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CCCA_V6No1_Dept-RegulatoryUpdate-FIN_CCCA_V5No3_Dept-RegulatoryUpdate-V1.qxd 2/13/12 8:59 PM Page 16 Regulatory Update The long reach of Dodd-Frank An emphasis on enforcement creates new challenges for Canadian issuers with U.S. presence. By John Keefe hen the Sarbanes-Oxley Act of company disclosures. While the bulk of 10 and 30 per cent of the monetary W2002 was enacted in the after- the SEC and stock exchange rules man- recovery obtained from companies in- math of the Enron and WorldCom cor- dated by Dodd-Frank will not apply to volved in securities fraud or violations of porate scandals, it brought sweeping Canadian issuers who can be classified in U.S. anti-bribery laws. To be eligible for changes to the corporate governance the U.S. as “foreign private issuers,” there the reward, the whistleblower must pro- and disclosure obligations of public are several provisions that do have a vide original information that leads to a companies in the United States. Similar potential impact on Canadian issuers. successful conviction resulting in sanc- rules (sometimes known as “SOX- tions exceeding $1-million. Dodd-Frank lite”) were implemented in Canada. In Whistleblower bounty also prevents employers from retaliating reaction to the lack of transparency and Dodd-Frank represents a shift in the against whistleblowers by enhancing the failure of management to enforce approach to corporate governance from anonymity and creating harsh punish- internal controls at places like Enron, SOX’s emphasis on disclosure to an ments for retaliation. Sarbanes-Oxley, to speak broadly, increased emphasis on enforcement, a In Ontario, the OSC has indicated that focused on disclosure and certification. move from mandating greater internal it too is considering the prospect of intro- Only a few years later, amidst the 2008 processes to strengthening the external ducing a new whistleblower program financial crisis generated by too much risk forces of the regulators. This change is under which financial compensation may and opaque derivative products, the multi- driven by the perceived failure of the reg- be provided to whistleblowers who pro- billion-dollar Ponzi scheme perpetrated by ulators leading up to the 2008 market col- vide information about misconduct. Bernard Madoff exploded in the press. As lapse, evident in particular during the con- Perhaps indicating issuers’ discomfort with details of the fraud emerged, critics began gressional testimony of Harry Markopolos, the change in focus from internal policing pointing fingers at the Securities and the whistleblower in the Madoff scheme. to external enforcement, one Canadian Exchange Commission (SEC) for its lack The SEC had rebuffed his attempts to alert general counsel wrote in a letter to the of oversight. There was a sense that both it to Madoff’s fraud. Markopolos lambasted OSC that issuers “whose compliance internal corporate governance processes the SEC for ignoring his repeated warn- processes are displaced through this process and external regulatory agencies had failed ings and testified that it was beholden to will… be delayed, or at worst denied, an to stop greedy individuals from defrauding the companies it was supposed to be inves- opportunity to self-police, which we innocent investors. Congress responded tigating and ill-equipped, outmatched and believe is an important component of cre- with the Dodd-Frank Wall Street Reform and too inexperienced to handle such complex ating a culture of compliance.” (“Loblaws Consumer Protection Act (“Dodd-Frank”), corporate crimes. takes stand on whistleblowers,” The signed into law in July 2010. Markopolos’s testimony and his promi- National Post (9 January 2012) online.) Dodd-Frank is a complex piece of leg- nence as a whistleblower was important in In order to mitigate such concerns islation that seeks to tackle systemic risk, the lead-up to the enactment of Dodd- about misdirected incentives, the SEC has rein in derivative products, improve con- Frank. Under the legislation, whistle- a broad discretion under Dodd-Frank to ISTOCKPHOTO sumer protection and increase public blowers may receive a bounty of between determine the quantum of an award by 16 CCCA Canadian Corporate Counsel Association SPRING 2012