Lowe v. SECAnnotate this Case
472 U.S. 181 (1985)
U.S. Supreme Court
Lowe v. SEC, 472 U.S. 181 (1985)
Lowe v. Securities and Exchange Commission
Argued January 7, 1986
Decided June 10, 1985
472 U.S. 181
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR
THE SECOND CIRCUIT
Petitioner Lowe is the president and principal shareholder of a corporation (also a petitioner) that was registered as an investment adviser under the Investment Advisers Act of 1940 (Act). Because Lowe was convicted of various offenses involving investments, the Securities and Exchange Commission (SEC), after a hearing, ordered that the corporation's registration be revoked and that Lowe not associate with any investment adviser. Thereafter, the SEC brought an action in Federal District Court, alleging that Lowe, the corporation, and two other unregistered corporations (also petitioners) were violating the Act, and that Lowe was violating the SEC's order by publishing, for paid subscribers, purportedly semimonthly newsletters containing investment advice and commentary. After determining that petitioners' publications were protected by the First Amendment, the District Court, denying for the most part the SEC's requested injunctive relief, held that the Act must be construed to allow a publisher who is willing to comply with the Act's reporting and disclosure requirements to register for the limited purpose of publishing such material and to engage in such publishing. The Court of Appeals reversed, holding that the Act does not distinguish between person-to-person advice and impersonal advice given in publications, that petitioners were engaged in business as "investment advisers" within the meaning of the Act, and that the exclusion in § 202(a)(11)(D) of the Act from the Act's definition of covered "investment advisers" for "the publisher of any bona fide newspaper, news magazine, or business or financial publication of general and regular circulation" did not apply to petitioners. Rejecting petitioners' constitutional claim, the court further held that Lowe's history of criminal conduct justified the characterization of petitioners' publications "as potentially deceptive commercial speech."
Held: Petitioners' publications fall within the statutory exclusion for bona fide publications, none of the petitioners is an "investment adviser" as defined in the Act, and therefore neither petitioners' unregistered status nor the SEC order against Lowe provides a justification for restraining the future publication of their newsletters. Pp. 472 U. S. 190-211.
(a) The Act's legislative history plainly demonstrates that Congress was primarily interested in regulating the business of rendering personalized investment advice, including publishing activities that are a normal incident thereto. On the other hand, Congress, plainly sensitive to First Amendment concerns, wanted to make clear that it did not seek to regulate the press through the licensing of nonpersonalized publishing activities. Pp. 472 U. S. 203-204.
(b) Because the content of petitioners' newsletters was completely disinterested, and because they were offered to the general public on a regular schedule, they are described by the plain language of § 202(a)(11)(D)'s exclusion. The mere fact that a publication contains advice and comment about specific securities does not give it the personalized character that identifies a professional investment adviser. Thus, petitioners' newsletters do not fit within the Act's central purpose, because they do not offer individualized advice attuned to any specific portfolio or to any client's particular needs. On the contrary, they circulate for sale to the public in a free, open market. Lowe's unsavory history does not prevent the newsletters from being "bona fide" within the meaning of the exclusion. In light of the legislative history, the term "bona fide" translates best to "genuine"; petitioners' publications meet this definition. Moreover, the publications are "of general and regular circulation." Although they have not been published on a regular semimonthly basis as advertised, and thus have not been "regular" in the sense of consistent circulation, they have been "regular" in the sense important to the securities market. Pp. 472 U. S. 204-209.
725 F.2d 892, reversed.
STEVENS, J., delivered the opinion of the Court, in which BRENNAN, MARSHALL, BLACKMUN, and O'CONNOR, JJ., joined. WHITE, J., filed an opinion concurring in the result, in which BURGER, C.J., and REHNQUIST, J., joined, post, p. 472 U. S. 211. POWELL, J., took no part in the decision of the case.
JUSTICE STEVENS delivered the opinion of the Court.
The question is whether petitioners may be permanently enjoined from publishing nonpersonalized investment advice and commentary in securities newsletters because they are not registered as investment advisers under § 203(c) of the Investment Advisers Act of 1940 (Act), 54 Stat. 850, 15 U.S.C. § 80b-3(c).
