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).