Evening star., 1962-01-07

My husband and I have an
investment adviser who from
time to time suggests we buy a
stock. We have faith in his
good Judgment. his standard OF
ethics, his loyalty to us as
clients. When, therefore, on
occasion he volunteers the in
formation that he is buying for
his own account a stock he is
suggesting for us, we usually
act at once.
What if we found out that
a week or two after we had
bought the stock, our adviser
had secretly sold his holdings?
Even though he had sent us
the material facts" about the
stock, how would we react to
news that he hadn't told us
he was unloading on the price
rise his recommendation to us
and to other clients had helped
inspire?
I'll tell you how we would
react. We'd accuse him to his
face of an appallingly low
standard of business morality.
We would consider his act a
deceit" in violation Of the
1910 law supervising invest
ment advisers. We'd say he was
"scalping" by entering the
stock market in competition to
us, the clients paying a fee for
his services.
Case Is Recalled
This apparently is how Judge
Clark, one of the three Circuit
Judges of the United States
Court Of Appeals for the Sec
ond Circuit feels about the op-
erations of the Capital Gains
Research Bureau, Inc, Of
Larchmont, N. Y, an invest
ment advisory service charging
subscribers $18 a year for "spe-
cial" bulletins in which it rec
ommends purchase or sale of
stocks.
Capital Gains in 1860 bought
seven different blocks of stock,
followed each purchase with a
widely circulated buy" recon-
mendation, then sold out on the
price rise after each recon-
mendation. It did not tell its
clients what it was doing. When
the Securities & Exchange
Commission attempted to get
an injunction prohibiting Capt.
tai Gains from continuing this
practice, it was turned down
first by a District Court and
then by the Circuit Court pri-
marily on the basis that there
is no law, rule or regulation
against a service buying or SELL
ing a stock within a specific
period of time before or after
a recommendation of the stock.
But to Judge Clark the ma
jority opinion Endorses and in
effect validates a distressingly
low standard of business moral
ity." 1t grants a license which
the top investment advisers will
deteSt because of the doubt
cast upon the good faith and
loyalty of all of their profess
sion." Moreover, declares Judge
Clark:
Cd A first duty of a fiduciary
(the adviser) is loyalty to his
beneficiary (the client). eff he
engaged in feathering his own
nest, he cannot be giving his
client that wholly disintereSted
advice which it is his stock in
trade to provide" s
(2) The aim Of the 1910 law
is to prohibit practices such as
this, and the majority opinion
is an unduly restrictive in
depreciation.
90 Another aim is to safe
guard bona fide investment ad-
viserS against the stigma of
the activities of unscrupulous
tipsters and touts." The ma
jority opinion does just the op-
posite.
"a An adviser "who rec
ommends the purchase of q
stock because or after he has
secretly taken a position in
that stock which will make his
recommendation profitable for
him is guilty of deception il
he conceals the secret motive
and underlying his advice"
(5) The 1860 amendments
to the 1910 act definitely give
the SEC power to adopt rules