Tips and awards: the OSC and SEC whistleblower programs report milestones
The OSC announces a C$525,000 award to “industry expert”
The enforcement team at the Ontario Securities Commission (the “OSC”) is emphasizing the unique role that industry experts should play in identifying and reporting potential wrongdoing within market participants. On April 6, 2020, the OSC announced that it awarded C$525,000 to a company outsider who used industry expertise to identify irregularities. While the details of the case are kept strictly confidential and all reasonable efforts are made to ensure a whistleblower’s identity is protected, the announcement highlights the value that Enforcement Staff places on tips from industry insiders with specialized knowledge and expertise.
Jeff Kehoe, Director of Enforcement at the OSC, stated in the accompanying release: “experts can be among the first to spot signs of potential misconduct in our markets. These subtle clues are often buried deep in reams of data and technical information decipherable only by someone with in-depth market knowledge or industry-specific expertise.”
Since its launch in July 2016, the OSC’s Whistleblower Program has awarded more than $8 million to whistleblowers. It is the first program of its kind in Canada. The Program accepts tips on possible violations of Ontario securities law, offers protections for individuals who come forward, as well as compensation of up to C$5 million for tips that lead to enforcement action.
The SEC’s Whistleblower Report
The OSC’s announcement comes a few months after the release of the U.S. Securities and Exchange Commission’s (the “SEC”) 2019 Annual Whistleblower Report to Congress (the “SEC Report”). According to the SEC Report (released on November 15, 2019) the SEC received over 5,200 whistleblower tips in 2019, the second highest number of tips received in a fiscal year and a 74% increase since the beginning of the program. The SEC received tips from individuals in 70 countries outside of the United States, as well as from every state within the United States. With respect to international tipsters, the SEC’s whistleblower program received the highest number of tips from individuals in Canada, Germany, the United Kingdom, China and Australia in 2019.
The tips covered a broad range of allegation types, including nearly 300 tips relating to cryptocurrencies, an emerging area of interest for the SEC. Furthermore, the most common complaint categories reported by whistleblowers were corporate disclosures and financials (21%), offering fraud (13%), and manipulation (10%).
The SEC Report trumpets its success: since the program’s inception, the SEC has ordered wrongdoers identified from information from meritorious whistleblowers to pay over US$2 billion in total monetary sanctions. This figure includes more than US$1 billion in disgorgement of ill-gotten gains and interest, of which almost US$500 million has been, or is scheduled to be, returned to harmed investors.
The SEC proposed changes to its whistleblower rules in 2018, changes that are geared toward running the awards application process more efficiently. The proposal has not yet been finalized, but the anticipated changes to the rules would authorize the SEC to adjust the award percentage to yield a payout “that does not exceed an amount that is reasonably necessary”. For large awards, the SEC proposes to have the discretion to limit awards to US$30 million (but not less than the statutory minimum of 10%), even in circumstances where the whistleblower’s contribution is exemplary and would otherwise deserve a 30% award. The SEC has provided reassurance to market participants that the proposed changes to the rules do not impose a cap on potential awards to whistleblowers.
Most recently, the SEC announced on April 16, 2020 that it awarded more than US$27 million to a whistleblower who reported financial misconduct occurring, in part, overseas. The award allowed the SEC to highlight factors relevant to setting an award amount, as reflected by the fact that the whistleblower had repeatedly tried to bring the matter to the attention of his or her employer only to be met with inaction. The SEC’s order set outs the quantum of the award and applauds the whistleblower’s actions in bringing the matter to it. Jane Norberg, Chief of the SEC’s Office of the Whistleblower noted, “this award marks several milestones for the program. This is the largest whistleblower award announced by the Commission this year, and the sixth largest award overall since the inception of the program.” The SEC did not provide information on the person’s identity or the company involved in the enforcement action, citing federal law that protects confidentiality.
Whistleblower programs in the U.S. and Canada
The SEC’s whistleblower program dates back to 2010. In July 2010, the United States Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act, known colloquially as “Dodd-Frank”, in response to the 2008 financial crisis. One of the most important components of this broad overhaul of the U.S. financial regulatory system was the enactment of the SEC whistleblower program. The SEC's whistleblower program allows the regulator to reward whistleblowers who give the agency information that leads to a successful enforcement action. Whistleblowers (under the current regime) can receive between 10% and 30% of the monetary sanctions paid by the offenders if the sanctions total at least $1 million.
Although the whistleblower award landscape in Canada is relatively new as compared to the U.S., the regime in Ontario appears to be gaining steam. As we have previously discussed, the OSC’s whistleblower program was established almost four years ago and was the first of its kind by a Canadian securities regulator. Individuals who meet certain eligibility criteria and who voluntarily submit information to the OSC are eligible for compensation of up to C$5 million. Awards are now being paid out under the program, demonstrating that the OSC is committed to its newly-adopted bounty-based approach to incentivizing tipsters to report potential misconduct.
Other Canadian jurisdictions have whistleblower programs, but only Ontario pays a “bounty” for tips that yield results. (We have previously reported on other Canadian whistleblower programs, which you can find here, here, and here).
Since the beginning of the SEC’s whistleblower program, the Commission has awarded approximately US$387 million to 67 individuals. By contrast, in the two years after its launch in July 2016, the OSC reported that its whistleblower program generated approximately 200 tips, where 10% of the tips were referred to enforcement and seven percent of those were associated with active investigations The OSC paid out its first-ever whistleblower awards under its whistleblower program on February 27, 2019, awarding three whistleblowers in separate matters a total of C$7.5 million.
Both the SEC’s and OSC’s programs offer a number of whistleblower protections, including confidentiality, the option to report anonymously and strict anti-reprisal and anti-retaliation measures.
Implications, best practices and observations
Notwithstanding the success of the OSC whistleblower program, it is not clear that tips received by the OSC have resulted in more enforcement proceedings being commenced or the nature of the cases. The OSC’s whistleblower program does not reveal which cases were the result of whistleblower intervention, and does not often provide a great amount of detail related to the reasons for the award. This aspect of the OSC’s program stands in contrast with the SEC’s program, which is more transparent. OSC staff explain that the relative nature and size of the Canadian market require this distinction to better ensure tipper confidentiality and protection. Without challenging that proposition, this detracts from the program’s transparency and the ability for market players to assess the impact of insider concerns raised in each particular case.
Nonetheless, it remains essential for businesses to have in place a strong controls system and corporate culture in order to detect potential problems as early as possible and to protect employees who come forward to report those problems internally. Otherwise, the existence of such whistleblower programs incentivize those who might otherwise report conduct within their own companies to provide information to the OSC. This can inadvertently thwart companies from internally investigating and remedying potential issues, thereby depriving companies from benefiting from reduced sanctions or other options available under the OSC’s settlement and credit for co-operation regimes. A robust approach to internal compliance is the best defence against the increasingly real risk that boards and management will first hear about serious misconduct within their organizations from the OSC as a result of a whistleblower tip.