Recent Developments: Sox Securities Cases

Most recently in August 2015, the Securities and Exchange Commission issued an interpretive rule ( Hyperlink: https://www.sec.gov/rules/interp/2015/34-75592.pdf) to clarify that, for employment retaliation protections provided by Section 21F of the Securities Exchange Act of 1934 (“Exchange Act”), an individual’s status as a whistleblower does not depend on adherence to the reporting procedures specified in Exchange Act Rule 21F-9(a), but is determined solely by the terms of Exchange Act Rule 21F- 2(b)(1). As per this guidance, the anti-retaliation provisions equally apply to those tipsters who claim retaliation after internal reporting as well as to the SEC. This is an important development about internal reporting qualifying for Dodd-Frank coverage because Dodd-Frank provides enhanced recoveries and time frames for retaliation claims as compared to SOX. In past cases, retaliation claims based on the broader interpretation that Dodd-Frank covers internal reporting protected by the Sarbanes-Oxley Act (SOX) as well as reports to the SEC, had been dismissed.

In another instance, the U.S. Supreme Court held that employees of private contractors and subcontractors who provide services to publicly traded companies including mutual funds are protected by the whistleblower provisions of Sarbanes-Oxley Act of 2002 (“Act”), the United States Supreme Court held in its decision dated March 4, 2014. See 18 U.S.C. § 1514A; Lawson v. FMR LLC, --- S. Ct. ---, 2014 WL 813701, *7, 2014 U.S. LEXIS 1783 (U.S. 2014). The majority decision, written by Justice Ginsburg, relied on the language of the Act, applying “their ordinary meaning.” Lawson, *7. Separately, the Court in a minority decision cited the legislative history for the Act, but this part was not joined by Justices Scalia and Thomas, and therefore was not a part of the holding of the majority.

The case involved two employees who formerly worked for “privately held companies that provide advisory and management services to” Fidelity funds. Id. at *6. One of the employees worked for Fidelity Brokerage Services, LLC, a subsidiary of the Respondents, for 14 years. Id. This employee alleged that she suffered a series of adverse employment actions, eventually being constructively discharged, after raising concerns about certain cost accounting methodologies that may have overstated expenses associated with operating the mutual funds. Id. The second employee worked for Fidelity Management & Research Co. and later by a different subsidiary, FMR, Co., Inc. for eight years, and alleged he was fired after raising concerns about inaccuracies in a draft SEC registration statement concerning certain Fidelity funds. Id.

The holding of the Supreme Court has a significant impact in the area of whistleblower protections. This decision solidifies whistleblower protection to employees of contractors. This is significant for mutual funds, which the Supreme Court noted do not generally employ any of their own employees and are “managed, instead, by independent investment advisors. Id. at *12.

The Court held that the plain language of the Act and the treatment of a similar whistleblower provision protecting employees who complain about violations relating to air carrier safety supported its conclusion. The Act stated “[n]o [public] company… or any officer, employee, contractor, or subcontractor … may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against any employee in the terms and conditions of employment because of [whistleblowing or other protected activity].” Id. at *3 (citing § 1514A(a) (2006 ed.)).

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