Securities litigators are expressing concerns about the Ontario Securities Commission’s newly released whistleblower policy that they believe could lead employees, officers, and even legal advisers to blindside management with ostensibly anonymous reports to the regulator.
The policy proposal, released yesterday, increases the maximum reward to $5 million from a previously proposed $1.5 million, although the higher amount can only be achieved if the information results in fines or payments worth upwards of $35 million.
While the maximum payout has been raised, it still falls short of the tens of millions paid out by the U.S. Securities and Exchange Commission and it may not be enough to encourage senior officers at large corporations, who commonly earn more than $10 million a year, to risk their careers, a lawyer suggests.
“The amounts are still low compared to the SEC program, but you know, I think it’s a step in the right direction,” says Linda Fuerst, a securities litigator at Norton Rose Fulbright Canada LLP. “If the commission is serious about providing meaningful incentives to individuals, particularly in senior positions, to be reporting serious misconduct, then they’re going to have to find another source of funding and increase the maximum award.”
Perhaps a bigger issue, says Fuerst, is that the new whistleblower policy gives companies little opportunity to look into allegations internally before being confronted with a high-profile public investigation. Under the program, employees can report misconduct directly to the OSC without going to their supervisor or internal compliance officer.
Senior officers, directors, auditors, and legal advisers are generally excluded from the program but they can take advantage of it in specific circumstances, such as situations in which they believe the organization is on the verge of engaging in misconduct that “is likely to cause substantial injury to the financial interest or property of the entity or investors.”
With no requirement by whistleblowers to report internally first, a company may be taken completely off guard by the allegations. “There’s a huge benefit to encourage individuals to report first internally to give the organization an opportunity to look at the allegations, and if necessary, conduct an appropriate internal investigation and decide whether there’s any merit to them before the regulators get involved,” says Fuerst.
Fuerst acknowledges that many employees may have reason to fear retaliation from managers who may be involved in misconduct. In those cases, however, whistleblowers should be required to explain to the commission why they didn’t report the allegations internally first.
“I think that what needs to be done is to require that a whistleblower report internally or be able to provide a reasonable explanation for why the whistleblower didn’t,” she says. “If the whistleblower says, ‘I’m in a small shop and we didn’t have any program for this,’ or, ‘I was legitimately afraid of retaliation and here is why, and I can explain that,’ then of course they should still be able to qualify.”
Fuerst also points out that anonymity can only be guaranteed at the reporting stage. In the event that allegations lead to charges and subsequent proceedings, the defendant will have a right to disclosure. Without the identity of the whistleblower, the case may fall apart along with any potential reward.
“It’s going to be inevitable in many of these cases that the identity of the whistleblower is going to end up being part of that disclosure that has to be made to the respondents in order for them to have an opportunity to defend the allegations appropriately,” says Fuerst. “So that’s why the OSC can’t give any ironclad guarantee of anonymity.”