Court Opinion

ID: 4392041
Source: CourtListenerOpinion
Date Created: 2019-04-30 15:00:37.135524+00
Date Added: 2024-06-11T12:09:35.664033
License: Public Domain

United States Court of Appeals
          FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued January 23, 2019                  Decided April 30, 2019

                          No. 16-1453

              THE ROBARE GROUP, LTD., ET AL.,
                      PETITIONERS

                               v.

          SECURITIES AND EXCHANGE COMMISSION,
                       RESPONDENT

            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 for the court by Circuit Judge ROGERS.

    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
                               2
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
                                3
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).
                              4
    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. § 80b–3(c); 17 C.F.R. § 275.203–1(a).

    Here, the relevant background is that The Robare Group
(TRG) located in Houston, Texas registered in 2003 as an
independent investment adviser with the Commission after
being state-registered since 2001. From the beginning TRG
used Fidelity Investments for execution, custody, and clearing
services for its advisory clients. In 2004, TRG entered into a
“revenue sharing arrangement” with Fidelity whereby Fidelity
paid TRG when its clients invested in certain funds “offered on
Fidelity’s on-line platform.” Robare Grp., Ltd., Investment
Advisers Act Release No. 4566 at 2, 115 SEC Docket 2796,
2016 WL 6596009 (Nov. 7, 2016) (hereinafter Decision).
Between September 2005 and September 2013, TRG received
from Fidelity approximately four hundred thousand dollars,
which was approximately 2.5% of TRG’s gross revenue. Id. at
3. As of August 26, 2013, TRG served as investment adviser
to approximately 350 separately managed discretionary
accounts and had approximately $150 million in assets under
management.

    In September 2014, the Division of Enforcement at the
Securities and Exchange Commission instituted administrative
                                5
and cease-and-desist proceedings against TRG and its
principals, Mark L. Robare (83% owner) and Jack L. Jones
(17% owner). The Division alleged that they had failed for
many years to disclose to their clients and to the Commission
the compensation TRG received through its arrangement with
Fidelity and the conflicts of interest arising from that
compensation. Specifically, the Division alleged that Mark
Robare and TRG willfully violated Sections 206(1) and 206(2)
of the Advisers Act, 15 U.S.C. § 80b–6(1), (2); Jack Jones
aided, abetted, and caused the violations; and all three willfully
violated Section 207 of the Act, 15 U.S.C. § 80b–7.

     Following an evidentiary hearing, an administrative law
judge dismissed the charges. He found that Mark Robare and
Jack Jones had not acted “with scienter or any intent to deceive,
manipulate or defraud” their clients, and that the Enforcement
Division had failed to prove a negligent violation under Section
206(2) or a willful violation under Section 207. Robare Grp.,
Ltd., Initial Decision Release No. 806 at 39, 42–44, 111 SEC
Docket 3765, 2015 WL 3507108 (June 4, 2015) (hereinafter
Initial Decision). The Division sought review by the
Commission. See 15 U.S.C. § 78d–1; 17 C.F.R. § 201.410(a).

     Upon de novo review, the Commission conducted an
“independent review of the record,” Decision at 2, and
concluded that Mark Robare and TRG, “as investment advisers
with fiduciary obligations to their clients, failed adequately to
disclose material conflicts of interest” to their clients, and that
“in so doing they acted negligently (but without scienter) and
thus violated Section 206(2) . . . (but not Section 206(1)),” id.
at 7. The Commission also found that “[Jack] Jones caused the
violations of Section 206(2)” and was “therefore liable.” Id.
(citing Advisers Act § 203(k), 15 U.S.C. § 80b–3(k)). The
Commission further found that TRG and its principals violated
Section 207 because Mark Robare and Jack Jones failed to
                              6
disclose material conflicts of interest to the Commission on
TRG’s Forms ADV. Id. at 15. Because TRG and its principals
repeatedly breached their “fundamental fiduciary duty to
provide full and fair disclosure of all material facts,” and
because of their “continuing responsibilities in the investment
advisory industry,” the Commission determined there was “a
sufficient risk of future violations” to warrant issuance of a
cease-and-desist order. Id. at 16. In addition, the Commission
concluded that “the serious nature of the violations” warranted
imposition of $50,000 civil monetary penalties on TRG and on
each of its principals. Id. at 16–17.

