Page - 100 - in Austrian Law Journal, Volume 1/2015

ALJ 1/2015 Brian Carroll 100 cant part of Section § 202(a)(11) defines an investment adviser as one who “for compensation, engages in the business of advising others [...] as to the value of securities or as to the advisability of investing in, purchasing, or selling securities [...].”3 While much of the work of these and other financial professionals falls clearly under this definition, investment adviser status is not always obvious, particularly when dealing with newly created financial services and products. This article examines how courts approach the elements of this definition and some of the chal- lenges they face. It starts by noting briefly why investment adviser status is important. It then reviews the complete statutory definition of an investment adviser and touches on the relation- ship between investment adviser status and investment adviser registration with the U.S. Securi- ties & Exchange Commission (“Commission”), a federal agency charged with administering the Advisers Act. Next, the article identifies the types of cases that may implicate this definition. Final- ly, it outlines key judicial approaches to interpreting this definition while sharing some observa- tions about these approaches. II. Investment Adviser: Definition, Exceptions and an Exemption Investment adviser status is important because it carries with it certain responsibilities and op- portunities. At the very least, an adviser that meets this definition owes a fiduciary duty to its clients4 and is subject to the Commission’s authority to investigate and prosecute in civil proceed- ings investment adviser fraud under provisions of § 206,5 regardless of whether or not an in- vestment adviser is required to register with the Commission.6 Similarly, an investment adviser is designated by law as a potential whistleblower target under § 21F7 of the Securities Exchange Act of 1934 (“Exchange Act”).8 On the other hand, registered investment advisers may participate as a 3 Investment Advisers Act of 1940 (“Advisers Act”), § 202(a)(11), 15 U.S.C. § 80b-2(a)(11) (1940). Hereafter references to sections of Advisers Act and rules promulgated thereunder will not be identified as part of the Advisers Act, but simply by section number and rule number. 4 Sec. & Exch. Comm’n v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 191 (1963) (citations omitted) (“The Investment Advisers Act of 1940 thus reflects a congressional recognition of the delicate fiduciary nature of an investment advisory relationship.”); Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 472 n.11 (1977) (“[…] Congress in- tended the Investment Advisers Act to establish federal fiduciary standards for investment advisers.” (citations omitted); Transamerica Mortg. Advisors, Inc. v. Lewis, 444 U.S. 11, 17 (1979) (“[T]he [Advisers] Act’s legislative his- tory leaves no doubt that Congress intended to impose enforceable fiduciary obligations.”). 5 See § 206(1)-(2), Prohibited Transactions by Investment Advisers, 15 U.S.C. § 80b-6(1-2), (“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 pro- spective client […].”). 6 See § 206, Prohibited Transactions by Investment Advisers, 15 U.S.C. § 80b-6; Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 17 n.6 (1979) (When amending Section 206 by adding Section 206(4), “[…] Congress also extended the provision of § 206 to all investment advisers, whether or not such advisers were required to regis- ter under § 203 of the [Advisers] Act, 15 U.S.C. § 80b-3. 74 Stat. 887.”); see also “Investment Adviser Status and In- vestment Adviser Registration with the Commission” in this article. 7 § 21F Securities Exchange Act of 1934 (“Exchange Act”), Securities Whistleblower Incentives and Protection, 15 U.S.C. § 78u-6; see Securities Whistleblower Incentives and Protections, Securities Exchange Act Release No. 64545 (May 25, 2011) 3, 76 FR 34300 (June 13, 2011) (adopting rule release) (“Section 21F directs that the Commission pay awards, subject to certain limitations and conditions, to whistleblowers who voluntarily provide the Commission with original information about a violation of the securities laws that leads to the successful enforcement of an action brought by the Commission that results in monetary sanctions exceeding $ 1,000,000.”); see also Exchange Act § 3(a)(47), 15 U.S.C. 78c(47) (“The term ‘securities laws’ means [...] the Investment Advisers Act of 1940 [...].”). 8 15 U.S.C. § 78a et seq.