United States Court of Appeals, District of Columbia Circuit
January 23, 2019
Petition for Review of an Order of the Securities &
E. VonderHeide argued the cause for petitioners. With her on
the briefs was Alan M. Wolper.
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.
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.
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.
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).
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. § 80b-3(c); ...