    The Commission’s decision revolved around TRG’s 2004
“revenue sharing arrangement” with Fidelity. See id. at 2–3.
Under this arrangement, the Commission found that:

         Fidelity paid TRG “shareholder servicing fees” when
         its clients, using the on-line platform, invested in
         certain “eligible” non-Fidelity, non-transaction fee
         funds. Fidelity would pay between two and twelve
         basis points, in an increasing formula, based on the
         value of eligible assets under management. The fees
         were paid to [TRG] through Triad [Advisers, a
         brokerage firm TRG used to execute trades], which
         itself received 10 percent of the payments. As
         explicitly stated in its agreement with Fidelity, TRG
         acknowledged that it was “responsible for reviewing
         and determining whether additional disclosure is
         necessary in [its] Form ADV.”

Id. (third alteration in original). When the arrangement was
revised in 2012, Fidelity began paying fees directly to TRG and
TRG agreed to “provide ‘back-office, administrative, custodial
support and clerical services’ for Fidelity in exchange for the
fees.” Id. at 3. TRG also “agreed that it had ‘made and [would]
                                7
continue to make all appropriate disclosures to Clients . . . with
regard to any conflicts of interest’” arising from the
arrangement. Id. (second alteration in original). Yet the
Commission found that TRG and its principals did not “provide
any disclosure of the [a]rrangement before December 2011,”
id. at 17 (emphasis added), and did not adequately disclose the
arrangement “until at least April 2014,” id. at 8. It concluded
that they were negligent, and therefore violated Section 206(2),
because the “obvious inadequacy” of their disclosures to
clients, id. at 14, demonstrated a “failure to exercise reasonable
care,” id. at 12. The Commission also found that TRG and its
principals “violated Section 207 by willfully omitting material
facts from TRG’s Forms ADV,” explaining that Mark Robare
and Jack Jones “both reviewed each of the Forms ADV before
filing” them with the Commission and “were responsible for
[their] content.” Id. at 15.

                               II.

     TRG and its principals challenge the Commission’s
findings that they violated Section 206(2) by negligently failing
to disclose the arrangement with Fidelity to their clients. They
contend that the record shows they provided the necessary
disclosures. Alternatively, they contend that the Enforcement
Division failed to prove they engaged in negligent conduct.
Neither contention succeeds.

      The court must uphold the Commission’s decision unless
it is “arbitrary, capricious, an abuse of discretion, or otherwise
not in accordance with law.” 5 U.S.C. § 706(2)(A); see
Kornman v. SEC, 592 F.3d 173, 184 (D.C. Cir. 2010). The
Commission’s findings of fact are conclusive when supported
by substantial evidence, 15 U.S.C. § 80b–13(a), which is “such
relevant evidence as a reasonable mind might accept as
adequate to support a conclusion,” Koch v. SEC, 793 F.3d 147,
                               8
151–52 (D.C. Cir. 2015) (quoting Pierce v. Underwood, 487
U.S. 552, 565 (1988)).

                                 A.
    TRG and its principals have stipulated that the receipt of
payments under the arrangement with Fidelity created actual or
potential conflicts of interest. Mark Robare and Jack Jones
concede that the arrangement created an incentive for them to
maximize their payments from Fidelity by advising clients to
invest in eligible funds rather than non-eligible funds, although
they deny this ever occurred in fact. ALJ Hr’g Tr. 335 (Feb.
10, 2015); id. at 725 (Feb. 11, 2015). They maintain that the
ALJ correctly found there was insufficient evidence to
establish the legal standard of care imposed on investment
advisers with regard to Form ADV disclosures. In their view,
they adequately disclosed the conflicts of interest arising from
the payment arrangement with Fidelity through statements in
TRG’s Forms ADV, TRG’s General Information and
Disclosure Brochure, and Fidelity’s Brokerage Account Client
Agreement. A review of the record shows abundant evidence
supports the Commission’s contrary findings.

