Financial Services Alert - February 14, 2012

Developments of Note

First Circuit Limits SOX Whistleblower Coverage to Employees of Public Companies Federal Banking Agencies Update Guidance Concerning Allowance for Loan and Lease Losses CFTC Rescinds QEP Exemption from Commodity Pool Operator Registration CFTC Issues Final Rule Amending Registration Exemptions for Registered Investment Companies and Proposes to Harmonize Compliance Obligations for Registered Investment Companies Required to Register as Commodity Pool Operators DOL Issues Final Regulation Regarding Service Provider Fee Disclosure FinCEN Issues Final Rule Requiring Residential Mortgage Lenders and Originators to Implement Anti-Money Laundering Programs and to File Suspicious Activity Reports CFTC Proposes Volcker Rule Regulations Other Items of Note

SEC Staff Supplements FAQ on Form ADV and IARD SEC Staff Posts Responses to Questions about the Family Office Exclusion under the Advisers Act DEVELOPMENTS OF NOTE

First Circuit Limits SOX Whistleblower Coverage to Employees of Public Companies

In an important case of first impression, the First Circuit recently ruled that whistleblower protection under Section 806 of the Sarbanes Oxley Act ("SOX") is generally limited to employees of public companies. Lawson v. Fidelity Mgmt. & Research, LLC, No. 10-2240, 2012 WL 335647 (1st Cir. Feb. 3, 2012). Chief Judge Lynch authored the opinion, overturning the District Court's decision below, and reigning in an expansive interpretation of Section 806 that would have extended whistleblower protection to employees of private companies that enter into contractual relationships to provide goods or services to public companies.

The central issue in the case was one of statutory interpretation: what did Congress mean in Section 806 when it provided that "[n]o company with a class of securities registered under section 12 of the Securities Exchange Act of 1934 . . . , or that is required to file reports under section 15(d) of the [Act] . . . , or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of" the employee's protected whistleblowing activity? 18 U.S.C. § 1514A(a) (emphasis added). For purposes of its opinion, the First Circuit referred to companies registered under Section 12 of the Securities Exchange Act of 1934 (the "1934 Act") or filing reports under Section 15(d) of the 1934 Act as "public companies."

The plaintiffs in the case were both employees of privately held investment advisers (the "Advisers"). The Advisers had entered into advisory contracts with certain mutual funds, which by virtue of the ongoing public offering of their shares under the Securities Act of 1933 were required to file reports with the SEC under Section 15(d) of the 1934 Act, making them public companies for Section 806 purposes. Plaintiffs claimed that they were terminated or constructively terminated in retaliation for engaging in whistleblowing protected by Section 806. Section 806 protects, among other things, providing information "regarding any conduct which the employee reasonably believes constitutes a violation of section 1341 [mail fraud], 1343 [wire fraud], 1344 [bank fraud], or 1348 [securities or commodities fraud], any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders, when the information or assistance is provided to or the investigation is conducted by . . . a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct) . . . ." Plaintiffs claimed that the Advisers retaliated against them in violation of Section 806 for, among other things, complaining about cost accounting methodologies used and alleged inaccuracies in a registration statement drafted by the Advisers for certain mutual funds. Plaintiffs alleged that they reasonably believed when they complained that they were blowing the whistle on violations of federal securities laws or SEC rules or regulations.

Plaintiffs argued that they were protected from retaliation by Section 806 because that provision covers employees of private companies that enter into contracts or subcontracts with a public company. In addition to denying that it had taken any adverse employment action against plaintiffs because of their alleged protected activities, the Advisers countered that plaintiffs were not covered by Section 806 because they were not public company employees. Section 806 coverage, the Advisers argued, does not extend beyond employees of public companies.

The First Circuit agreed with the Advisers. The court based its decision on Section 806's plain language, its title and caption, SOX's language outside of Section 806, and SOX's legislative history. The court also recognized Supreme Court precedent counseling against overly broad interpretations of securities laws that exact burdens on American companies beyond those intended by Congress.

SECTION 806'S PLAIN LANGUAGE

The First Circuit held the Advisers' to be the "more natural reading" of Section 806. Section 806, the court found, first enumerates the employers that are covered—publicly traded companies with a class of securities registered under section 12 or those that file reports with the SEC under section 15(d)of the Securities Exchange Act (the "Act"). Section 806 then enumerates a list of representatives of the employer that, along with the public company itself, may not retaliate against an employee for engaging in protected whistleblowing activity.

To read Section 806 differently, the court noted, would lead to anomalies. To accept plaintiffs' reading that because Section 806 prohibits retaliation by "any officer, employee, contractor, subcontractor, or agent" of a public company, it must also protect employees of those entities against retaliation, one would have to accept that Congress intended to protect employees of employees and employees of officers from whistleblower retaliation. Of course, employees and officers do not typically have employees.

SECTION 806'S TITLE AND CAPTION

The First Circuit next considered Section 806's title and caption. Section 806's title states that it concerns "Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud." Section 806's caption similarly provides: "Whistleblower protection for employees of publicly traded companies." Neither the title nor the caption suggest that Congress intended Section 806 to extend to protect employees of private companies. This "double limitation," the court found, "strongly work[ed] against plaintiffs' interpretation." And consideration of the title and caption was appropriate, the court found, because neither contradicted the plain meaning of Section 806's text. Rather, they shed light on that meaning.

SOX'S OTHER TEXT

Congress's textual choices elsewhere in SOX, the court found, confirmed its intent to limit Section 806's scope to employees of public companies. The court's review of SOX's text beyond Section 806 revealed that when Congress intended whistleblower coverage to extend to employees of private companies, it knew how to do so clearly. For example, in Section 1107, Congress broadly criminalized retaliation for whistleblowing directly to law enforcement officers regardless of who the whistleblower works for. The First Circuit noted that Section 806's scope "is, by contrast, conspicuously narrow."

STRICT INTERPRETATION OF SECURITIES LAWS

In interpreting Section 806, the...