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Supreme Court Allows Whistleblower Protection for Fund Adviser Employees

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  • Baker, John
    The U.S. Supreme Court has ruled that the antiretaliation provision of the Sarbanes-Oxley Act of 2002 protects employees of contractors and subcontractors to
    Message 1 of 1 , Mar 4, 2014
      The U.S. Supreme Court has ruled that the antiretaliation 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, in the case below, 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. Mutual funds are public companies but usually have no employees of their own, instead relying on the employees of their investment adviser and other service providers. Except when the service providers are themselves public companies, therefore, their employees would have no right of action for retaliation, if the view of the First Circuit had prevailed.

      In a plurality opinion by Justice Ginsburg, joined by Chief Justice Roberts and Justices Breyer and Kagan, the Court concluded that the statutory text, purposes and history show that the 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 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. (It remains to be seen if this will undercut future arguments that mutual funds should receive special treatment in agency rulemakings.)

      A concurring opinion by Justice Scalia, joined by Justice Thomas, joined the plurality opinion in principal part, although disavowing the Court's use of legislative history in its analysis. However, the concurrence actually construed Section 1514A more broadly than the Solicitor General's argument as amicus curiae. The Solicitor General had suggested that Section 1514A protects contractor employees only to the extent that their whistleblowing relates to the contractor fulfilling its role as a contractor for the public company. The concurrence stated that, so long as an employee works for a public company, contractor, etc. and reports a covered form of fraud, the employee is protected from retaliation. Thus, in the view of Justice Scalia, an employee of a fund adviser would be protected against retaliation in reporting fraud at the adviser that had nothing to do with the mutual fund. The plurality opinion found it unnecessary to reach this issue.

      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 directors and officers, such as gardeners and babysitters, will now have antiretaliation 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.

      The opinions are available online at


      Other filings in the case are available at


      John M. Baker, Esquire
      Stradley Ronon Stevens & Young, LLP
      1250 Connecticut Avenue, N.W., Suite 500
      Washington, DC 20036-2652
      p: 202.419.8413
      f: 202.822.0140
      FundLaw Listowner http://groups.yahoo.com/neo/groups/fundlaw/conversations/messages

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