     The Commission found that TRG’s Forms ADV did not
fully and fairly disclose the potential conflicts of interest
arising from the payment arrangement with Fidelity until at
least April 2014. See Decision at 8–11. Item 13 of Part II of
the Form ADV in use from 2004 until October 2010 required
investment advisers to indicate whether they “receive[d] some
economic benefit . . . from a non-client in connection with
giving advice to clients.” TRG accurately reported that it did.
Item 13 also instructed advisers to “describe [such]
arrangements on Schedule F.” From February 2004 until
August 2005, TRG’s Schedule F description stated: “Mark
Robare, Carol Hearn & Jack Jones sell securities and insurance
                                 9
products for sales commissions.” From August 2005 until
March 2011, it stated:

         Certain investment adviser representatives of
         ROBARE, when acting as registered representatives
         of a broker-dealer, may receive selling compensation
         from such broker-dealer as a result of the facilitation
         of certain securities transactions on Client’s behalf
         through such broker-dealer.

         Additionally, investment adviser representatives of
         ROBARE, through such representative’s association
         as a licensed insurance agent, may also receive selling
         compensation resulting from the sale of insurance
         products to clients of ROBARE.

         These other arrangements may create a conflict of
         interest.

     As the Commission found, these statements “did not
disclose that [TRG] had entered into an [a]rrangement under
which it received payments from Fidelity for maintaining client
investments in certain funds Fidelity offered.” Decision at 9.
Even assuming the payments from Fidelity could properly be
characterized as “sales commissions” or “selling
compensation,” which was disputed, see id. at 6 & n.6; Initial
Decision at 23–24, 33–35, TRG’s Forms ADV “in no way
alerted its clients to the potential conflicts of interest presented
by the undisclosed [a]rrangement,” Decision at 9.

     Item 14 of Part 2A of the amended Form ADV in use since
October 1, 2010 instructs investment advisers (1) to “generally
describe” any arrangement in which they receive an economic
benefit from a non-client “for providing investment advice or
other advisory services” to clients; (2) to “explain the conflicts
                               10
of interest” arising from any such arrangement; and (3) to
“describe how [they] address the conflicts of interest.” TRG
filed an updated Form ADV in March 2011, stating in response
to Item 14:

         We do not have any arrangement under which it or its
         related person compensates, or receives compensation
         from, another for client referrals at this time.

         Certain      of      our     [Independent      Advisor
         Representatives], when acting as registered
         representatives of Triad, may receive selling
         compensation from Triad as a result of the facilitation
         of certain securities transactions on your behalf
         through Triad. Such fee arrangements shall be fully
         disclosed to clients. In connection with the placement
         of client funds into investment companies,
         compensation may take the form of front-end sales
         charges, redemption fees and 12(b)–1 fees or a
         combination thereof.        The prospectus for the
         investment company will give explicit detail as to the
         method and form of compensation.

     This filing did not describe the payment arrangement with
Fidelity much less alert TRG’s clients to the potential conflicts
of interest it created. At the ALJ hearing, a senior vice
president from Fidelity testified that when Fidelity’s
compliance team reviewed TRG’s Form ADV in late 2011, it
found “no mention” of the payment arrangement. ALJ Hr’g
Tr. 64 (Feb. 9, 2015). The Commission “f[ou]nd it telling” that
the compliance team “‘did not find’ the disclosure of the
[a]rrangement and requested that TRG disclose it.” Decision
at 10 (quoting December 2011 email from Fidelity to TRG).
The Commission agreed with the Enforcement Division that
“no reasonable client reading” TRG’s pre-December 2011
                               11
Forms ADV “could have discerned the existence — let alone
the details — of the [a]rrangement.” Id.

