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Justia › US Law › US Case Law › US Supreme Court › Volume 375 › SEC v. Capital Gains Research Bureau, Inc.
Securities and Exchange Commission v.
Capital Gains Research Bureau, Inc.
Under the Investment Advisers Act of 1940, the Securities and Exchange Commission may obtain an injunction compelling a registered investment adviser to disclose to his clients a practice of purchasing shares of a security for his own account shortly before recommending that security for long-term investment and then immediately selling his own shares at a profit upon the rise in the market price following the recommendation, since such a practice "operates as a fraud or deceit upon any client or prospective client" within the meaning of the Act. Pp. 375 U. S. 181-201.
(a) Congress, in empowering the courts to enjoin any practice which operates "as a fraud or deceit" upon a client, did not intend to require proof of intent to injure and actual injury to the client; it intended the Act to be construed like other securities legislation "enacted for the purpose of avoiding frauds," not technically and restrictively, but rather flexibly to effectuate its remedial purposes. Pp. 375 U. S. 186-195.
(b) The Act empowers the courts, upon a showing such as that made here, to require an adviser to make full and frank disclosure of his practice of trading on the effect of his recommendations. Pp. 375 U. S. 195-197.
(c) In the light of the evident purpose of the Act to substitute a philosophy of disclosure for the philosophy of caveat emptor, it cannot be assumed that the omission from the Act of a specific proscription against nondisclosure was intended to limit the application of the anti-fraud and anti-deceit provisions of the Act so as to render the Commission impotent to enjoin suppression of material facts. Pp. 375 U. S. 197-199.
(d) The 1960 amendment to the Act does not justify a narrow interpretation of the original enactment. Pp. 375 U. S. 199-200.
(e) Even if respondents' advice was "honest," in the sense that they believed it was sound and did not offer it for the purpose of furthering personal pecuniary objectives, the Commission was entitled to an injunction requiring disclosure. Pp. 375 U. S. 200-201.
306 F.2d 606 reversed and remanded.
"An Investment Service devoted exclusively to (1) The protection of investment capital. (2) The realization of a steady and attractive income therefrom. (3) The accumulation of CAPITAL GAINS thru the timely purchase of corporate equities that are proved to be undervalued."
Between March 15, 1960, and November 7, 1960, respondents, on six different occasions, purchased shares of a particular security shortly before recommending it in the Report for long-term investment. On each occasion, there was an increase in the market price and the volume of trading of the recommended security within a few days after the distribution of the Report. Immediately thereafter, respondents sold their shares of these securities at a profit. [Footnote 4] They did not disclose any aspect of these transactions to their clients or prospective clients.
of injunctive relief. [Footnote 6] 306 F.2d 606. The majority concluded that no violation of the Act could be found absent proof that "any misstatements or false figures were contained in any of the bulletins"; or that "the investment advice was unsound"; or that "defendants were being bribed or paid to tout a stock contrary to their own beliefs"; or that "these bulletins were a scheme to get rid of worthless stock"; or that the recommendations were made "for the purpose of endeavoring artificially to raise the market so that [respondents] might unload [their] holdings at a profit." Id., 306 F.2d at 608-609. The four dissenting judges pointed out that "[t]he common law doctrines of fraud and deceit grew up in a business climate very different from that involved in the sale of securities," and urged a broad remedial construction of the statute which would encompass respondents' conduct. Id., 306 F.2d at 614. We granted certiorari to consider the question of statutory construction because of its importance to the investing public and the financial community. 371 U.S. 967.
intent to injure and actual injury to clients, or whether Congress intended a broad remedial construction of the Act which would encompass nondisclosure of material facts. For resolution of this issue, we consider the history and purpose of the Investment Advisers Act of 1940.
"It requires but little appreciation . . . of what happened in this country during the 1920's and 1930's to realize how essential it is that the highest ethical standards prevail "
in every facet of the securities industry. Silver v. New York Stock Exchange, 373 U. S. 341, 373 U. S. 366.
The Public Utility Holding Company Act of 1935 "authorized and directed" the Securities and Exchange Commission "to make a study of the functions and activities of investment trusts and investment companies. . . ." [Footnote 14] Pursuant to this mandate, the Commission made an exhaustive study and report which included consideration of investment counsel and investment advisory services. [Footnote 15] This aspect of the study and report culminated in the Investment Advisers Act of 1940.
