Canadian Lawyer InHouse

ceedings against Chinese companies have forced the commission to confront the challenges of pursuing foreign- based companies, while enforcement initiatives unveiled late last year borrow heavily from measures already in place at regulators internationally. The OSC is still drafting its strategic T plan, but hinted at its future approach in October 2011 with a staff notice that controversially mooted no-contest settle- ments and whistleblower bounties, among others, as new weapons in its enforcement armoury. Both ideas have a history south of the border at the U.S. Securities and Exchange Commission, where companies have for decades been able to settle with- out admitting to a breach of securities law, and recent legislation allowed whistleblow- ers to share in the monetary sanctions it imposes. While some say the proposals could prove a springboard to strengthened enforcement and increased investor pro- tection in Ontario, others are warning the commission is in danger of overreaching. Anita Anand, chair of the OSC's Investor Advisory Panel, says the regulator can learn a lot from its foreign counter- parts. "This type of initiative and focus on making enforcement more effective is extremely important. Studying other juris- dictions enhances the quality of the pro- posal. The investor advisory panel believes that investors in Ontario should be as well protected as they are in other jurisdictions," she says. "Thus, learning what other juris- dictions are doing is extremely important." Susan Hackett, the former general counsel of the Association of Corporate Counsel, says the increasingly global nature of business forces all securities regulators to consider the approach of their foreign counterparts."You're going to see an awful lot more handholding on enforcement, because companies are multinational. To regulate them one way in one juris- diction and another way in every other he Ontario Securities Commission is look- ing far beyond the province's borders as it formulates a plan for its future approach to regulation. High-profile pro- jurisdiction doesn't really make sense," she says. "And if regulators deem one jurisdic- tion to have created a best practice, they're certainly going to examine it and poten- tially implement it." According to Anand, that task may be made more difficult for the OSC by the Supreme Court of Canada's nixing of the federal government's attempt to cre- ate a national regulator. "Lack of national co-ordination on enforcement is a major drawback of the current system. While the [Canadian Securities Administrators] has been able to ensure co-ordination on prospectus approvals, enforcement is a dif- ferent story," she says. Ed Waitzer, the director of the Hennick Centre for Business and Law at York University and a former chairman of the OSC, says the commission needs to make sure it won't be spread too thin as a result of any changes it makes. "We have this habit of piling on more and more regulation as opposed to thinking about how they all interact and thinking about what the unintended consequences might be," he says. "You've got to worry about the com- mission trying to be all things to all people. Let's not jump on something just because it's the idea du jour." Waitzer has particular concerns over the OSC's proposed whistleblowing pro- gram, which would be a first for Canadian securities regulators. In the October release, the OSC invited comments on a system that would give employees who suspect misconduct in the marketplace a direct line to the regulator, rather than having to go through any internal systems that exist at their companies. The suggest- ed program could include incentives, such as protection from retaliation or financial compensation. "We've spent a lot of time over the last 20 years trying to encourage better corporate governance, and, in effect, self- regulation, by building up compliance cultures. If people are going to end-run the internal culture, where do we end up? It's going to undermine all that," Waitzer says. "A bounty encourages all kinds of people to come forward, and I wonder if the commission has the resources to deal with that. They're going to have a hard enough time doing what they're supposed to be doing now." In May 2011, the SEC created its own Office of the Whistleblower, fulfilling a demand in the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed the previous year by the U.S. Congress. The office takes tips from employees and allows them to claim between 10 and 30 per cent of sanctions imposed by the SEC as a result of the information provided, as long as the pen- alties are worth at least $1 million in total. The program has been popular. An SEC report indicates the office received more than 300 whistleblower tips in its first seven weeks of operation. No money has been paid out yet, and it could take a while for tips to translate into payouts. Hackett, now a law firm consultant at Legal Executive Leadership, spearheaded the fight against the whistleblower provi- sions of Dodd-Frank during her tenure at the ACC. She says regulators risk becom- ing buried under an avalanche of specula- tive tips from employees hoping to hit the jackpot. "Government agencies are going to be investigating thousands and thousands of violations, most of which won't bear the kind of fruit that most of these laws I think are intended to address," Hackett says. In addition, she suggests bounties pro- vide potential whistleblowers with per- verse incentives to let wrongdoing develop beyond its early stages in order to maxi- mize their personal payout. In practice, Hackett says the SEC has simply added an unneeded extra layer of bureaucracy, because, after receiving the tip, the regula- tor processes it and sends it back to the company for investigation. "Now if there actually is a failure, we've got potentially months between when that failure was uncovered and the time that the company can begin to address it, and that doesn't really help anybody." Canadian companies such as BMO Financial Group, Royal Bank of Canada, Bell Canada Enterprises, and TD Bank Financial Group signed on to Hackett's ACC campaign in the U.S., and more Canadian companies have since added their voices to the whistleblower dis- sent, including George Weston Ltd., the parent company of Loblaw Companies Ltd. and President's Choice Financial. Robert Balcom, its senior vice president INHOUSE APRIL 2012 • 27

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