- Employees of Mutual Fund’s Investment Adviser Have Whistleblower Protections
- June 6, 2014 | Authors: Peter D. Fetzer; Terry D. Nelson
- Law Firms: Foley & Lardner LLP - Milwaukee Office ; Foley & Lardner LLP - Madison Office
Mutual fund boards should be aware that the U.S. Supreme Court has ruled that the employees of investment advisers and other mutual fund service providers are protected by the anti-retaliation provisions of the Sarbanes-Oxley Act of 2002. In light of this, as part of its ongoing oversight process, boards should reassess the funds’ whistleblower policies and procedures and those of the funds’ investment adviser. Boards should also ensure that the funds’ other service providers also have adequate whistleblower policies and procedures.
In reaching a conclusion that the funds’ investment adviser and other service providers have adequate whistleblower policies and procedures, boards may rely on the Chief Compliance Officer’s review of such policies and procedures. Boards should ensure that such review and due diligence is occurring, and that the Chief Compliance Officer reports back on such reviews.
Specifically, the U.S. Supreme Court ruled that the anti-retaliation provision of the Sarbanes-Oxley Act of 2002 protects employees of contractors and subcontractors to mutual funds and other public companies who engage in whistleblowing. Lawson v. FMR LLC, No. 12-3 (U.S. Mar. 4, 2014). Lower courts had split on the issue, with the U.S. Court of Appeals for the First Circuit ruling that the provision in question, 8 U.S.C. § 1514A, protects only employees of the public company and not employees of contractors and subcontractors.
Section 1514A provides that no public company, or any officer, employee, contractor, subcontractor, or agent of such company, may retaliate against “an employee” for whistleblowing. It has been an open question since the passage of the Sarbanes-Oxley Act whether the “employee” in question must be an employee of the public company, or could also be an employee of the contractor or subcontractor.
Even though mutual funds are public companies, they generally have no employees of their own. Instead, they rely on the employees of their investment adviser and other service providers. So, if the view of the First Circuit had prevailed, employees of investment advisers and other service providers would not have had whistleblower protections unless an adviser or service provider was publicly traded because such employees are not employees of the mutual funds.
In a plurality opinion by Justice Ginsburg, joined by Chief Justice Roberts and Justices Breyer and Kagan, the U.S. Supreme Court concluded that the statutory text, purposes and history show that the anti-retaliation provision shelters employees of private contractors and subcontractors, just as it shelters employees of the public company served by them. Among other considerations, the plurality placed special emphasis on the lot of outside lawyers and accountants, who would otherwise have no protection against retaliation for whistleblowing.
The U.S. Supreme Court was dismissive of the argument that mutual funds and investment advisers are separately regulated under the Investment Company Act of 1940 and the Investment Advisers Act of 1940, for nowhere else in these legislative measures are investment management employees afforded whistleblower protection.
A dissenting opinion by Justice Sotomayor, joined by Justices Kennedy and Alito, supported the defendants' view that only employees of a public company are protected. The dissent was particularly influenced by the possibility that employees of trustees and officers of mutual funds, such as gardeners and babysitters, will now have anti-retaliation rights. The plurality was dismissive of fears that its decision would open the floodgates, although it agreed that such employees would be entitled to protection.