Several cases of enforcement action suggest the OSC’s whistleblower program may have a broader-than-expected impact
In 2016, the Ontario Securities Commission (OSC) broke new ground for securities regulators in Canada with the introduction of its whistleblower program. Under the initiative, tipsters whose reports of potential misconduct lead to an OSC enforcement action stand to receive a reward of up to $5 million from the OSC.
The impact of the program on the OSC’s ability to protect investors and keep companies in line is obvious. Less noticeable, however, is the impact of its rules on employment agreements (as laid out in 121.5(3) of the Securities Act.
“Modelled after similar U.S. rules adopted by the Securities and Exchange Commission (SEC), the OSC's rules automatically void employment agreement provisions to the extent that they preclude employees from communicating with regulators about potential securities law violations,” wrote Omar K. Madhany of Borden Ladner Gervais in a recent commentary.
That means companies may run afoul of the OSC because of some protective inclusions commonly seen in employment agreements. One case in point is a settlement reached between the SEC and Anheuser-Busch InBev in September 2016. The SEC had charged the company with violating its whistleblower rules by requiring departing employees to sign a severance agreement obligating them to “keep in strict secrecy and confidence any and all unique, confidential and/or proprietary information and material belonging to [the company].”
Non-disparagement clauses, which restrict what employees may say about a company in public or to third parties, could also be misconstrued as a tool to muzzle employees who might approach regulators with unfavourable information. In December 2016, Madhany said, the SEC reached a settlement with SandRidge Energy over charges of requiring departing employees to agree to “not at any time in the future defame, disparage or make statements or disparaging remarks which could embarrass or cause harm to SandRidge's name and reputation.”
Companies may also have their employees agree to notify them of any subpoenas or legal requests for information related to the company that the employees may receive. In many cases, this is just to give companies due awareness in advance of public disclosure. However, Madhany said, regulators might aggressively interpret such clauses as an attempt to prevent employees from cooperating with regulators on a confidential basis in response to a regulator’s subpoena or request for information. The SEC took this position in a settled action against a company called BlueLinx Holdings in August 2016, which it accused of such a violation of whistleblower rules.
Another area of risk has to do with requiring employees to keep details of an internal investigation confidential. Such clauses are meant to preserve the integrity of the investigation; a witness who discusses the investigation with the target of the effort might taint the findings, for example. But such provisions might also be seen as another way to preclude witnesses from cooperating, which is precisely what the SEC accused KBR of doing in its first enforcement action under whistleblower rules in April 2015.
“[The OSC] disclosed last year that it has received approximately 200 tips since the Program began,” Madhany said. “As the tips begin generating enforcement actions, the OSC may well follow its U.S. counterpart and begin examining the tipsters' company employment agreements to determine whether they violate the whistleblower rules and warrant enforcement action of their own.”