Christopher Lowe is the president and principal shareholder of Lowe Management Corporation. From 1974 until 1981, the corporation was registered as an investment adviser under the Act. [Footnote 1] During that period, Lowe was convicted of misappropriating funds of an investment client, of engaging in business as an investment adviser without filing a registration application with New York's Department of Law, of tampering with evidence to cover up fraud of an investment client, and of stealing from a bank. [Footnote 2] Consequently, on May 11, 1981, the Securities and Exchange Commission (Commission), after a full hearing before an Administrative Law Judge, entered an order revoking the registration of the Lowe Management Corporation, and ordering Lowe not to associate thereafter with any investment adviser.
In fashioning its remedy, the Commission took into account the fact that petitioners "are now solely engaged in the business of publishing advisory publications." The Commission noted that, unless the registration was revoked, petitioners
would be "free to engage in all aspects of the advisory business," and that even their publishing activities afforded them "opportunities for dishonesty and self-dealing." [Footnote 3]
A little over a year later, the Commission commenced this action by filing a complaint in the United States District Court for the Eastern District of New York, alleging that Lowe, the Lowe Management Corporation, and two other corporations [Footnote 4] were violating the Act, and that Lowe was violating the Commission's order. The principal charge in the complaint was that Lowe and the three corporations (petitioners) were publishing two investment newsletters and soliciting subscriptions for a stock-chart service. The complaint alleged that, through those publications, the petitioners were engaged in the business of advising others
"as to the advisability of investing in, purchasing, or selling securities . . . and as a part of a regular business . . . issuing reports concerning securities. [Footnote 5]"
Because none of the petitioners was registered or exempt from registration under the Act, the use of the mails in connection with the advisory business allegedly violated § 203(a) of the Act. The Commission prayed for a permanent injunction restraining the further distribution of petitioners' investment advisory publications;
for a permanent injunction enforcing compliance with the order of May 11, 1981; and for other relief. [Footnote 6]
Although three publications are involved in this litigation, only one need be described. A typical issue of the Lowe Investment and Financial Letter contained general commentary about the securities and bullion markets, reviews of market indicators and investment strategies, and specific recommendations for buying, selling, or holding stocks and bullion. The newsletter advertised a "telephone hotline" over which subscribers could call to get current information. The number of subscribers to the newsletter ranged from 3,000 to 19,000. It was advertised as a semimonthly publication, but only eight issues were published in the 15 months after the entry of the 1981 order. [Footnote 7]
Subscribers who testified at the trial criticized the lack of regularity of publication, [Footnote 8] but no adverse evidence concerning the quality of the publications was offered. There was no evidence that Lowe's criminal convictions were related to the publications; [Footnote 9] no evidence that Lowe had engaged in any
trading activity in any securities that were the subject of advice or comment in the publications; and no contention that any of the information published in the advisory services had been false or materially misleading. [Footnote 10]
For the most part, the District Court denied the Commission the relief it requested. 556 F.Supp. 1359, 1371 (EDNY 1983). The court did enjoin petitioners from giving information to their subscribers by telephone, individual letter, or in person, but it refused to enjoin them from continuing their publication activities or to require them to disgorge any of the earnings from the publications. [Footnote 11] The District Court acknowledged that the face of the statute did not differentiate between persons whose only advisory activity is the "publication of impersonal investment suggestions, reports and analyses" and those who rendered person-to-person advice, but concluded that constitutional considerations suggested the need for such a distinction. [Footnote 12] After determining that petitioners' publications were protected by the First Amendment, the District Court held that the Act must be construed to allow a publisher who is willing to comply with the existing reporting and disclosure requirements to register for the limited purpose of publishing such material and to engage in such publishing. [Footnote 13]