"completely perform their basic function -- furnishing to clients on a personal basis competent, unbiased, and continuous advice regarding the sound management of their investments -- unless all conflicts of interest between the investment counsel and the client were removed. [Footnote 16]"
"[An investment adviser] should continuously occupy an impartial and disinterested position, as free as humanly possible from the subtle influence of prejudice, conscious or unconscious; he should scrupulously avoid any affiliation, or any act, which subjects his position to challenge in this respect. [Footnote 21]"
"to the end that the quality of services to be rendered by investment counselors may measure up to the high standards which the public has a right to expect and to demand. [Footnote 26]"
"Upon the basis of facts disclosed by the record and report of the Securities and Exchange Commission . . . , it is hereby declared that the national public interest and the interest of investors are adversely affected -- . . . (4) when the business of investment advisers is so conducted as to defraud or mislead investors, or to enable such advisers to relieve themselves of their fiduciary obligations to their clients.
It is hereby declared that the policy and purposes of this title, in accordance with which the provisions of this title shall be interpreted, are to mitigate and, so far as is presently practicable, to eliminate the abuses enumerated in this section."
S. 3580, 76th Cong., 3d Sess., § 202.
"strict limitation of [their right] to buy and sell securities in the normal way if there is any chance at all that to do so might seem to operate against the interests of clients and the public. [Footnote 32]"
"two fundamental principles upon which the pioneers in this new profession undertook to meet the growing need for unbiased investment information and guidance were, first, that they would limit their efforts and activities to the study of investment problems from the investor's standpoint, not engaging in any other activity, such as security selling or brokerage, which might directly or indirectly bias their investment judgment; and, second, that their remuneration for this work would consist solely of definite, professional fees fully disclosed in advance. [Footnote 33] "
consciously or unconsciously -- to render advice which was not disinterested. It would defeat the manifest purpose of the Investment Advisers Act of 1940 for us to hold, therefore, that Congress, in empowering the courts to enjoin any practice which operates "as a fraud or deceit," intended to require proof of intent to injure and actual injury to clients.
suit for a preliminary injunction in which the relief sought is, as the dissenting judges below characterized it, the "mild prophylactic," 306 F.2d at 613, of requiring a fiduciary to disclose to his clients not all his security holdings, but only his dealings in recommended securities just before and after the issuance of his recommendations.
The content of common law fraud has not remained static, as the courts below seem to have assumed. It has varied, for example, with the nature of the relief sought, the relationship between the parties, and the merchandise in issue. It is not necessary in a suit for equitable or prophylactic relief to establish all the elements required in a suit for monetary damages.
"Law had come to regard fraud . . . as primarily a tort, and hedged about with stringent requirements, the chief of which was a strong moral, or rather immoral element, while equity regarded it, as it had all along regarded it, as a conveniently comprehensive word for the expression of a lapse from the high standard of conscientiousness that it exacted from any party occupying a certain contractual or fiduciary relation towards another party. [Footnote 41]"
"Fraud has a broader meaning in equity [than at law], and intention to defraud or to misrepresent is not a necessary element. [Footnote 42] "
"Fraud, indeed, in the sense of a court of equity, properly includes all acts, omissions and concealments which involve a breach of legal or equitable duty, trust, or confidence, justly reposed, and are injurious to another, or by which an undue and unconscientious advantage is taken of another. [Footnote 43]"
believed that his subscribers would profit by his advice. . . ." The court, holding that "his belief in the soundness of his advice is wholly immaterial," declared the act in question "a palpable fraud."
We cannot assume that Congress, in enacting legislation to prevent fraudulent practices by investment advisers, was unaware of these developments in the common law of fraud. Thus, even if we were to agree with the courts below that Congress had intended, in effect, to codify the common law of fraud in the Investment Advisers Act of 1940, it would be logical to conclude that Congress codified the common law "remedially" as the courts had adapted it to the prevention of fraudulent securities transactions by fiduciaries, not "technically" as it has traditionally been applied in damage suits between parties to arm's-length transactions involving land and ordinary chattels.
The foregoing analysis of the judicial treatment of common law fraud reinforces our conclusion that Congress, in empowering the courts to enjoin any practice which operates "as a fraud or deceit" upon a client, did not intend to require proof of intent to injure and actual injury to the client. Congress intended the Investment Advisers Act of 1940 to be construed, like other securities legislation "enacted for the purpose of avoiding frauds," [Footnote 47] not technically and restrictively, but flexibly to effectuate its remedial purposes.
