Lowe v. Securities & Exchange Commission
472 U.S. 181, 105 S. Ct. 2557, 1985 U.S. LEXIS 125 (1985)
Rule of Law:
The Investment Advisers Act of 1940's definition of "investment adviser" and its exclusion for "the publisher of any bona fide newspaper, news magazine, or business or financial publication of general and regular circulation" does not apply to publications that offer impersonal investment advice to the general public, as such publications fall within the statutory exclusion and do not establish the personalized, fiduciary relationships the Act was designed to regulate.
Facts:
- From 1974 until 1981, Lowe Management Corporation, whose president and principal shareholder was Christopher Lowe, was registered as an investment adviser under the Investment Advisers Act of 1940.
- During this period, Christopher Lowe was convicted of misappropriating client funds, operating as an unregistered investment adviser in New York, tampering with evidence to conceal fraud, and stealing from a bank.
- On May 11, 1981, the Securities and Exchange Commission (SEC) revoked Lowe Management Corporation's registration and ordered Christopher Lowe not to associate with any investment adviser, noting that petitioners were then solely engaged in publishing advisory publications.
- After the 1981 order, Christopher Lowe and his associated corporations continued publishing two investment newsletters, including the "Lowe Investment and Financial Letter," and solicited subscriptions for a stock-chart service.
- The "Lowe Investment and Financial Letter" contained general commentary, market reviews, investment strategies, and specific buy, sell, or hold recommendations for stocks and bullion, and advertised a telephone hotline for current information.
- The number of subscribers to the "Lowe Investment and Financial Letter" ranged from 3,000 to 19,000, and the publication was advertised as semimonthly.
- There was no evidence that Lowe's criminal convictions were related to the publications, that Lowe engaged in trading in recommended securities, or that any information in the advisory services was false or misleading.
- Subscribers testified about the lack of regularity of publication, but no adverse evidence regarding the quality of the publications was offered.
Procedural Posture:
- The SEC filed a complaint in the United States District Court for the Eastern District of New York, alleging that Christopher Lowe and his corporations were violating the Act by publishing investment newsletters and violating Lowe's SEC bar order.
- The District Court generally denied the SEC's requested relief, enjoining petitioners only from giving advice by telephone, individual letter, or in person, but allowing them to continue publication activities.
- The Court of Appeals for the Second Circuit reversed the District Court, holding that petitioners were "investment advisers" under the Act, the Act did not distinguish between personalized and impersonal advice, and the "bona fide newspaper" exclusion did not apply. It also rejected petitioners' First Amendment claim.
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Issue:
Does the Investment Advisers Act of 1940 require individuals who publish impersonal investment advice and commentary in general circulation newsletters to register as investment advisers, or are such publications excluded as "bona fide newspapers, news magazines, or business or financial publications of general and regular circulation" under the Act, thereby avoiding potential First Amendment concerns?
Opinions:
Majority - Justice Stevens
No, the Investment Advisers Act of 1940 does not require petitioners to register as investment advisers because their publications fall within the statutory exclusion for bona fide publications. The Court found that while the literal definition of an "investment adviser" might appear to cover petitioners, the Act contains an exclusion for "the publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation." Based on a review of the legislative history, Congress intended to regulate persons offering personalized investment advice, characterized by a fiduciary, person-to-person relationship, rather than impersonal publishing activities. The SEC's own report leading to the Act explicitly stated an intention to exclude publishers who furnished advice solely through publications to subscribers without providing specific advice to clients. Congress also demonstrated sensitivity to First Amendment concerns, as evidenced by references to Near v. Minnesota and Lovell v. City of Griffin, which oppose prior restraints on publication. The terms "bona fide" and "general and regular circulation" in the exclusion differentiate genuine, disinterested publishers from "tipsters" or "touts" offering episodic or promotional material. Petitioners' newsletters meet these criteria because they are published by those solely in the publishing business, offer disinterested commentary, are not masquerading as personal communications, contain no false information, and are circulated to the public at large on a regular schedule. The dangers of fraud that motivated the Act are primarily present in personalized communications, not in publications sold in an open market. Therefore, the publications are presumptively within the exclusion, and the Court avoids addressing the constitutional question.
Concurring - Justice White
Yes, petitioners are investment advisers subject to regulation under the Act, but preventing them from publishing is inconsistent with the First Amendment. Justice White disagreed with the majority's statutory construction, arguing that the plain language of the Act's definition of "investment adviser" covers those who advise "through publications or writings" or "issues or promulgates analyses or reports concerning securities." He noted that the SEC has consistently interpreted the Act to apply to publishers of investment newsletters since its inception and that this administrative construction is entitled to substantial weight. Furthermore, the legislative history, including testimony from SEC and industry representatives, indicated an understanding that publishers of investment newsletters would be covered. Expanding the "bona fide publications" exception as the majority did renders key parts of the primary definition superfluous and frustrates the Act's policy by hindering its application to prevent practices like "scalping," as addressed in SEC v. Capital Gains Research Bureau, Inc. While acknowledging the principle of constitutional avoidance, Justice White argued that the majority's construction materially deviates from the legislative plan. He concluded that the application of the Act's enforcement provisions to prohibit impersonal publishing activities constitutes a direct restraint on freedom of speech and the press, rather than merely a permissible regulation of a profession. Although the government can license professions (like law) where speech is incidental to professional conduct, this does not extend to licensing speech or the press per se. Even under the commercial speech doctrine, a flat prohibition on publishing any advice, regardless of its content, based on a mere possibility of future fraud, is too extreme and not narrowly tailored, as less drastic remedies (e.g., antifraud provisions) are available. Therefore, the Act cannot constitutionally be applied to prevent unregistered persons from offering impersonal investment advice through publications.
Analysis:
This case significantly narrowed the scope of the Investment Advisers Act of 1940 by interpreting the "bona fide publications" exclusion broadly, thereby protecting certain impersonal investment newsletters from registration requirements. The Court opted for statutory construction to avoid a direct First Amendment ruling on prior restraints on speech concerning commercial activity. This decision reinforces the principle that regulations impacting speech, even in a commercial context, will be carefully scrutinized, pushing regulatory bodies to target specific fraudulent conduct rather than imposing broad licensing schemes on publishers. It highlights the ongoing tension between government interests in investor protection and constitutional guarantees of freedom of the press.
