Page - 107 - in Austrian Law Journal, Volume 1/2015

ALJ 1/2015 Observations on Judicial Approaches to Discerning Investment Adviser Status 107 A. Advice Must Concern Securities An investment adviser must provide advice concerning securities.51 The definition of a security under § 202(a)(18)52 is consistent with other United States federal securities statutes’ definition of a security.53 Consequently, these definitions are generally interpreted as a single body of law.54 This body of law reflects several interpretative themes. Consistent with the broad legislative goal of United States federal securities laws to eliminate serious abuses in the securities markets, courts view as securities not only financial instruments that fall within the ordinary concept of a security, but also “virtually any instrument that might be sold as an investment”.55 When deciding whether an instrument meets the definition of a security, courts are not bound by any legal for- malism,56 rather they engage in a case-by-case57 examination of the economic reality underlying the transaction.58 Two Supreme Court opinions anchor the framework for determining whether a security is created: SEC v. W.J. Howey Co.59 and Reves v. Ernst & Young.60 In addition, Congress con- tinues to play a legislative role in defining a security.61 At bottom, the breath of the definition of an investment adviser is tied directly to the definition of a security. As more financial instruments are created and meet the definition of a security, the scope of investment adviser status corre- spondingly expands. 51 See, e.g., Rasmussen v. Thomson & McKinnon Auchincloss Kohlmeyer, Inc., 608 F.2d 175 (5th Cir. 1979) (commod- ities advice does not meet securities advice requirement under § 202(a)(11), 15 U.S.C. § 80b-2(a)(11); Mechigian v. Art Capital Corp., 639 F. Supp. 702 (S.D.N.Y. 1986) (art purchase does not meet securities advice requirement un- der § 202(a)(11), 15 U.S.C. § 80b-2(a)(11)). 52 Section 202(a)(18), 15 U.S.C. § 80b-2(a)(18), defines a security as “any note, stock, treasury stock, security future bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agree- ment, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment con- tract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit) or on any group or index of securities (including any interest therein or based on the value thereof), or any put, call straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a ‘security’, or any certificate on interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase any of the foregoing.” 53 See Securities Act, § 2(a)(1), 15 U.S.C. § 77b(a)(1); Exchange Act, § 3(a)(10); 15 U.S.C. § 78c(a)(1), Investment Com- pany Act, § 2(a)(36), 15 U.S.C. § 80a-2(a)(36). 54 See, e.g., Sec. & Exch. Comm’n v. Edwards, 540 U.S. 389 (2004); Reves v. Ernst & Young, 494 U.S. 56, 61 n.1 (1990); Marine Bank v. Weaver, 455 U.S. 551, 555 n.3 (1982); United Hous. Found., Inc. v. Forman, 421 U.S. 837 (1975). 55 Reves v. Ernst & Young, 494 U.S. 56, 61 (1990). 56 Sec. & Exch. Comm’n v. Edwards, 540 U.S. 389, 393 (2004) (“Congress’ purpose in enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name they are called. [...] To that end, it enacted a broad definition of ‘security,’ sufficient to ‘encompass virtually any instrument that might be sold as an investment.’”) (emphasis in original). 57 See U.S. v Leonard, 529 F.3d 83, 89 (2d Cir. 2008) (citing Reves v. Ernst & Young, 494 U.S. 56, 61 (1990)). 58 See Reves v. Ernst & Young, 494 U.S. 56, 61 (1990); Sec. & Exch. Comm’n v. W.J. Howey Co., 328 U.S. 293 (1946). 59 328 U.S. 293 (1946). Under SEC v. W. J. Howey Co., 328 U.S. 293 (1946) and its progeny, the Supreme Court estab- lished a multiple factor test for determining when an investment contract constitutes a security, including hori- zontal and vertical commonality tests. 60 494 U.S. 56 (1990). Under Reves v. Ernst & Young, 494 U.S. 56 (1990), the Court adopted the “Family Resem- blance” approach for determining when a note may meet the definition of a security. It applied a rebuttable pre- sumption that a note is a security unless it bears a “family resemblance” to a judicially recognized list of notes that do not meet the definition of a security. 61 For example, §§ 761(a)(2) and 768(a)(1) of the Dodd-Frank Act amend the definition of a security under the Ex- change Act § 3(a)(10), 15 U.S.C. § 78c(a), and Securities Act § 2(a)(1), 15 U.S.C. § 77b(a)-(1), respectively, to define a security-based swap as a security. See also SEC. & EXCH. COMM’N, LIFE SETTLEMENTS TASK FORCE, STAFF REPORT TO THE U.S. SECURITIES & EXCHANGE COMMISSION (July 22, 2010) (recommending that the Commission considers requesting Congress to amending the definition of a security under federal securities law to include life settlements).