     Indeed, the record shows that it was only after Fidelity told
TRG that it would cease making payments if their arrangement
were not disclosed that TRG modified its Form ADV to
specifically refer to the arrangement. TRG’s December 2011
response to Item 14 stated in an opening sentence: “We do not
receive an economic benefit from a non-client for providing
investment advice or other advisory services to our clients.”
This “was false,” id. at 11, inasmuch as TRG’s previous Forms
ADV acknowledged the Fidelity compensation was that type
of economic benefit. TRG’s December 2011 response
continued, however:

         Additionally,     we     may     receive     additional
         compensation in the form of custodial support
         services from Fidelity based on revenue from the sale
         of funds through Fidelity. Fidelity has agreed to pay
         us a fee on specified assets, namely no transaction fee
         mutual fund assets in custody with Fidelity. This
         additional compensation does not represent additional
         fees from your accounts to us.

Although TRG’s December 2011 filing mentioned the payment
arrangement with Fidelity, the Commission concluded, as is
evident, that

         [b]ecause it failed to mention that not all “no
         transaction fee mutual fund assets in custody with
         Fidelity” resulted in [payments to TRG], the
         disclosure failed to reveal that TRG had an economic
         incentive to put client assets into eligible non-Fidelity,
         non-transaction fee funds over other funds available
         on the Fidelity platform. Without this information,
                                12
         TRG’s clients could not properly assess the relevant
         conflicts.

Id. at 10–11.

     Until April 2014, TRG’s response to Item 14 of Form
ADV remained unchanged, apart from an unrelated disclosure
about “client luncheons” added in April 2013. Then, for the
first time, TRG disclosed the Fidelity payment formula and
rates, revealing the source and details of the conflicts of
interest. Thus, there is substantial evidence to support the
Commission’s finding that TRG’s Form ADV filings did not
fully and fairly disclose the conflicts of interest arising from its
payment arrangement with Fidelity “until at least April 2014.”
Id. at 8.

     Likewise supported by substantial evidence are the
Commission’s findings that TRG and its principals failed to
discharge their fiduciary duty by providing clients with copies
of TRG’s General Information and Disclosure Brochure (Jan.
2004) and Fidelity’s Brokerage Account Client Agreement.
See id. at 11–12. Like the Forms ADV, TRG’s Disclosure
Brochure failed to describe the payment arrangement with
Fidelity; it contained only a general statement that when TRG
referred clients to “other money managers,” it received “a
portion of the fees generated by the referred clients.” See id. at
12. And it is undisputed that the relevant portion of the Fidelity
Client Agreement was never received by “a large proportion of
TRG’s clients,” id. at 11, because the Client Agreement was
only distributed from 2005 onward. See Pet’rs’ Br. 39–40;
Reply Br. 9.

     In sum, the evidence before the Commission demonstrated
that TRG and its principals persistently failed to disclose
known conflicts of interest arising from the payment
                                13
arrangement with Fidelity in a manner that would enable their
clients to understand the source and nature of the conflicts. As
the Commission emphasized, TRG and its principals had the
burden under the Advisers Act of showing they provided “full
and fair disclosure of all material facts,” Decision at 7 (quoting
Capital Gains, 375 U.S. at 194), and the evidentiary record
permitted the Commission to find they did not carry this
burden. Evidence that their clients suffered actual harm was
not required. See Capital Gains, 375 U.S. at 195. TRG and its
principals cannot, and do not, suggest their payment
arrangement with Fidelity was not a material fact of which their
clients needed to be fully and fairly informed, nor do they
explain how, during the period of years at issue, that material
fact was conveyed through TRG’s Forms ADV or other means.

