan Hackett. “They are assuming that offering whistleblowers money to come forward will yield better results without imposing disproportionate costs for companies, shareholders and the very compliance programs that ACC members have spent decades building.”
Dodd-Frank is a huge piece of legislation that was meant to regulate the American banking system following the financial crisis by tackling systemic risk, reining in derivative products, improving consumer protection, and increasing public company disclosures.
Beyond the whistleblower payments, Dodd-Frank contains other regulations that can impact Canadian companies, say lawyers with American firm Paul Weiss, which has an extensive Canadian practice and recently opened a new office in Toronto.
“It is a massive piece of legislation and could have a huge impact on Canadian companies,” Andrew Foley, a partner at Paul Weiss, said at a recent Toronto seminar.
Among other things, Canadian extractive industries — oil, gas, and mining — face new requirements under miscellaneous disclosure provisions of Dodd-Frank. The act also increases the disclosure burden on Canadian companies in terms of reporting payments they make to non-U.S. governments.