Page - 112 - in Austrian Law Journal, Volume 1/2015

ALJ 1/2015 Brian Carroll 112 rangement was arguably “misappropriated” from the client by the broker, who kicked back a por- tion of these “misappropriated” client funds to the investment adviser. These client funds paid to the investment adviser constituted an economic benefit that should have been disclosed. This analysis lends support to Ogale’s broader view that “misappropriated” client funds are an economic benefit that satisfies the compensation element.88 In addition to § 207, other provisions of United States federal securities laws implicate an economic benefit approach to determine whether a compensation requirement is met. For example, an eco- nomic benefit approach was used to determine whether an employee of a securities issuer was compensated for participating in an unregistered, public securities offering in violation of § 5 of the Securities Act.89 Also, in interpreting § 15(a) of the Investment Company Act of 1940,90 the compan- ion legislation to the Advisers Act, at least one court has applied an economic benefit approach to determine whether inappropriate compensation was paid to an investment adviser under contract with an investment company.91 The economic benefit concept is also used to determine whether a security has been created.92 In further developing the compensation element of § 202(a)(11), courts may find useful these examples of the application of an economic benefit approach in United States federal securities laws. 3. Another Way to Approach Compensation: Contract Analysis Taking a step back from the economic benefit approach, the language and structure of the Advis- ers Act also supports viewing compensation within a contractual framework. Like other profes- sional services providers, an adviser typically enters into a contract that establishes what services are to be provided and the compensation to be paid for those services. Consistent with this prac- tice, the Advisers Act contemplates that a contract between the investment adviser and client will be formed.93 Indeed, the Advisers Act specifically regulates the content of an advisory contract,94 88 Both Vernazza and Tandem Management are enforcement actions alleging violations of § 207, 15 U.S.C. § 80b-7, based on the economic benefit disclosure requirements of Form ADV. One of the purposes of Form ADV’s economic benefit language, however, is to compel disclosure of investment adviser conflicts of interest, a goal arguably requir- ing a broader view of economic benefit than traditional notions of compensation in professional service relation- ships. See generally Sec. & Exch. Comm’n v. Capital Gains Research Bureau, 375 U.S. 180, 190 (1963) (discussing actu- al and potential conflicts of interest arising from investment adviser’s undisclosed “economic self-interest”). 89 Prohibitions Relating to Interstate Commerce and the Mails, 15 U.S.C. § 77e (2012). See, e.g., Sec. & Exch. Comm’n v. Phan, 500 F.3d 895 (9th Cir. 2007) (receipt of an economic benefit by issuer employees for sale or distribution of securities relevant in determining whether a violation of Securities Act § 5 occurred); see also Sec. & Exch. Comm’n v. Solomon Inc., 1995 WL 412429 (S.D.N.Y 1995) (economic benefit of ownership of securities in prear- ranged, sham transactions), vacated on other grounds by 78 F.3d 802 (2d Cir. 1996); Securities Act § 17(b), Fraudu- lent Interstate Transactions, 15 U.S.C. § 77q, (undisclosed compensation paid to stock touter of securities is ele- ment of violation of Securities Act § 17(b)). 90 Investment Company Act § 15(a), Contracts of Advisers and Underwriters, 15 U.S.C. § 80a-15(a). 91 Steadman v. Sec. & Exch. Comm’n, 603 F.2d 1126 (5th Cir. 1979) (applying economic benefit approach in holding that interest fee loan to adviser qualified as compensation under Investment Company Act § 15(a)(1)). 92 See, e.g., Sec. & Exch. Comm’n v. Kirkland, 521 F. Supp. 2d 1281 (M.D. Fla. 2007) (economic benefit relevant in determining if an investment contract meets the definition of a security). 93 See, e.g., § 201(1), Findings, 15 U.S.C.§ 80b-1(1) (“[I]nvestment advisers are of national concern, [...] their [...] con- tacts [...] with clients are negotiated and performed, by the use of the mails and means and instrumentalities of interstate commerce [...].”); § 205(d), 15 U.S.C. § 80b-5(d) (defines for certain purpose an investment advisory contract as “any contract or agreement whereby a person agrees to act as investment adviser to or to manage any investment or trading account of another person other than an investment company registered under title I of this Act [Advisers Act]”). 94 See, e.g., § 205(a)(3), 15 U.S.C. § 80b-5(a)(3) (requires that an investment advisory contract includes a provision requiring an investment adviser organized as a partnership to notify the client of any change in membership of the partnership).