                                B.
    The alternative contention put forth by TRG and its
principals is that they did not violate Section 206(2) because
they were not negligent. Negligence is the failure to “exercise
reasonable care under all the circumstances.” RESTATEMENT
(THIRD) OF TORTS: LIABILITY FOR PHYSICAL & EMOTIONAL
HARM § 3 (2010); see Morrison v. MacNamara, 407 A.2d 555,
560 (D.C. 1979). The Commission found that in view of an
investment adviser’s fiduciary obligation, TRG and its
principals “should have known” their disclosures were
inadequate. Decision at 12. Specifically, the Commission
found, and the record supports, that the principals
acknowledged the payment arrangement with Fidelity created
potential conflicts of interest and that they knew of their
obligation to disclose this information to their clients. Id. at 14;
see ALJ Hr’g Tr. 442–43 (Feb. 10, 2015) (testimony of
Robare); id. at 719–20, 728–29 (Feb. 11, 2015) (testimony of
Jones).     Nevertheless, their disclosures were “plainly
inadequate,” Decision at 8, over a period of “many years,” id.
at 12. Because a reasonable adviser with knowledge of the
                               14
conflicts would not have committed such clear, repeated
breaches of its fiduciary duty, TRG and its principals acted
negligently. See id. at 12–14.

     Their counterarguments are unpersuasive. First, the
suggestion that the Enforcement Division failed to establish a
standard from which its disclosures deviated misses the mark.
Expert testimony, as they point out, is often used to establish a
professional standard of care, for example in support of an
attorney malpractice claim, see Kaempe v. Myers, 367 F.3d
958, 966 (D.C. Cir. 2004). And it may be necessary in a
securities civil enforcement action where the determination of
negligence “involve[s] complex issues,” SEC v. Shanahan, 646
F.3d 536, 546 (8th Cir. 2011), “beyond a layperson’s
understanding,” SEC v. Ginder, 752 F.3d 569, 575 (2d Cir.
2014). Even with lay triers of fact, however, expert testimony
is unnecessary where a professional’s “lack of care and skill is
so obvious that the trier of fact can find negligence as a matter
of common knowledge.” Kaempe, 367 F.3d at 966 (quoting
O’Neil v. Bergan, 452 A.2d 337, 341 (D.C. 1982)).

     TRG and its principals maintain that the standard of care
for Form ADV disclosures “is not self-evident” because, they
assert, even compliance professionals may have difficulty
satisfying “the evolving Form ADV disclosure requirements.”
Pet’rs’ Br. 27. But regardless of what Form ADV requires,
TRG and its principals had a fiduciary duty to fully and fairly
reveal conflicts of interest to their clients. Their statutory
obligation and the administrative record here show that the
question whether TRG and its principals negligently breached
their duty was not so complex as to require expert testimony;
for a decade their disclosures simply did not refer to the
payment arrangement with Fidelity, much less its terms.
                              15
     Further, expert testimony that the disclosures they made
“conformed to or exceeded the industry standards,” Pet’rs’ Br.
32, may be “relevant to establishing how a reasonable and
prudent person would act under the circumstances,” but “it is
not dispositive.” Ray v. Am. Nat’l Red Cross, 696 A.2d 399,
403 (D.C. 1997); see Beard v. Goodyear Tire & Rubber Co.,
587 A.2d 195, 199 (D.C. 1991); RESTATEMENT (THIRD) OF
TORTS, supra, § 13(a). Negligence is judged against “a
standard of reasonable prudence, whether [that standard]
usually is complied with or not.” Beard, 587 A.2d at 199
(quoting Tex. & Pac. Ry. Co. v. Behymer, 189 U.S. 468, 470
(1903)). Even assuming the TRG principals’ conduct was like
that of most other investment advisers at the time would not
require the Commission to find that they acted reasonably. See,
e.g., Monetta Fin. Servs., Inc. v. SEC, 390 F.3d 952, 956 (7th
Cir. 2004). They have acknowledged that as investment
advisers they had a fiduciary duty to disclose the payment
arrangement with Fidelity to their clients, and yet the
administrative record shows they resisted doing so for years.

