ARB Needs Your Help on SOX Coverage of Subsidiaries
by Michael Fox
Well, that may be a bit of an overstatement, but the Administrative Review Board, which gets the final appellate say at the administrative level of Sarbanes Oxley claims has asked the Assistant Secretary of OSHA and the SEC, and it appears other amici, to submit briefs addressing four specific questions:
The Order Requesting Additional Briefing by the Parties and the Amici Curae all comes in the context of an actual case, Johnson v. Siemens Building Technologies, ARB Case No. 08-32, ALJ Case No. 2005-SOX-015.
- Is a subsidiary categorically covered under §806 (e.g., Morefield/Walters)? If so, does the level of ownership of the subsidiary play a factor in that coverage?
- Under SOX's whistleblower protection provision, must a nonpublicly held subsidiary respondent be an agent of a publicly held company? What are the factors under a §806 agency test?
- Is the integrated enterprise test applieable to §806? If so, should the Board consider the "centralized control of labor relations" the most appropriate factor?
- Is there any other theory under which you contend that subsidiaries would be covered under §806? If so, explain.
This all comes about because of the way Congress drafted the Whistleblower section of SOX, originally §806 and now recodified as 18 U.S.C. §1541A:
Whistleblower Protection for Employees of Publicly Traded Companies.— No company with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l), or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o (d)), 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 any lawful act done by the employee—
When I was drafting the SOX chapter (28) of the Texas Association of Business Texas Employment Law Book
, I mentioned that since most publicly held companies were holding companies with few employees, it was possible that arguments would be made that whistleblowers who worked for non-public subsidiaries might not be covered, which would of course have been a major loop hole. And I was at least right that the argument has been made, not terribly successfully I am afraid.
In fact in the last edition, after noting that the entity often registered with the SEC is the holding company, with only a small number of employees, I had to say:
Although some of the initial decisions by the Administrative Law Judges adopted this view, the Administrative Review Board has taken a broader approach, finding such companies liable under an agency theory. The only Circuit Court to address the issue has adopted a similar view.
But from their request for help, what's clear is that the ARB is still puzzled as to what the right rationale for answering the question is.
Not to be a cynic, it's an interesting question, but it's sort of like asking a condemned man if he has a preference for his method of execution. Polite to be sure, but it's highly unlikely to change the ultimate outcome.