We turn now to a consideration of whether the specific conduct here in issue was the type which Congress intended to reach in the Investment Advisers Act of 1940.
we hold that the Investment Advisers Act of 1940 empowers the courts, upon a showing such as that made here, to require an adviser to make full and frank disclosure of his practice of trading on the effect of his recommendations.
any practice which operates "as a fraud or deceit," deemed a specific proscription against nondisclosure surplusage.
"by rules and regulations [to] define, and prescribe means reasonably designed to prevent, such acts, practices, and courses of business as are fraudulent, deceptive, or manipulative."
the 1940 legislation. "[O]pinions attributed to a Congress twenty years after the event cannot be considered evidence of the intent of the Congress of 1940." Securities & Exchange Comm'n v. Capital Gains Research Bureau, Inc., 306 F.2d 606, 615 (dissenting opinion). See United States v. Philadelphia Nat. Bank, 374 U. S. 321, 374 U. S. 348-349.
Respondents argue, finally, that their advice was "honest" in the sense that they believed it was sound, and did not offer it for the purpose of furthering personal pecuniary objectives. This, of course, is but another way of putting the rejected argument that the elements of technical common law fraud -- particularly intent -- must be established before an injunction requiring disclosure may be ordered. It is the practice itself, however, with its potential for abuse, which "operates as a fraud or deceit" within the meaning of the Act when relevant information is suppressed. The Investment Advisers Act of 1940 was "directed not only at dishonor, but also at conduct that tempts dishonor." United States v. Mississippi Valley Generating Co., 364 U. S. 520, 364 U. S. 549. Failure to disclose material facts must be deemed fraud or deceit within its intended meaning, for, as the experience of the 1920's and 1930's amply reveals, the darkness and ignorance of commercial secrecy are the conditions upon which predatory practices best thrive. To impose upon the Securities and Exchange Commission the burden of showing deliberate dishonesty as a condition precedent to protecting investors through the prophylaxis of disclosure would effectively nullify the protective purposes of the statute. Reading the Act in light of its background, we find no such requirement commanded. Neither the Commission nor the courts should be required "to separate the mental urges," Peterson v. Greenville, 373 U. S. 244, 373 U. S. 248, of an investment adviser, for "[t]he motives of man are too complex . . .
to separate. . . ." Mosser v. Darrow, 341 U. S. 267, 341 U. S. 271. The statute, in recognition of the adviser's fiduciary relationship to his clients, requires that his advice be disinterested. To insure this, it empowers the courts to require disclosure of material facts. It misconceives the purpose of the statute to confine its application to "dishonest," as opposed to "honest," motives. As Dean Shulman said in discussing the nature of securities transactions, what is required is "a picture not simply of the show window, but of the entire store . . . , not simply truth in the statements volunteered, but disclosure." [Footnote 56] The high standards of business morality exacted by our laws regulating the securities industry do not permit an investment adviser to trade on the market effect of his own recommendations without fully and fairly revealing his personal interests in these recommendations to his clients.
Experience has shown that disclosure in such situations, while not onerous to the adviser, is needed to preserve the climate of fair dealing which is so essential to maintain public confidence in the securities industry and to preserve the economic health of the country.
54 Stat. 847, as amended, 15 U.S.C. § 80b-1 et seq.
"It shall be unlawful for any investment adviser, by use of the mails or any means or instrumentality of interstate commerce, 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;"
"(3) acting as principal for his own account, knowingly to sell any security to or purchase any security from a client, or acting as broker for a person other than such client, knowingly to effect any sale or purchase of any security for the account of such client, without disclosing to such client in writing before the completion of such transaction the capacity in which he is acting and obtaining the consent of the client to such transaction. The prohibitions of this paragraph shall not apply to any transaction with a customer of a broker or dealer if such broker or dealer is not acting as an investment adviser in relation to such transaction. . . ."