     Second, the Commission did not “violate[] its own
standard of deference afforded to ALJs,” Pet’rs’ Br. 35. Here,
TRG and its principals conflate the ALJ’s credibility
determinations, which the Commission accepts absent
“overwhelming evidence to the contrary,” Lucia v. SEC, 138 S.
Ct. 2044, 2055 (2018), and the ALJ’s factual findings, which
the Commission reviews de novo, see Jarkesy v. SEC, 803 F.3d
9, 12–13 (D.C. Cir. 2015); 17 C.F.R. § 201.411(a), (d). The
Commission appropriately gave “significant weight” to the
ALJ’s credibility determinations in finding that the conduct of
TRG and its principals was neither intentional nor reckless.
Decision at 12. Because its review of the administrative record
was de novo, however, the Commission owed the ALJ no
deference on the factual question of whether Mark Robare and
Jack Jones “specifically sought or received advice from [their]
                               16
consultants about how to disclose the [payment]
[a]rrangement” with Fidelity, and the record showed they did
not. See id. at 13. Furthermore, substantial evidence supports
the Commission’s finding that any reliance on such advice was
objectively unreasonable because TRG and its principals knew
of their fiduciary duty to fully and fairly disclose the potential
conflicts arising from the payment arrangement with Fidelity,
yet repeatedly failed to disclose the source and details of the
conflicts. See id. at 14.

                               III.

     More persuasively, TRG and its principals contend that the
Commission erred in ruling that they violated Section 207 of
the Advisers Act by willfully omitting material information
about the payment arrangement with Fidelity from TRG’s
Forms ADV. For purposes of Section 206, the Commission
found that TRG and its principals acted negligently but not
“intentionally or recklessly” by making disclosures that did not
contain “the information [their clients] needed to assess the
relevant conflicts of interest and did not even, at a minimum,
satisfy the specific disclosure requirements of Form ADV.”
Decision at 12. For purposes of Section 207, the Commission
found the same conduct to be willful. See id. at 15. TRG and
its principals contend there is not substantial evidence to
support the Commission’s findings of willfulness, and we
agree.

     This court has yet to address the meaning of “willfully” in
Section 207, but the parties agree that the standard set forth in
Wonsover v. SEC, 205 F.3d 408, 413–15 (D.C. Cir. 2000),
applies here. Pet’rs’ Br. 45; Resp’t’s Br. 44–45. We will
therefore assume (without deciding) that the Wonsover
standard governs this case. In Wonsover, the petitioner
challenged the Commission’s definition of “willfully” in
                                17
Section 15(b)(4) of the Securities Exchange Act of 1934, 15
U.S.C. § 78o(b)(4). Relying on Supreme Court and Circuit
precedent, this court observed that “[i]t has been uniformly
held that ‘willfully’ in this context means intentionally
committing the act which constitutes the violation,” and
rejected an interpretation that “the actor [must] also be aware
that he is violating one of the Rules or Acts.” Wonsover, 205
F.3d at 414 (alterations in original).

     The Commission found that Mark Robare and Jack Jones
acted willfully because they “both reviewed each of the Forms
ADV before filing” them with the Commission and they “were
responsible” for the forms’ content. Decision at 15. It is the
Commission’s position that they “acted intentionally, as
opposed to involuntarily” because they “intentionally chose the
language contained in the Forms ADV and intentionally filed
those Forms.” Resp’t’s Br. 45; see SEC v. K.W. Brown & Co.,
555 F. Supp. 2d 1275, 1309–10 (S.D. Fla. 2007). In the
Commission’s view, neither the principals’ “alleged ‘good
faith mindset’” nor their “subjective belief that their disclosures
were proper . . . . is relevant to willfulness.” Resp’t’s Br. 45.
This misinterprets Section 207, which does not proscribe
willfully completing or filing a Form ADV that turns out to
contain a material omission but instead makes it unlawful
“willfully to omit . . . any material fact” from a Form ADV. 15
U.S.C. § 80b–7 (emphasis added). The statutory text signals
that the Commission had to find, based on substantial evidence,
that at least one of TRG’s principals subjectively intended to
omit material information from TRG’s Forms ADV.