A splintered panel of the Court of Appeals for the Second Circuit reversed. 725 F.2d 892 (1984). The majority first
held that petitioners were engaged in business as "investment advisers" within the meaning of the Act. It concluded that the Act does not distinguish between person-to-person advice and impersonal advice given in printed publications. [Footnote 14] Rather, in its view, the key statutory question was whether the exclusion in § 202(a)(11)(D), 15 U.S.C. § 80b-2(a)(11)(D), for "the publisher of any bona fide newspaper, news magazine, or business or financial publication of general and regular circulation" applied to the petitioners. Relying on its decision in SEC v. Wall Street Transcript Corp., 422 F.2d 1371, cert. denied, 398 U.S. 958 (1970), the Court of Appeals concluded that the exclusion was inapplicable. [Footnote 15]
Next, the Court of Appeals rejected petitioners' constitutional claim, reasoning that this case involves "precisely the kind of regulation of commercial activity permissible under the First Amendment." [Footnote 16] Moreover, it held that Lowe's history of criminal conduct while acting as an investment adviser justified the characterization of his publications "as potentially deceptive commercial speech." [Footnote 17] The Court of Appeals reasoned that a ruling that petitioners
"may not sell their views as to the purchase, sale, or holding of certain securities is no different from saying that a disbarred lawyer may not sell legal advice. [Footnote 18]"
Finally, the court noted that its holding was limited to a prohibition against selling advice to clients about specific securities. [Footnote 19] Thus, the Court of
Appeals apparently assumed that petitioners could continue publishing their newsletters if their content was modified to exclude any advice about specific securities. [Footnote 20]
One judge concurred separately, although acknowledging his agreement with the court's opinion. [Footnote 21] The dissenting judge agreed that Lowe may not hold himself out as a registered investment adviser and may not engage in any fraudulent activity in connection with his publications, but concluded that the majority had authorized an invalid prior restraint on the publication of constitutionally protected speech. To avoid the constitutional question, he would have adopted the District Court's construction of the Act. [Footnote 22]
We granted certiorari to consider the important constitutional question whether an injunction against the publication
and distribution of petitioners' newsletters is prohibited by the First Amendment. 469 U.S. 815 (1984). [Footnote 23] Petitioners contend that such an injunction strikes at the very foundation of the freedom of the press by subjecting it to license and censorship, see, e.g., Lovell v. City of Griffin,303 U. S. 444, 303 U. S. 451 (1938). Brief for Petitioners 15-19. In response, the Commission argues that the history of abuses in the securities industry amply justified Congress' decision to require the registration of investment advisers, to regulate their professional activities, and, as an incident to such regulation, to prohibit unregistered and unqualified persons from engaging in that business. Brief for Respondent 10; cf. Konigsberg v. State Bar of California,366 U. S. 36, 366 U. S. 50-51 (1961). In reply, petitioners acknowledge that person-to-person communication in a commercial setting may be subjected to regulation that would be impermissible in a public forum, cf. Ohralik v. Ohio State Bar Assn.,436 U. S. 447, 436 U. S. 455 (1978), but contend that the regulated class -- investment advisers -- may not be so broadly defined as to encompass the distribution of impersonal investment advice and commentary in a public market. Reply Brief for Petitioners 1-4.
In order to evaluate the parties' constitutional arguments, it is obviously necessary first to understand, as precisely as possible, the extent to which the Act was intended to regulate
the publication of investment advice and the reasons that motivated Congress to authorize such regulation. Moreover, in view of the fact that we should "not decide a constitutional question if there is some other ground upon which to dispose of the case," [Footnote 24] and the further fact that the District Court and the dissenting judge in the Court of Appeals both believed that the case should be decided on statutory grounds, a careful study of the statute may either eliminate, or narrowly limit, the constitutional question that we must confront. We therefore begin with a review of the background of the Act, with a particular focus on the legislative history describing the character of the profession that Congress intended to regulate.