"(e) Whenever it shall appear to the Commission that any person has engaged, is engaged, or is about to engage in any act or practice constituting a violation of any provision of this subchapter, or of any rule, regulation, or order hereunder, or that any person has aided, abetted, counseled, commanded, induced, or procured, is aiding, abetting, counseling, commanding, inducing, or procuring, or is about to aid, abet, counsel, command, induce, or procure such a violation, it may in its discretion bring an action in the proper district court of the United States, or the proper United States court of any Territory or other place subject to the jurisdiction of the United States, to enjoin such acts or practices and to enforce compliance with this subchapter or any rule, regulation, or order hereunder. Upon a showing that such person has engaged, is engaged, or is about to engage in any such act or practice, or in aiding, abetting, counseling, commanding, inducing, or procuring any such act or practice, a permanent or temporary injunction or decree or restraining order shall be granted without bond."
See Appendix, infra, p. 375 U. S. 202.
"WHEREFORE the plaintiff demands a temporary restraining order, preliminary injunction and final injunction:"
"1. Enjoining the defendants Capital Gains Research Bureau, Inc. and Harry P. Schwarzmann, their agents, servants, employees, attorneys and assigns, and each of them, while the said Capital Gains Research Bureau, Inc. is an investment advisor, directly and indirectly, by the use of the mails or any means or instrumentalities of interstate commerce from:"
"(a) Employing any device, scheme or artifice to defraud any client or prospective client by failing to disclose the material facts concerning"
"(1) The purchase by defendant, Capital Gains Research Bureau, Inc., of securities within a very short period prior to the distribution of a recommendation by said defendant to its clients and prospective clients for purchase of said securities;"
"(2) The intent to sell and the sale of said securities by said defendant so recommended to be purchased within a very short period after distribution of said recommendation to its clients and prospective clients;"
"(3) Effecting of short sales by said defendant within a very short period prior to the distribution of a recommendation by said defendant to its clients and prospective clients to dispose of said securities;"
"(4) The intent of said defendant to purchase and the purchase of said securities to cover its short sales;"
"(5) The purchase by said defendant for its own account of puts and calls for securities within a very short period prior to the distribution of a recommendation to its clients and prospective clients for purchase or disposition of said securities."
"(b) Engaging in any transaction, practice and course of business which operates as a fraud or deceit upon any client or prospective client by failing to disclose the material facts concerning the matters set forth in demand 1(a) hereof."
The case was originally heard before a panel of the Court of Appeals, which, with one judge dissenting, affirmed the District Court. 300 F.2d 745. Rehearing en banc was then ordered.
The Court of Appeals purported to recognize that "federal securities laws are to be construed broadly to effectuate their remedial purpose." 306 F.2d 606, 608. But, by affirming the District Court's "technical" construction of the Investment Advisers Act of 1940 and by requiring proof of "misstatements," unsound advice, bribery, or intent to unload "worthless stock," the court read the statute, in effect, as confined by traditional common law concepts of fraud and deceit.
See generally Douglas and Bates, The Federal Securities Act of 1933, 43 Yale L.J. 171 (1933); Loomis, The Securities Exchange Act of 1934 and the Investment Advisers Act of 1940, 28 Geo.Wash.L.Rev. 214 (1959); Shulman, Civil Liability and the Securities Act, 43 Yale L.J. 227 (1933). Cf. Galbraith, The Great Crash (1955).
48 Stat. 74, as amended, 15 U.S.C. § 77a et seq.
48 Stat. 881, as amended, 15 U.S.C. § 78a et seq.
49 Stat. 838, as amended, 15 U.S.C. § 79 et seq.
53 Stat. 1149, as amended, 15 U.S.C. § 77aaa et seq.
54 Stat. 789, as amended, 15 U.S.C. § 80a-1 et seq.
See H.R.Rep. No. 85, 73d Cong., 1st Sess. 2, quoted in Wilko v. Swan, 346 U. S. 427, 346 U. S. 430.
49 Stat. 837, 15 U.S.C. § 79z-4.
While the study concentrated on investment advisory services which provide personalized counseling to investors, see Investment Trusts and Investment Companies, Report of the Securities and Exchange Commission, Pursuant to Section 30 of the Public Utility Holding Company Act of 1935, on Investment Counsel, Investment Management, Investment Supervisory, and Investment Advisory Services, H.R. Doc. No. 477, 76th Cong., 2d Sess. 1 (thereinafter cited as SEC Report), the Senate Committee on Banking and Currency did receive communications from publishers of investment advisory services, see, e.g., Hearings on S. 3580 before Subcommittee of the Senate Committee on Banking and Currency, 76th Cong., 3d Sess., pt. 3 (Exhibits), 1063, and the Act specifically covers "any person who, for compensation, engages in the business of advising others, either directly or through publications or writings. . . ." 54 Stat. 847, 15 U.S.C. § 80b-2.
