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Should mutual fund workers have whistleblower protections?

Posted by Jamison Mark on May 9, 2014 10:51:00 AM

The Sarbanes-Oxley Act prohibits public companies from retaliating against employees who blow the whistle on illegal activities they see in their workplaces. When it comes to companies in the financial services industry, it seems like simple good policy to extend whistleblower protections as far as possible, considering that illegal activities in that industry can have nationwide or even worldwide repercussions.

Unfortunately, it appears there is a gaping hole in those protections when it comes to those who manage mutual funds, as two Fidelity portfolio managers found out. One alerted her supervisors that Fidelity appeared to be improperly retaining millions of dollars in fees. For her honesty she was denied a promotion and threatened with consequences for "insubordination."

Another complained that a newly-instituted pay plan calculated Fidelity's portfolio managers' pay inaccurately and didn't comply with legal rules in describing that calculation. He was given poor reviews and then fired him in retaliation.

Because Fidelity Investments is a public company, the two plaintiffs filed whistleblower retaliation claims against it under Sarbanes-Oxley. When the case got to court, however, they were surprised to learn that they weren’t Fidelity employees at all -- they actually worked for an affiliate called Fidelity Management & Research Company, or FMRCo. Unfortunately, FMRCo is a private company.

Mutual fund companies say they technically have no workers, except for their boards of directors. Instead, they hire out all of their work to private management companies, who in turn hire portfolio managers to invest the funds. Since those companies are private, Sarbanes-Oxley doesn’t apply, they say, and neither do its whistleblower protections.

Their case was brought in the 1st Circuit Court of Appeals, which held in favor of Fidelity. Furthermore, the court found that the two FMRCo workers were not covered by any other federal or Massachusetts whistleblower statutes.

The U.S. Supreme Court has just agreed to hear the case next year. The Securities and Exchange Commission and the Labor Department support the two whistleblowers, and both filed friend-of-the-court briefs supporting whistleblower protections for mutual fund workers. The Obama Administration has not yet taken a position on the case, which will be heard sometime after September.

Do you think Fidelity’s outsourcing of virtually all employees to privately-held companies is just an attempt to escape the requirements of the Sarbanes-Oxley Act?

Source: Reuters, “Supreme Court agrees to hear Fidelity whistleblower case,” Lawrence Hurley, May 20, 2013

Topics: Whistleblower Protection

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