OSC whistleblower program less than meets the eye

The Ontario Securities Commission took the wraps off its whistleblower program in July, offering monetary compensation for tipsters who provide “high quality information that contains timely, specific and credible facts regarding potential misconduct.”

The commission noted that the aim was to enhance its ability to “protect investors and achieve better outcomes for our markets by helping us identify and pursue violations of securities law that may only come to light through a whistleblower.” Maureen Jensen, OSC chair, called it nothing short of “a game changer for securities enforcement in Canada.”

A true game changer?

It’s early days. While the idea is sound and used effectively in other jurisdictions, the devil is in the details.

The debut press release and coverage for the OSC program focused on compensation of up to $5 million for “tips that lead to enforcement action.” But that’s not entirely true. In order to receive up to $5 million, the commission has to take enforcement action—and collect money, too.

That’s an important detail, because the OSC has a less-than-stellar record of following up on debts. In fiscal 2016, it collected 19% of money owed related to settlements and orders during the year. The year before, it was just 14% (which was actually a substantial improvement over the prior two years’ single-digit collection rates).

In the event the commission is unable to collect the money, the highest possible whistleblower payout drops to $1.5 million. That seems like a deterrent to the deterrent.

Is $1.5 million enough to lure people out of the weeds? Will that mid-level manager already making several hundred thousand a year, with an eye on much higher payouts down the road, be willing to tank their career for the price of a Vancouver home?

Read: How to blow the whistle

Canadian-sized payouts

Compared to the SEC’s whistleblower program in the U.S., ours pales in many respects. Stateside, whistleblower awards look more like lotto payouts. In August, the SEC paid US$22.4 million to a whistleblower who turned in Monsanto Company for accounting improprieties. The award represented 28% of the US$80 million paid by the firm.

The SEC offers to pay whistleblowers 10% to 30% of the amount it levies. The OSC offers just 5% to 15% of the amount sanctioned, which may be another factor keeping the OSC’s payouts, ahem, Canadian-sized.

Before the Monsanto case, the SEC paid out substantial amounts in three other large cases: US$17 million in June 2016, US$30 million in September 2014 and US$14 million in September 2013.

The new whistleblower rules give the OSC the right to publicize that an award has been made. However, the commission has said it would never reveal that a specific case involved a whistleblower tip or reward. That would seem to miss the best advantage of having such a program.

The measure is meant to protect tipster anonymity, but it wouldn’t take much to put two and two together, as the media did in the Monsanto case. The only way to prevent that kind of leakage is to keep payouts small, which won’t incentivize many informants. Companies don’t have to be named, but it helps when executives see their peers openly shamed.

Whistleblower programs work by publicity. The larger and more frequent the payments, the more tips received. The concept is to feed tips and hopefully short-circuit fraud—or to prevent it before it starts.

Quality of internal whistleblower policies

While the program has just started, it seems hobbled in more than a few ways compared to the SEC’s program. Supposing that the OSC’s program takes off, despite the less than spectacular incentives, advisors should keep a few things in mind.

Companies are supposed to fear whistleblowers, and regulators hope they react by putting in place internal controls and policies to prevent corporate malfeasance.

Corporate audit committees are required by National Instrument 52-110 to ensure that firms have internal whistleblower hotlines or similar reporting procedures. The rules were originally aimed at collecting information on “accounting, internal accounting controls, or auditing matters.” But many of these policies have expanded to cover codes of conduct (bribery), environmental values and other areas.

Advisors are not used to considering corporate governance outside of takeover offerings or other share-related disputes, but this is an area that could have a direct impact on share price. When investigations into a company’s accounting or conduct becomes public, the resulting impact on share price can wipe out several years of gains. Companies can aim to prevent those instances with well-crafted and broadly communicated whistleblower policies.

The requirements are basic, so the implementation and vigour of whistleblower policies can vary significantly between companies. For instance, the rules tend to focus on confidentiality for employees, which often leaves out whistleblower avenues for consultants and contractors.

Advisors should also be on guard for situations that can involve the complicity of senior executives or governance when it’s at its weakest. This includes companies with large, related-party transactions, rich executive compensation plans, and minority shareholder situations where insiders control the voting structure. The devil is in the details.