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Recent Developments: Sox Securities Cases

SOX refers to the Sarbanes-Oxley Act that was passed in 2002. This law assists in protecting investors from deceptive and underhanded financial reporting. The legislation itself is a move to restrict and structure securities regulations, impose tougher penalties on individuals and corporations that carry out fraudulent schemes. SOX was passed in 2002 due to rampant securities fraud and corporate fraud earlier that past decade. The Securities Exchange Act of 1934 is being enhanced and reformed to ensure harsher consequences for fraud, regulations as well as corporate responsibility.

Most recently in August 2015, the Securities and Exchange Commission issued an interpretive rule to clarify that, in 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 2014, the US Supreme Court decided in a 6-3 ruling that the whistleblower provisions of SOX are inclusive to private contractors and subcontractors of a public company.

According to Justice Ginsburg, this decision was made intending to further expand protections for contractors, investors, and regain faith in the financial markets. This law was passed through Lawson v. FMR LLC in which Lawson and Zang began separate lawsuits against their employer. Lawson and Zang believed that they were terminated from their employment as a result of voicing suspicions about their employer’s cost accounting strategies and inconsistencies in statements being sent to the SEC. The arguments of the company against Lawson and Zang was that the definition of an employee must only apply to “public company employees” as is implied under the headings of whistleblower protections accounting to the Sarbanes-Oxley Act. This further expressed how headings and titles of each section does not compensate or contradict detailed information and restrictions present in the legislation itself. Therefore, this Supreme Court decision was put in place to safeguard insider employees and private contractors who are the primary employees in the mutual fund industry that may be the only eyewitness to fraud.

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 on 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 “[no 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)).

Restoring the transparency and authenticity of financial markets is the primary impact of the Sarbane-Oxley Act. The recent developments to the act itself as well as cases that have been decided based on the act are examples of how the framework of financial markets and its security is consistently being molded. SOX has installed an independent committee(PCAOB) through which financial markets can be monitored for the benefit of investors. Increased financial reporting, strengthened audit quality, penalties associated with those participating in fraud, extensive accountability, and certifications of financial content in corporate spaces as well as auditor independence has allowed SOX, as well as its developments, to continue to prevent financial disasters.

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