The
New York Court of Appeals refused to carve out an exception for a hedge fund’s
chief compliance officer from the common law doctrine that does not recognize a
cause of action for the wrongful discharge of an employee-at-will. While
acknowledging that compliance with extensive SEC regulations
overseen at hedge funds by compliance officers is an integral part of the
securities business, the court said that the existence of federal regulation
furnishes no reason to make state common law governing the employer-employee
relationship more intrusive. In an opinion by Judge Smith, the court said that Congress can regulate that relationship itself to the extent that it thinks the objectives of federal law
require it. The court rejected that the assertion that the legal and ethical
duties of a securities firm and its compliance officer justify recognizing a
cause of action for damages when the compliance officer is fired for objecting
to misconduct, such as deceptive trading practices. Sullivan v. Harnisch, New York Court of Appeals, No. 82, May 8, 2012.
The chief compliance officer emphasized the importance of compliance
officers in the overall scheme of federal securities regulation to which the
hedge fund, as a registered investment adviser, was subject. The SEC has found
that it is critically important for funds and advisers to have strong systems
of controls in place, and requires each registered adviser to designate a chief
compliance officer who will be responsible for administering policies and
procedures designed to prevent violations of federal law and regulations. From
this, the chief compliance officer analogized that compliance with securities
laws was central to his relationship with the hedge fund in the same way that
ethical behavior as a lawyer was central to employment at a law firm.
Important as regulatory compliance is, said the court in rejecting the
analogy, the regulatory and ethical obligations of the chief compliance officer
and his duties as an employee were not so closely linked as to be incapable of
separation. The chief compliance officer was not associated with other
compliance officers in a firm where all were subject to self-regulation as
members of a common profession. Indeed, he was not even a full-time compliance officer.
He had four other titles at the hedge fund, including executive vice president
and chief operating officer, and was, according to his claim, a 15 percent
partner in the business. Thus, the court found that regulatory compliance was
not at the core and the only purpose of his employment.
Congress passed the Dodd-Frank Act, which in Section 922 provides
whistleblower protection, including a private right of action for double back
pay, for employees who are fired for furnishing information about violations of
the securities laws to the SEC (Dodd-Frank Act § 922 [a], 15 USC § 78u-6). But
Section 922 seems not to apply to conduct like that alleged here, said the
Court, since the chief compliance officer does not claim to have blown a
whistle, that is, he does not claim to have told the SEC or anyone else outside
the hedge fund about the alleged misconduct. Nothing in federal law persuaded
the court to change New York