See text accompanying note 14 supra.
S. 3580, 76th Cong., 3d Sess.
Hearings on S. 3580 before Subcommittee of the Senate Committee on Banking and Currency, 76th Cong., 3d Sess. (hereinafter cited as Senate Hearings). Hearings on H.R. 10065 before Subcommittee of the House Committee on Interstate and Foreign Commerce, 76th Cong., 3d Sess. (hereinafter cited as House Hearings).
The bill as enacted did not contain a section attributing specific abuses to the investment adviser profession. This section was eliminated apparently at the urging of the investment advisers who, while not denying that abuses she occurred, attributed them to certain fringe elements in the profession. They feared that a public and general indictment of all investment advisers by Congress would do irreparable harm to their fledgling profession. See, e.g., Senate Hearings at 715-716. It cannot be inferred, therefore, that the section was eliminated because Congress had concluded that the abuses had not occurred, or because Congress did not desire to prevent their repetition in the future. The more logical inference, considering the legislative background of the Act, is that the section was omitted to avoid condemning an entire profession (which depends for its success on continued public confidence) for the acts of a few.
H.R.Rep. No. 2639, 76th Cong., 3d Sess. 28 (hereinafter cited as House Report). See also S.Rep. No. 1775, 76th Cong., 3d Sess. 22 (hereinafter cited as Senate Report).
See Senate Report at 22.
2 Loss, Securities Regulation (2d ed. 1961), 1412.
See cases cited in 37 C.J.S. Fraud § 2 (1943), p. 210.
Even in a damage suit between parties to an arm's-length transaction, the intent which must be established need not be an intent to cause injury to the client, as the courts below seem to have assumed.
"It is to be noted that it is not necessary that the person making the misrepresentations intend to cause loss to the other or gain a profit for himself; it is only necessary that he intend action in reliance on the truth of his misrepresentations."
1 Harper and James, The Law of Torts (1956), 531.
"[T]he fact that the defendant was disinterested, that he had the best of motives, and that he thought he was doing the plaintiff a kindness, will not absolve him from liability so long as he did in fact intend to mislead."
Prosser, Law of Torts (1955), 538. See 3 Restatement, Torts (1938), § 531, Comment b, illustration 3. It is clear that respondents' failure to disclose the practice here in issue was purposeful, and that they intended that action be taken in reliance on the claimed disinterestedness of the service and its exclusive concern for the clients' interests.
Neither is this a criminal proceeding for "willfully" violating the Act, 54 Stat. 857, as amended, 15 U.S.C. § 80b-17, nor a proceeding to revoke or suspend a registration "in the public interest," 54 Stat. 850, as amended, 15 U.S.C. § 80b-3. Other considerations may be relevant in such proceedings. Compare Federal Communications Comm'n v. American Broadcasting Co., 347 U. S. 284.
"Fraud is infinite, and were a Court of Equity once to lay down rules, how far they would go, and no farther, in extending their relief against it, or to define strictly the species or evidence of it, the jurisdiction would be cramped, and perpetually eluded by new schemes which the fertility of man's invention would contrive."
De Funiak, Handbook of Modern Equity (2d ed. 1956), 235.
Moore v. Crawford, 130 U. S. 122, 130 U. S. 128, quoting 1 Story, Equity Jur. § 187.
Prosser, Law of Torts (1955), 534-535 (citing cases). See generally Keeton, Fraud -- Concealment and Non-Disclosure, 15 Texas L.Rev. 1.
1 Harper and James, The Law of Torts (1956), 541.
See generally Shulman, Civil Liability and the Securities Act, 43 Yale L.J. 227 (1933).
3 Sutherland, Statutory Construction (3d ed. 1943), 382 et seq. (citing cases). See Note, 38 N.Y.U.L.Rev. 985; Comment, 30 U. of Chi.L.Rev. 121, 131-147.
See text accompanying note 27 supra.
For a discussion of the effects of investment advisory service recommendations on the market price of securities, see Note, 51 Calif.L.Rev. 232, 233.
