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The Robare Group, Ltd. v. Securities and Exchange Commission

United States Court of Appeals, District of Columbia Circuit

April 30, 2019

The Robare Group, Ltd., et al., Petitioners
v.
Securities and Exchange Commission, Respondent

          Argued January 23, 2019

          On Petition for Review of an Order of the Securities & Exchange Commission

          Heidi E. VonderHeide argued the cause for petitioners. With her on the briefs was Alan M. Wolper.

          Daniel E. Matro, Senior Counsel, U.S. Securities and Exchange Commission, argued the cause for respondent. With him on the brief was John W. Avery, Deputy Solicitor.

          Before: Rogers, Millett, and Katsas, Circuit Judges.

          OPINION

          Rogers Circuit Judge.

         The Robare Group, an investment adviser, and its principals petition for review of the decision of the Securities and Exchange Commission that they violated Section 206(2) and Section 207 of the Investment Advisers Act, 15 U.S.C. §§ 80b-6(2), 80b-7. They contend that the Commission's findings of inadequate disclosure of financial conflicts of interest over a period of years are not supported by substantial evidence, as shown by the contrary decision of the administrative law judge. Upon review, we hold that the Commission's findings of negligent violations under Section 206(2) are supported by substantial evidence, but the Commission's findings of willful violations under Section 207 based on the same negligent conduct are erroneous as a matter of law. Accordingly, we deny the petition in part, grant the petition in part, and remand the case for the Commission to determine the appropriate remedy for the Section 206(2) violations.

         I.

         "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." SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 186 (1963). Like the Securities Act of 1933 and the Securities Exchange Act of 1934, the Investment Advisers Act was intended "to achieve a high standard of business ethics in the securities industry." Id. Accordingly, the Act "establishes 'federal fiduciary standards' to govern the conduct of investment advisers," Transamerica Mortg. Advisors, Inc. (TAMA) v. Lewis, 444 U.S. 11, 17 (1979) (quoting Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 471 n.11 (1977)), imposing on them "an affirmative duty of 'utmost good faith, and full and fair disclosure of all material facts, '" Capital Gains, 375 U.S. at 194 (quoting William L. Prosser, Law of Torts 534-35 (2d ed. 1955)). This reflects "a congressional intent to eliminate, or at least to expose, all conflicts of interest which might incline an investment adviser - consciously or unconsciously - to render advice which [is] not disinterested." Id. at 191-92. Moreover, the anti-fraud provisions of the Advisers Act do not "require proof of . . . actual injury to the client." Id. at 195.

         Two anti-fraud provisions of the Advisers Act are at issue here. They work in tandem: Section 206 governs disclosures to clients, while Section 207 governs disclosures to the Commission. Section 206 provides, in relevant part:

It shall be unlawful for any investment adviser . . . directly or indirectly-
(1) to employ any device, scheme, or artifice to defraud any client or prospective client;
(2) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client[.]

15 U.S.C. § 80b-6. Citing Capital Gains, the Securities and Exchange Commission has long held that "[f]ailure by an investment adviser to disclose potential conflicts of interest to its clients constitutes fraud within the meaning of Sections 206(1) and (2)." Fundamental Portfolio Advisors, Inc., Investment Advisers Act Release No. 2146, 80 SEC Docket 1851, 2003 WL 21658248 at *15 & n.54 (July 15, 2003). A violation of Section 206(1) requires proof of "scienter," that is, proof of an "intent to deceive, manipulate, or defraud." SEC v. Steadman, 967 F.2d 636, 641 & n.3 (D.C. Cir. 1992) (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 n.12 (1976)). Proof of simple negligence suffices for a violation of Section 206(2), however. Id. at 643 n.5 (citing Capital Gains, 375 U.S. at 195).

         Additionally, Section 207 of the Advisers Act provides:

It shall be unlawful for any person willfully to make any untrue statement of a material fact in any registration application or report filed with the Commission under section 80b-3 or 80b-4 of this title, or willfully to omit to state in any such application or report any material fact which is required to be stated therein.

15 U.S.C. § 80b-7. The investment adviser registration application filed pursuant to Section 80b-3 is known as Form ADV. See id. ยง 80b-3(c); ...


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