As we observed in SEC v. Capital Gains Research Bureau, Inc., the
"Investment Advisers Act of 1940 was the last in a series of acts designed to eliminate certain abuses in the securities industry, abuses which were found to have contributed to the stock market crash of 1929 and the depression of the 1930's. [Footnote 25]"
The Act had its genesis in the Public Utility Holding Company Act of 1935, which "authorized and directed" the Commission
to make a study of the functions and activities of investment trusts and investment companies . . . and to report the results of its study and its recommendations to the Congress on or before January 4, 1937. [Footnote 26]
Pursuant to this instruction, the Commission transmitted to Congress its study on investment counsel, investment management, investment supervisory, and investment advisory services. [Footnote 27]
The Report focused on "some of the more important problems of these investment counsel organizations;" [Footnote 28] significantly, the Report stated that it
"was intended to exclude any person or organization which was engaged in the business of furnishing investment analysis, opinion, or advice solely through publications distributed to a list of subscribers, and did not furnish specific advice to any client with respect to securities. [Footnote 29]"
The Report traced the history and growth of investment counsel, noting that the profession did not emerge until after World War 1. [Footnote 30] In the 1920's, "a distinct class of persons . . . held themselves out as giving only personalized investment advisory service"; rapid growth began in 1929, and markedly increased in the mid-1930's in response
"to the demands of the investing public, which required supervision of its security investments after its experience during the depression years. [Footnote 31] "
Regarding the functions of investment counselors, the Report stated that
"[s]ome of the representatives of investment counsel firms urged that the primary function of investment counselors was"
"to render to clients, on a personal basis, competent, unbiased, and continuous advice regarding the sound management of their investments. [Footnote 32]"
Nevertheless, it noted that one investment counselor conceded:
"[Y]ou have a gradation from individuals who are professed tipsters and do not make any pretense of being anything else, all the way up the scale to the type of individual who, as you say, desires to give the impartial scientific professional advice to persons who are trying to plan their economic situation in the light of accomplishing various results, making provision for old age, education, and so forth. However, you can readily see . . . that a very significant part of that problem, as far as we are concerned, and possibly the most vital one, is, shall we say, the individuals on the fringes. . . . [Footnote 33]"
Representatives of the industry viewed the functions of investment counselors slightly differently, concluding that they should serve
"individuals and institutions with substantial funds who require continuous supervision of their investments and a program of investment to cover their entire economic
needs. [Footnote 34]"
Turning to the problems of investment counselors, the Report concluded that they fell within two categories:
"(a) the problem of distinguishing between bona fide investment counselors and 'tipster' organizations; and (b) those problems involving the organization and operation of investment counsel institutions. [Footnote 35] "
The Commission's work
"culminated in the preparation and introduction by Senator Wagner of the bill which, with some changes, became the Investment Advisers Act of 1940. [Footnote 36]"
Senator Wagner's bill, S. 3580, contained two Titles; the first, concerning investment companies, contained a definition of "investment adviser," [Footnote 37] but the second, concerning investment advisers, did not. After the introduction of S. 3580, a Senate Subcommittee held lengthy hearings at which numerous statements concerning investment advisers
were received. [Footnote 38] One witness distinguishing the investment counsel profession from investment firms and businesses, explained:
"It is a personal service profession, and depends for its success upon a close personal and confidential relationship between the investment counsel firm and its client. It requires frequent and personal contact of a professional nature between us and our clients. . . ."
"* * * *"
"We must establish with each client a relationship of trust and confidence designed to last over a period of
time because economic forces work themselves out slowly. Business and investment cycles last for years, and our investment plans have to be similarly long-range. No investment counsel firm could long remain in business or be of real benefit to clients except through such long-term associations. . . ."
". . . Judgment of the client's circumstances and of the soundness of his financial objectives and of the risks he may assume. Judgment is the root and branch of the decisions to recommend changes in a client's security holdings. If the investment counsel profession, as we have described it, could not offer this kind of judgment with its supporting experience and information, it would not have anything to sell that could not be bought in almost any bookstore. . . ."
"Furthermore, our clients are not unsophisticated in financial matters. They are resourceful men and women of means who are very critical in their examination of our performance. If they disapprove of our activities, they cancel their contracts with us, which eliminates our only source of income."
"* * * *"
"We are quite clearly not 'hit and run' tipsters, nor do we deal with our clients at arms' length through the advertising columns of the newspapers or the mails; in fact, we regard it as a major defeat if we are unable to have frequent personal contact with a client and with his associates and dependents. We do not publish for general distribution a statistical service or compendium of general economic observations or financial recommendations. To use a hackneyed phrase, our business is 'tailor-made.' [Footnote 39] "
David Schenker, Chief Counsel of the Commission's Investment Trust Study, summarized the extent of the proposed legislation: "If you have been convicted of a crime, you cannot be an investment counselor and you cannot use the mails to perpetrate a fraud," Senate Hearings 996. Schenker provided the Subcommittee with a significant report [Footnote 40] prepared by the Research Department of the Illinois Legislative Council. Ibid. Referring to possible regulation of investment counselors in the State of Illinois, the report stated in part:
"Regulatory statutes concerning investment counselors appear to exempt from their provisions those who furnish advice without remuneration or valuable consideration, apparently because it is thought impracticable to regulate such gratuitous services. Newspapers and journals generally also seem to be excluded, although this is not explicitly stated in the statutes, the exemption apparently being based on general constitutional and legal principles."