"The reason of the rule inhibiting a party who occupies confidential and fiduciary relations toward another from assuming antagonistic positions to his principal in matters involving the subject matter of the trust is sometimes said to rest in a sound public policy, but it also is justified in a recognition of the authoritative declaration that no man can serve two masters; and considering that human nature must be dealt with, the rule does not stop with actual violations of such trust relations, but includes within its purpose the removal of any temptation to violate them. . . ."
". . . In Hazelton v. Sheckells, 202 U. S. 71, 202 U. S. 79, we said:"
"The objection . . . rests in their tendency, not in what was done in the particular case. . . . The court will not inquire what was done. If that should be improper, it probably would be hidden, and would not appear."
United States v. Mississippi Valley Generating Co., 364 U. S. 520, 364 U. S. 550, n. 14.
"It shall be unlawful for any person in the offer or sale of any securities by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly --"
"(1) to employ any device, scheme, or artifice to defraud, or"
"(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or"
"(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser."
See Archer v. Securities & Exchange Comm'n, 133 F.2d 795 (C.A.8th Cir.), cert. denied, 319 U.S. 767; Charles Hughes & Co. v. Securities & Exchange Comm'n, 139 F.2d 434 (C.A.2d Cir.), cert. denied, 321 U.S. 786; Hughes v. Securities & Exchange Comm'n, 85 U.S.App.D.C. 56, 174, F.2d 969; Norris & Hirshberg v. Securities & Exchange Comm'n, 85 U.S.App.D.C. 268, 177 F.2d 228; Speed v. Transamerica Corp., 235 F.2d 369 (C.A.3d Cir.).
74 Stat. 887, 15 U.S.C. (Supp. IV) § 80b-6(4).
"(4) to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative. The Commission shall, for the purposes of this paragraph (4), by rules and regulations, define and prescribe means reasonably designed to prevent, such acts, practices, and courses of business as are fraudulent, deceptive, or manipulative."
Stonemets v. Head, 248 Mo. 243, 263, 154 S.W. 108, 114. See also note 41 supra.
Shulman, Civil Liability and the Securities Act, 43 Yale L.J. 227, 242.
On none occasion, respondents sold short some shares of a security immediately before stating in their Report that the security was overpriced. After the publication of the Report, respondents covered their short sales.
Although some of the above figures relating to profits are disputed, respondents do not substantially contest the remaining figures.
I would affirm the judgment below substantially for the reasons given by Judge Moore in his opinion for the majority of the Court of Appeals sitting en banc, 306 F.2d 606, and in his earlier opinion for the panel. 300 F.2d 745. A few additional observations are in order.
Contrary to the majority, I do not read the Court of Appeals' en banc opinion as holding that either § 206(1) of the Investment Advisers Act of 1940, 54 Stat. 847 (prohibiting the employment of "any device, scheme, or artifice to defraud any client or prospective client"), or § 206(2), 54 Stat. 847 (prohibiting the engaging "in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client"), is confined by traditional common law concepts of fraud and deceit. That court recognized that "federal securities laws are to be construed broadly to effectuate their remedial purpose." 306 F.2d at 608. It did not hold or intimate that proof of "intent to injure and actual injury to clients" (ante, p. 375 U. S. 186) was necessary to make out a case under these sections of the statute. Rather it explicitly observed: "Nor can there be any serious dispute that a relationship of trust and confidence should exist between the advisor and the advised," ibid., thus recognizing that no such proof was required. In effect, the Court of Appeals simply held that the terms of the statute require at least some proof that an investment adviser's recommendations are not disinterested.
The cases cited by the Court (ante, p. 375 U. S. 198) are wide of the mark, as even a skeletonized statement of them will show. In Securities & Exchange Comm'n v. Torr, 15 F.Supp. 315, reversed on other grounds, 87 F.2d 446, defendants were, in effect, bribed to recommend a certain stock. Although it was not apparent that they lied in making their recommendations, it was plain that they were motivated to make them by the promise of reward. In the case before us, there is no vestige of proof that the reason for the recommendations was anything other than a belief in the soundness of the investment advice given.
Charles Hughes & Co. v. Securities & Exchange Comm'n, 139 F.2d 434, involved sales of stock by customers' men to those ignorant of the market value of the stocks at 16% to 41% above the "over the counter" price. Defendant's employees must have known that the customers would have refused to buy had they been aware of the actual market price.
