Canadian companies and their directors and officers should take stock of two recent whistleblower awards made by the Securities and Exchange Commission (SEC). These awards highlight the importance of conducting an expedited internal investigation in response to serious whistleblower complaints, and minimizing the risk of creating new whistleblowers.
The Ontario Securities Commission was the first Canadian securities regulator to adopt a Whistleblower Policy (see our previous articles here and here), and the first to make awards under such a policy (see our article here). Under the OSC's Policy, eligible whistleblowers may be awarded up to $5 million for reporting serious securities- or derivatives-related misconduct that leads to significant enforcement or settlement outcomes.
Award #1: Compliance professional awarded for helping with ongoing investigation
On March 30, 2020, the SEC awarded $450,000 to a whistleblower who reported potential securities law violations. There are two noteworthy aspects of this award.
First, the whistleblower became aware of the potential securities law violations in connection with his or her "compliance-related responsibilities". The SEC's policy disqualifies individuals who obtain the information disclosed to the SEC as a result of their compliance or internal audit responsibilities, but exempts such individuals (like the whistleblower in this case) if they wait at least 120 days after reporting the matter internally to disclose to the SEC.
The OSC's whistleblower policy contains no outright prohibition on individuals with "compliance-related responsibilities" reporting potential securities law violations to the OSC. It does enumerate circumstances that could apply to make such a whistleblower ineligible for an award, including that the whistleblower "obtained or provided the information in circumstances which would bring the administration of the Program into disrepute." Under the OSC's whistleblower program, a chief compliance officer is generally not eligible for whistleblower awards, but might be eligible for awards in certain limited circumstances, including if, similar to the SEC policy, they wait for at least 120 days after the matter is reported internally to key supervisors to disclose to the OSC.
Second, the whistleblower disclosed information in the midst of an existing investigation by the SEC. The SEC Order noted that it was rewarding a "whistleblower whose significant information helped focus an ongoing investigation on the violations that were ultimately charged".
The OSC's whistleblower policy enumerates circumstances that would likely make such a whistleblower ineligible for an award, including individuals who obtain the information disclosed while conducting an inquiry or investigation into possible violations of law by a client or employer [s. 15(1)(f)].
However, like the SEC's policy, the OSC's policy exempts the whistleblower's ineligibility provided he or she makes the disclosure to the OSC at least 120 days after reporting it internally. In other words, the whistleblower in the SEC case would likely be eligible for an award from the OSC in similar circumstances.
Award #2: Whistleblower complaint scratches the surface of the misconduct uncovered
On April 28, 2020, the SEC awarded $18 million to a whistleblower who provided information that initiated the SEC's investigation but did not form the core part of the charges laid by the SEC. The whistleblower had repeatedly reported the problem internally before contacting the SEC. The SEC Order noted that "we also considered that while Claimant's information was significant, exam staff discovered violations that were broader than what was alleged by Claimant, and that a large portion of the monetary sanctions ordered against the firm related to conduct that was not reported by the Claimant to the Commission". In other words, the SEC found misconduct not reported by (and perhaps not known to) the whistleblower. While the OSC policy is less specific than the SEC program in this regard, it is possible that the whistleblower in the SEC case would be eligible for an award from the OSC in similar circumstances. Under the OSC policy, the original information submitted must be of meaningful assistance to OSC Staff in a proceeding that resulted in an order imposing significant monetary sanctions. The OSC may increase the amount of an award if the information provided by the whistleblower caused OSC Staff to open an investigation or to broaden the scope of an existing investigation [s. 25(2)(b)(i)].
Takeaways
- It is critical to conduct a preliminary assessment of whistleblower complaints received internally to determine whether they merit an internal investigation.
- The internal investigation may be conducted by internal compliance professionals, internal legal counsel or external counsel, subject to ensuring that privilege is protected. Only legal counsel are ethically prohibited, and are ineligible under the OSC's policy, from disclosing confidential information about potential securities law violations that are uncovered from the investigation. Therefore, we recommend that legal counsel supervise and conduct (or lead) sensitive investigations.
- Counsel should complete the investigation well before 120 days after the initial whistleblower report. Otherwise, an ineligible whistleblower could approach the OSC pursuant to the OSC's whistleblower policy.
- The investigation team must be multi-disciplinary, skilled and experienced. It is important to not unwittingly "create" a new whistleblower. As noted in the first case above, the whistleblower disclosed information that was probative in an ongoing Interviews and discussions about the issues being investigation must be compartmentalized so as to not reveal more than is absolutely necessary.
- The regulator's investigation will not necessarily be bounded by the whistleblower complaint. Therefore, the scope of the investigation must be carefully calibrated at the start of the investigation and revisited as appropriate. In certain circumstances, it will be necessary to investigate potential misconduct beyond the concern reported or known by the whistleblower. Also, a broader investigation will allow counsel to better assess self-reporting risks and confidently report matters to the regulator, when appropriate.
Originally published May 8, 2020.
To view the original article click here
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
