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Supreme Court Broadens Whistleblower Status

On March 4, 2014, the United States Supreme Court ruled in Lawson v. FMR LLC that the whistleblower protections under the Sarbanes-Oxley Act extended to employees of private companies that provide services to public companies. The Supreme Court noted that mutual funds are public companies that do not have employees and, instead, contract with other third-party service providers to accomplish their goals. Therefore, if someone discovered fraud "detrimental to mutual fund investors, the whistle-blowing employee must be on another company’s payroll." The Court emphasized that its expansive view of the whistleblower protections complies with the purpose of the Sarbanes-Oxley reforms and that failure to extend the protection would render certain employees "remediless" if they blew the whistle.

The whistleblower provisions protect employees who reveal fraud from retaliation by the employer and may also allow the employee to receive a portion of any money recovered if fraud is exposed.

This decision has a clear impact on private companies, including investment advisers and accounting firms that work for public companies, as well as on mutual funds. In response, each of these entities should review or implement policies that respond to potential whistleblower claims. Additionally, fund professionals should carefully consider taking some of the following actions:

  • review internal reporting processes and consider updating or improving compliance programs;

  • review and promptly remedy any compliance concerns;

  • educate employees on the internal reporting channels and provide proper training; and

  • effectively discipline employees and properly document those disciplinary actions.

Sources: Supreme Court Broadens Whistle-Blower Status, Mutual Fund Firms on Alert, Investment News, Mark Schoeff Jr. (March 5, 2014); Lawson et al. v. FMR LLC et al., No. 12-3, slip op. (U.S. March 4, 2014).

Copyright © 2020 Godfrey & Kahn S.C.National Law Review, Volume IV, Number 122

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About this Author

Chris Cahlamer Investment Management Attorney
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Chris Cahlamer is the team leader of the firm’s Investment Management Practice Group, where he practices in investment management and securities law, focusing on investment companies, investment advisers, regulatory examinations, new product development, SEC compliance and reporting obligations, CCO support, private fund formation and operation, investment company reorganizations, investment advisor mergers and acquisitions, and general corporate and board fiduciary issues.

Chris earned his law degree, summa cum laude, at Marquette University Law School. While there, he...

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Susan Hoaglund, Investment Management Attorney, Godfrey Kahn law firm
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Susan Hoaglund is a member of the Investment Management Practice Group. Susan provides advice to investment advisers, investment companies, broker-dealers and banks regarding legal, regulatory and compliance matters.

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