"* * * *
"A particular problem in defining the application of a law regulating investment counselors arises from the existence of individuals and.firms who furnish investment advice solely by means of publications. Insofar as such individuals and firms also render specialized advice to individual clients, they might be subject to any regulatory measure that may be adopted. The question arises, however, as to whether or not services which give the same general advice to all their clients, by means of some circular or other publication, are actually engaged in a type of investment counseling as to which regulation is feasible."
"* * * *"
"These investment services which function through publications sent to their subscribers, rather than through individualized advice, would present several difficulties not found in regulating investment counselors generally. In the first place, the large number of agencies publishing investment facts and interpretations is well known, and a very large administrative staff would be required to enforce detailed registration. Secondly, such information is supplied both by newspapers and by specialized financial journals and services. The accepted rights of freedom of the press and due process of law might prevent any general regulation, and perhaps also supervision over particular types of publications, even if the advertisements of these publications occasionally quite exaggerate the value of the factual information which is supplied. That the constitutional guarantee of liberty of the press is applicable to publications of all types, and not only to newspapers, has been clearly indicated by the United States Supreme Court [citing Lovell v. City of Griffin,303 U. S. 444 (1938)]. . . ."
"* * * *"
"To the problem of formulating reasonable and practicable regulations for the factual services must, accordingly, be added the legal and constitutional difficulties inherent in the attempted regulation of any individual or
organization functioning primarily by means of published circulars and volumes. However, liberty of the press is not an absolute right, and some types of regulation may be both constitutional and feasible, assuming that regulation of some sort is thought desirable. Such regulation could probably not legally take the form of licensing publications or prohibiting certain types of publications. Regulation of the publishing of investment advice in order to conform with constitutional requirements, would probably have to be confined to punishing, by civil or criminal penalties, those who perpetrate or attempt to perpetrate frauds or other specific acts declared to be contrary to law."
"* * * *"
"It may be thought desirable specifically to exclude from regulation the publishers of generalized investment information, along with those who furnish economic advice generally. This may be done by carefully defining the term 'investment counselor' so as to exclude"
"any person or organization which engages in the business of furnishing investment analysis, opinion, or advice solely through publications distributed to a list of subscribers, and not furnishing specific advice to any client with respect to securities, and also persons or organizations furnishing only economic advice, and not advice relating to the purchase or sale of securities. [Footnote 41]"
After the Senate Subcommittee hearings on S. 3580, and after meetings attended by representatives of investment adviser firms, a voluntary association of investment advisers, and the Commission, a revised bill, S. 4108, was reported by the Senate Committee on Banking and Currency. In the Report accompanying the revised bill, the Committee on Banking and Currency wrote:
"Not only must the public be protected from the frauds and misrepresentations of unscrupulous tipsters and
touts, but the bona fide investment adviser must be safeguarded against the stigma of the activities of these individuals. Virtually no limitations or restrictions exist with respect to the honesty and integrity of individuals who may solicit funds to be controlled, managed, and supervised. Persons who may have been convicted or enjoined by courts because of perpetration of securities fraud are able to assume the role of investment advisers."