    “Intent and negligence are regarded as mutually exclusive
grounds for liability.” Harris v. U.S. Dep’t of Veterans Affairs,
776 F.3d 907, 916 (D.C. Cir. 2015) (quoting District of
Columbia v. Chinn, 839 A.2d 701, 706 (D.C. 2003) (quoting 1
DAN B. DOBBS ET AL., THE LAW OF TORTS § 26 (1st ed. 2001))).
                               18
“Any given act may be intentional or it may be negligent, but
it cannot be both.” Id. (quoting 1 DAN B. DOBBS ET AL., THE
LAW OF TORTS § 31 (2d ed. 2011)). Intent is defined as acting
“with the purpose of producing” a given consequence or
“knowing that the consequence is substantially certain to
result.” RESTATEMENT (THIRD) OF TORTS, supra, § 1.
“Extreme recklessness” may constitute “a lesser form of
intent.” Steadman, 967 F.2d at 641–42; see Marrie v. SEC, 374
F.3d 1196, 1203–06 (D.C. Cir. 2004). Negligence, by contrast,
means acting “without having purpose or certainty required for
intent” but in a manner that is nevertheless unreasonable.
DOBBS ET AL. (2d ed.), supra, § 31; see RESTATEMENT (THIRD)
OF TORTS, supra, § 1 cmt. d.

     The Commission did not find that Mark Robare or Jack
Jones acted with “scienter” in failing adequately to disclose the
payment arrangement with Fidelity on TRG’s Forms ADV.
Decision at 12 (defining “scienter” as “a mental state
embracing intent to deceive, manipulate, or defraud” (quoting
Hochfelder, 425 U.S. at 193 n.12)). Instead, the Commission
gave “significant weight” to the ALJ’s determination that their
testimony and demeanor during cross-examination “belied the
notion they were ‘trying to defraud anyone.’” Id. (quoting
Initial Decision at 39). The Commission also found that the
record evidence did not “establish that [their] investment
decisions on behalf of their clients were influenced by the fees
they received from Fidelity.” Id. So it did not find Mark
Robare or Jack Jones “acted intentionally or recklessly,” only
that they “acted negligently.” Id. Because the Commission
found the repeated failures to adequately disclose conflicts of
interest on TRG’s Forms ADV were no more than negligent for
purposes of Section 206(2), the Commission could not rely on
the same failures as evidence of “willful[]” conduct for
purposes of Section 207.
                              19
     The cases on which the Commission relies do not hold
otherwise. In ZPR Investment Management, Inc. v. SEC, 861
F.3d 1239, 1252–53, 1255 (11th Cir. 2017), the willful
violation of Section 203(e) of the Advisers Act did not rest on
a finding of negligence; the Commission found the adviser
“acted with a high degree of scienter” by disseminating
information that he knew to be false. Similarly, in Vernazza v.
SEC, 327 F.3d 851, 860 (9th Cir. 2003), the Section 207
violation was based on the Commission’s finding that the
advisers were, at a minimum, “reckless” in failing to disclose
potential conflicts of interest in their Forms ADV. We are
aware of no appellate case holding that negligent conduct can
be “willful[]” within the meaning of Section 207, and we
conclude that it cannot.

     Accordingly, we deny the petition on the Section 206(2)
violations, grant the petition on the Section 207 violations,
vacate the order imposing sanctions, and remand the case for
the Commission to determine the appropriate sanction for the
Section 206(2) violations.