In light of recent developments, mutual funds should take steps to protect themselves from potential whistleblower lawsuits by ensuring that they have systems in place to efficiently facilitate internal reporting and that they thoroughly investigate all internal complaints. It is critical to think creatively about the most effective ways to communicate to employees the importance of internal reporting to ensure that any problems are addressed promptly before they become larger problems.
In March, a Massachusetts federal district court ruled in Lawson v. FMR LLC that the Sarbanes-Oxley whistleblower protections apply to employees of investment private firms that operate and advise mutual funds. Then in July, the Dodd-Frank Act enhanced the protections for whistleblowers (the Act did not address the coverage of employees of an investment adviser to a mutual fund).
The Dodd-Frank Act incentivizes whistleblowers to report complaints directly to the SEC. This is in contrast to Sarbanes-Oxley, which required companies to establish whistleblower hotlines to encourage employees and others to report suspected wrongdoing internally, subject to ultimate audit committee oversight. Essentially, the Sarbanes-Oxley provisions were designed to enable companies to identify and redress problems internally as a matter of good corporate governance.
In contrast, the Dodd-Frank Act creates incentives that will likely encourage employees to report directly to the SEC based on the prospect of obtaining substantial financial rewards. Specifically, the Dodd-Frank Act significantly expands the SEC's bounty authority, allowing the SEC to pay bounties of up to 30 percent of all monies collected, including penalties, disgorgement, and interest, to parties who provide key information in any type of enforcement action (previously, an individual bounty payment could not exceed 10 percent of the penalty collected, and could only be paid in insider trading cases).
The Dodd-Frank Act also significantly expands anti-retaliation employment protections and remedies for whistleblowers. Specifically, the new provisions: (1) extend the statute of limitations to bring retaliation claims from 90 days to six years; (2) exempt whistleblower claims from pre-dispute arbitration agreements; (3) allow whistleblowers to bypass the administrative process to bring claims directly in federal court; (4) clarify that whistleblower claims, including claims under Sarbanes-Oxley, can be tried before a jury; and (5) provide not only for reinstatement and attorneys' fees, but also double back pay.
Mutual funds should take the initiative to:
- Review and update compliance policies, including provisions for anonymous reporting and whistleblower policies
- Cultivate a culture that emphasizes the importance of legal and regulatory compliance and ethical conduct
- Ensure that the compliance program has appropriate oversight at the board level
- Offer training on the whistleblower policy and procedures so that employees know the process and appreciate the roles of the people involved
- Ensure that all employees understand that retaliation for reporting legitimate concerns of potential misconduct will not be tolerated
- Investigate and evaluate whistleblower complaints expeditiously