"necessarily establish that petitioner violated the anti-fraud provisions of the Securities and Securities Exchange Acts." Id. at 271, 177 F.2d at 231. Defendant's trading practices, however, were found to establish such a violation; an example of these was the buying of shares of stock from one customer and the selling to another at a substantially higher price on the same day. The opinion explicitly distinguishes between what is necessary to prove common law fraud and the grounds under securities legislation sufficient for revocation of a broker-dealer registration. Id. at 273, 177 F.2d at 233.
Arleen Hughes v. Securities & Exchange Comm'n, 85 U.S.App.D.C. 56, 174 F.2d 969, concerned the revocation of the license of a broker-dealer who also gave investment advice but failed to disclose to customers both the best price at which the securities could be bought in the open market and the price which she had paid for them. Since the court expressly relied on language in statutes and regulations making unlawful "any omission to state a material fact," id. at 63, 174 F.2d at 976, this case hardly stands for the proposition that the result would have been the same had such provisions been absent.
In Speed v. Transamerica Corp., 235 F.2d 369, the controlling stockholder of a corporation made a public offer to buy stock, concealing from the other shareholders information known to it as an insider which indicated the real value of the stock to be considerably greater than the price set by the public offer. Had shareholders been aware of the concealment, they would undoubtedly have refused to sell; as a consequence of selling, they suffered ascertainable damages.
brokerage firm of Harris, Upham & Co., for which he worked as a trader. Securities of the customers of the latter firm were bought by defendants' company at under the market level, and defendants' company sold securities to the clients of Harris, Upham & Co. at prices above the market.
In all of these cases but Arleen Hughes, which turned on explicit provisions against nondisclosure, the concealment involved clearly reflected dishonest dealing that was vital to the consummation of the relevant transactions. No such factors are revealed by the record in the present case. It is apparent that the Court is able to achieve the result reached today only by construing these provisions of the Investment Advisers Act as it might a pure conflict of interest statute, cf. United States v. Mississippi Valley Generating Co., 364 U. S. 520, something which this particular legislation does not purport to be.
However salutary may be thought the disclosure rule now fashioned by the Court, I can find no authority for it either in the statute or in any regulation duly promulgated thereunder by the SEC. Only two Terms ago, we refused to extend certain provisions of the Securities Exchange Act of 1934 to encompass "policy" considerations at least as cogent as those urged here by the SEC. Blau v. Lehman, 368 U. S. 403. The Court should have exercised the same wise judicial restraint in this case. This is particularly so at this interlocutory stage of the litigation. It is conceivable that, at the trial, the SEC would have been able to make out a case under the statute construed according to its terms.
According to respondents' brief (and the fact does not appear to be contested), the annual gross income of Capital Gains Research Bureau from publishing investment information and advice was some $570,000. Even accepting the SEC's figures, respondents' profit from the trading transactions in question was somewhat less than $20,000. Thus, any basis for an inference that respondents' advice was tainted by self-interest, which might have been drawn had respondents' buying and selling activities been more significant, is lacking on this record.
"to obtain money or property by means of . . . any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading. . . ."
"(1) to employ any device, scheme, or artifice to defraud . . . (3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser."
Compare the language of these provisions with that of § 206(1), (2) of the Investment Advisers Act, supra, p. 375 U. S. 203.
The argument is that, by the time of enactment of the Investment Advisers Act in 1940, Congress had become aware that the courts "were merging the proscription against nondisclosure (contained in the 1933 Securities Act) into the general proscription against fraud" also found in the same act. Ante, 375 U. S. 198. However, the only federal pre-1940 case cited is Securities & Exchange Comm'n v. Torr, ante, 198, and supra, p. 375 U. S. 204. There, the failure of a fiduciary to disclose that his advice was prompted by a "bribe" was equated by the trial judge with deceit. Such a decision can hardly be deemed to establish that any nondisclosure of a fact material to the recipient of investment advice is fraud or deceit. Saying the least, it strains credulity that a provision expressly proscribing material omissions would be thought by Congress to be "surplusage" when it came to enacting the 1940 Act. This is particularly so when it is remembered that violation of the fraud and deceit section is punishable criminally (§ 217 of the Investment Advisers Act of 1940, 54 Stat. 857); Congress must have known that the courts do not favor expansive constructions of criminal statutes.

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