"* * * *"
"Title II recognizes that, with respect to a certain class of investment advisers, a type of personalized relationship may exist with their clients. As a consequence, this relationship is a factor which should be considered in connection with the enforcement by the Commission of the provisions of this bill. [Footnote 42]"
Committee on Interstate and Foreign Commerce wrote in its Report accompanying the bill:
"The essential purpose of Title II of this bill is to protect the public from the frauds and misrepresentations of unscrupulous tipsters and touts and to safeguard the honest investment adviser against the stigma of the activities of these individuals by making fraudulent practices by investment advisers unlawful. The title also recognizes the personalized character of the services of investment advisers, and especial care has been taken in the drafting of the bill to respect this relationship between investment advisers and their clients. [Footnote 45]"
The definition of "investment adviser" included in Title II when the Act was passed, 54 Stat. 848-849, is in all relevant respects identical to the definition before the Court today. [Footnote 46]
The basic definition of an "investment adviser" in the Act reads as follows:
"'Investment adviser' means any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities. . . . [Footnote 47]"
Petitioners' newsletters are distributed "for compensation and as part of a regular business," and they contain "analyses or reports concerning securities." Thus, on its face, the
basic definition applies to petitioners. The definition, however, is far from absolute. The Act excludes several categories of persons from its definition of an investment adviser, lists certain investment advisers who need not be registered, and also authorizes the Commission to exclude "such other person" as it may designate by rule or order. [Footnote 48]
One of the statutory exclusions is for "the publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation." [Footnote 49] Although neither the text of the Act nor its legislative history defines the precise scope of this exclusion, two points seem tolerably clear. Congress did not intend to exclude publications that are distributed by investment advisers as a normal part of the business of servicing their clients. The legislative history plainly demonstrates that Congress was primarily interested in regulating the business of rendering personalized investment advice, including publishing activities that are a normal incident thereto. On the other hand, Congress, plainly sensitive to First Amendment concerns, wanted to make clear that it did not seek to regulate the press through the licensing of nonpersonalized publishing activities.
Congress was undoubtedly aware of two major First Amendment cases that this Court decided before the enactment of the Act. The first, Near v. Minnesota ex rel. Olson,283 U. S. 697 (1931), established that
"liberty of the press, and of speech, is within the liberty safeguarded by the due process clause of the Fourteenth Amendment from invasion by state action."
Id. at 283 U. S. 707. In Near, the Court emphatically stated that the "chief purpose" of the press guarantee was "to prevent previous restraints upon publication," id. at 283 U. S. 713, and held that the Minnesota nuisance statute at issue in that case was unconstitutional because it authorized a prior restraint on publication.
Almost seven years later, the Court decided Lovell v. City of Griffin,303 U. S. 444 (1938), a case that was expressly
noted by the Commission during the Senate Subcommittee hearings. In striking down an ordinance prohibiting the distribution of literature within the city without a permit, the Court wrote:
"We think that the ordinance is invalid on its face. Whatever the motive which induced its adoption, its character is such that it strikes at the very foundation of the freedom of the press by subjecting it to license and censorship. The struggle for the freedom of the press was primarily directed against the power of the licensor. It was against that power that John Milton directed his assault by his 'Appeal for the Liberty of Unlicensed Printing.' And the liberty of the press became initially a right to publish 'without a license what formerly could be published only with one.' While this freedom from previous restraint upon publication cannot be regarded as exhausting the guaranty of liberty, the prevention of that restraint was a leading purpose in the adoption of the constitutional provision. . . ."
"The liberty of the press is not confined to newspapers and periodicals. It necessarily embraces pamphlets and leaflets. These indeed have been historic weapons in the defense of liberty, as the pamphlets of Thomas Paine and others in our own history abundantly attest. The press in its historic connotation comprehends every sort of publication which affords a vehicle of information and opinion. What we have had recent occasion to say with respect to the vital importance of protecting this essential liberty from every sort of infringement need not be repeated. Near v. Minnesota. . . ."
Id. at 303 U. S. 451-452 (emphasis in original) (footnote omitted). The reasoning of Lovell, particularly since the case was cited in the legislative history, supports a broad reading of the exclusion for publishers. [Footnote 50]
The exclusion itself uses extremely broad language that encompasses any newspaper, business publication, or financial publication provided that two conditions are met. The publication must be "bona fide," and it must be "of regular and general circulation." Neither of these conditions is defined, but the two qualifications precisely differentiate "hit and run tipsters" and "touts" from genuine publishers. Presumably a "bona fide" publication would be genuine in the sense that it would contain disinterested commentary and analysis, as opposed to promotional material disseminated by a "tout." Moreover, publications with a "general and regular" circulation would not include "people who send out bulletins from time to time on the advisability of buying and selling stocks," see Hearings on H.R. 10065, at 87, or "hit and run tipsters." [Footnote 51] Ibid. Because the content of petitioners' newsletters was completely disinterested, and because they were offered to the general public on a regular schedule, they are described by the plain language of the exclusion.
