Page - 121 - in Austrian Law Journal, Volume 1/2015

ALJ 1/2015 Observations on Judicial Approaches to Discerning Investment Adviser Status 121 1. An Opportunity to Act by the Recipient of Investment Advice The Wang decision also raised an issue of whether the recipient of advice must be in a position to act on that advice. As noted, Wang argued that by the defendant sending a letter to limited part- nership investors outlining the sales terms of the property, he provided investment advice. In rejecting this argument, the court relied, in part, on its conclusion that Wang, as a limited partner, “had no input or say as to the sale [of the apartment building]”148 by the limited partnership and his “inability to participate”149 in the decision to sell meant that the advice was not investment advice. This “inability to participate” limitation on the advising “others” element, strongly implies that Wang as the recipient of the advice must be in a position to participate in the decision to sell the property for the advice to meet the requirements of § 202(a)(11). An ability to participate in certain business decisions may run afoul of United States federal secu- rities laws. A requirement that a holder of a security (Wang as a limited partner) must participate in the business affairs of the issuer of securities (the limited partnership) may contradict the defi- nition of a security. In 1945, the Supreme Court in SEC v. W.J. Howey,150 held that an investment contract may meet the definition of a security if, among other requirements, an investor is “led to expect profits solely from the effort of the promoter or a third party.”151 More recently, in devel- oping this requirement, courts have not only made a distinction between passive investor con- duct and significant investor control,152 but, in determining whether a limited partnership interest is a security, have required that the relevant partnership agreement give the general partner the “exclusive right and power to manage, conduct, and operate [...]” the partnership’s business.153 To the extent that Wang is required to participate in investment decisions of a partnership, Wang jeopardizes the limited partnership interest meeting the requirements of a security. 2. The Trustee Conundrum – Is Advising “Yourself” Advising Others? Given the legal relationship between a trustee and the trust, courts have struggled over whether trustee investment advice to a trust constitutes advice to itself or to another entity. By way of back- ground, in 1942, the Commission granted an application of Augustus P. Loring, Jr. requesting an order, pursuant to then § 202(a)(11)(F),154 exempting him from the definition of an investment adviser. After a public hearing, the Commission concluded that Mr. Loring served as a professional trustee in the administration of trusts and estates and the management of property. The vast majority of Loring’s business155 consisted of acting as a court appointed fiduciary (a trustee, guardian, conser- vator or executor) under court supervision. Loring administered both personal and real property. When acting under court appointment, he held legal title to the property and acts as a principal.156 148 715 F.2d at 1192. 149 Id. 150 Sec. & Exch. Comm’n v. W. J. Howey Co., 328 U.S. 293 (1946) (multiple factor tests for determining whether an in- vestment contract meets the definition of a security). 151 Id. at 298–99. 152 Sec. & Exch. Comm’n v. Aqua-Sonic Products Corp., 687 F.2d 577, 582 (2d Cir. 1982). 153 Sec. & Exch. Comm’n v. Rabinovich & Associates, LP, 2008 WL 4937360 1, 3 (S.D.N.Y. 2008) (citations omitted); see, e.g., Sec. & Exch. Comm’n v. Northshore Asset Mgmt., 2008 WL 1968299 1, 7 (S.D.N.Y. 2008). 154 Since the Commission issued its order In the Matter of Augustus P. Loring, Jr. in 1942, § 202(a)(11)(F), 15 U.S.C. § 80b-2(a)(11)(F), has been renumbered as § 202(a)(11)(G), 15 U.S.C. § 80b-2(a)(11)(G). 155 Loring also provided trustee services under trust indenture appointment and power of attorney arrangements. Investment Advisers Act Release No. 33, 1942 WL 34539 1 (July 22, 1942). 156 Id. at 2.