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Incenting securities snitches

Legal Report: White Collar
|Written By Jennifer Brown
Incenting securities snitches
Illustration: Gary Neill

Will financial rewards to whistleblowers from the OSC help or hinder companies from complying with securities laws?

On the way to her office one morning in early March, Nadia Campion glanced up at the digital display in the elevator she had just entered and noticed an ad for a snitch program that has caused more than one client to pick up the phone and call her. It was a promotion from the Ontario Securities Commission’s Office of the Whistleblower: “Know of a company breaking securities law? We want to hear from you.”

Campion, a partner at Polley Faith LLP in Toronto, says she has questioned whether the prospect of financial rewards will have an impact on the number of whistleblowers who come forward, the quality of the information and the seriousness of the conduct reported. But in a January article published by the New York School of Law on the topic, 2016 was heralded as a “banner year” for the SEC and Commodity Futures Trading Commission’s whistleblower programs.

“The stats look pretty favourable to the regulators,” she says.

“In my view, I think that financial rewards are likely the best way forward for regulators, and in any event, the criteria for obtaining a financial reward are difficult to satisfy — they provide a good counterweight to the concerns expressed by critics and act as a strong gatekeeper to prevent the misuse of the whistleblower program,” says Campion.

The OSC’s whistleblower program was introduced in July 2016 and offers financial rewards of up to $5 million to those who voluntarily come forward with information — provided, of course, that they satisfy certain eligibility criteria and that the information submitted is of real assistance to the OSC and results in monetary sanctions of $1 million or more. The rewards promised are potentially much less, but the program is somewhat similar to the U.S. Securities and Exchange Commission program created in 2011, as a reaction to the 2008 financial crisis. So far, the SEC has paid out US$149 million to 41 whistleblowers.

In January, the SEC announced an award of $7 million to be split between three whistleblowers who helped the SEC prosecute an investment scheme.

In the Ontario program, individuals who participate in the misconduct reported are also eligible for a financial reward. In addition to financial rewards, whistleblowers to the OSC are promised various protections, including that the OSC will use all reasonable efforts to keep the identity of the whistleblower confidential. And, employers of whistleblowers are strictly prohibited from taking any retaliatory measures.

By late September, the OSC reported it had received more than 30 “credible” tips reporting potential violations of securities laws such as mistakes in accounting and disclosure violations.

Critics of the OSC whistleblower program argue that providing financial rewards will give rise to an “American–style bounty program” and may lead to individuals coming forward with incomplete or misleading information that may implicate others for nefarious or monetary motives. Also, giving wrongdoers financial rewards may be contrary to the jurisdiction’s common law tradition that one should not profit from their crimes.

John Tuzyk, partner at Blake Cassels & Graydon LLP, says whistleblower programs with cash rewards represent the “continuing evolution” of the privatization of securities law enforcement that started with securities class actions.

“You pay people to come forward with complaints and then class action lawyers bring secondary market claims: It’s a market-driven privatized system,” he says.

Tuzyk argues the whistleblower program creates disincentives for anyone to use internal reporting programs and mechanisms that companies were already required to set up under the existing national rules.

This means that corporations and employers lose control of the disclosure and internal investigation process, which could be problematic.

“Essentially, individuals with evidence of wrongdoing may jump the queue to the detriment of the corporation/employer and may make it difficult for such entities to defend themselves or at least manage the process,” Campion says.

Campion says these criticisms “have had some traction.” Last summer, Quebec’s Autorité des marchés financiers introduced its new whistleblower program, which does not provide any financial rewards, and Alberta’s regulators have announced they have opted to go with a no-rewards-for-tips whistleblower policy.

In the face of all this, Campion says, corporations, with the assistance of their in-house legal teams, should create a culture of reporting internally without fear of retaliation and develop a concrete framework for addressing allegations made by whistleblowers. “As I recently said to one in-house lawyer on the topic: ‘In the absence of an effective internal reporting process, whistleblowers will contact the OSC directly, particularly if they will be paid for their tips.’”

Campion says the cash-for-information whistleblower program creates a big risk for companies that don’t have robust reporting programs or the right culture and incentives provided to employees to report internally first. Instead, the incentive now is to go to the OSC.

Academically, she says, the conclusions drawn elsewhere, such as in Quebec and Europe, seem to suggest the financial reporting doesn’t improve the quality of information reported. However, the stats in the U.S. from the SEC seem to suggest they are getting a lot of tips.

“Ultimately, what companies and their in-house lawyers want to do is control the process,” says Campion.

Barbara Hendrickson of BAX Securities Law says internal reporting policies and the OSC’s whistleblower program don’t have to be inconsistent with each other. If an issuer has a robust internal policy, they can potentially deal with issues before they are escalated to the OSC, and most public companies will have a program in their own code of business ethics.

“It’s a big step to go to the OSC, for anyone,” says Hendrickson. “If people felt there were internal procedures in place and their concerns would receive a fair hearing and there would be no retaliation, then they might be more likely to go internally. I guess the only caveat is how serious it is — that may affect a whisteblower’s confidence in the internal control system.”

Campion does agree a financial rewards program is probably better than what Quebec and Alberta have. From a regulator’s perspective, it increases the chance they will come across good and reliable information as opposed to a program where there is no financial incentive.

“I do think there is a good balance when you read the various policies of the OSC and what they will consider in terms of giving a financial reward,” she says.

In Ontario, general counsel can also be whistleblowers, which Campion says calls into question whether an in-house lawyer would be offside their solicitor-client privilege obligations.

If someone made an internal complaint and the company dealt with it internally, there is an existing policy on companies getting “credit for co-operation.” The OSC Staff Notice 15-702 Credit for Cooperation program was revised in 2014 and addresses self-disclosure and expectations from market participants in such a situation. However, how it actually works in practical terms is somewhat of a mystery to some in the securities bar.

They would like the OSC to be more transparent about what happens when people have self-disclosed under the Credit for Cooperation program or fixed a problem that was detected and then disclosed. Some have asked for examples where the OSC has applied the policy and what some of the fact patterns were when it has been applied.

“There is less information than would ultimately be out there, ideally,” says Danielle Royal, partner with Stikeman Elliott LLP. She says there should be more transparency in this area. “If you think about compliance as a tool box, the whistleblower program is just one piece of it. We know the enforcement authority doesn’t have the resources to track everything, so I think it’s in everyone’s interest to provide incentives to the companies to do their own internal reviews and enforcement.”

Royal says she understands the rationale for a whistleblower program, but she says it will be “a more interesting conversation to have in a year” to see if the OSC has struck the right balance.

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