The Court of Appeals relied on its opinion in SEC v. Wall Street Transcript Corp., 422 F.2d 1371 (CA2), cert. denied,
398 U.S. 958 (1970), to hold that petitioners were not bona fide newspapers, and thus not exempt from the Act's registration requirement. In Wall Street Transcript, the majority held that the
"phrase 'bona fide' newspapers . . . means those publications which do not deviate from customary newspaper activities to such an extent that there is a likelihood that the wrongdoing which the Act was designed to prevent has occurred."
It reasoned that whether
"a given publication fits within this exclusion must depend upon the nature of its practices, rather than upon the purely formal 'indicia of a newspaper' which it exhibits on its face and in the size and nature of its subscription list."
422 F.2d at 1377. The court expressed its concern that an investment adviser "might choose to present [information to clients] in the guise of traditional newspaper format." Id. at 1378. The Commission, citing Wall Street Transcript, has interpreted the exclusion to apply
"only where, based on the content, advertising material, readership and other relevant factors, a publication is not primarily a vehicle for distributing investment advice. [Footnote 52]"
These various formulations recast the statutory language without capturing the central thrust of the legislative history, and without even mentioning the apparent intent of Congress to keep the Act free of constitutional infirmities. [Footnote 53] The Act was designed to apply to those persons
engaged in the investment-advisory profession -- those who provide personalized advice attuned to a client's concerns, whether by written or verbal communication. [Footnote 54] The mere fact that a publication contains advice and comment about specific securities does not give it the personalized character that identifies a professional investment adviser. Thus, petitioners' publications do not fit within the central purpose of the Act, because they do not offer individualized advice attuned to any specific portfolio or to any client's particular needs. On the contrary, they circulate for sale to the public at large in a free, open market -- a public forum in which typically anyone may express his views.
The language of the exclusion, read literally, seems to describe petitioners' newsletters. Petitioners are "publishers of any bona fide newspaper, news magazine or business or financial publication." The only modifier that might arguably disqualify the newsletters are the words "bona fide." Notably, however, those words describe the publication, rather than the character of the publisher; hence Lowe's unsavory history does not prevent his newsletters from being "bona fide." In light of the legislative history, this phrase translates best to "genuine"; petitioners' publications meet
this definition: they are published by those engaged solely in the publishing business, and are not personal communications masquerading in the clothing of newspapers, news magazines, or financial publications. Moreover, there is no suggestion that they contained any false or misleading information, or that they were designed to tout any security in which petitioners had an interest. Further, petitioners' publications are "of general and regular circulation." [Footnote 55] Although the publications have not been "regular" in the sense of consistent circulation, the publications have been "regular" in the sense important to the securities market: there is no indication that they have been timed to specific market activity, or to events affecting or having the ability to affect the securities industry. [Footnote 56]
The dangers of fraud, deception, or overreaching that motivated the enactment of the statute are present in personalized communications, but are not replicated in publications that are advertised and sold in an open market. [Footnote 57] To the extent that the chart service contains factual information about past transactions and market trends, and the newsletters contain commentary on general market conditions, there can be no doubt about the protected character of the communications, [Footnote 58] a matter that concerned Congress when the exclusion was drafted. The content of the publications and the audience to which they are directed in this case reveal the specific limits of the exclusion. As long as the communications between petitioners and their subscribers remain entirely impersonal and do not develop into the kind of fiduciary, person-to-person relationships that were discussed at length in the legislative history of the Act and that are characteristic of investment adviser-client relationships, we believe the publications are, at least presumptively, within the exclusion, and thus not subject to registration under the Act. [Footnote 59]
We therefore conclude that petitioners' publications fall within the statutory exclusion for bona fide publications, and that none of the petitioners is an "investment adviser" as defined in the Act. It follows that neither their unregistered status, nor the Commission order barring Lowe from associating with an investment adviser, provides a justification for restraining the future publication of their newsletters. It also follows that we need not specifically address the constitutional question we granted certiorari to decide.
The judgment of the Court of Appeals is reversed.
It is so ordered.
JUSTICE POWELL took no part in the decision of this case.
In re Lowe Management Corp., [1981 Transfer Binder] CCH Fed.Sec.L.Rep.