Volume IV, Issue II (April 2006) - Columbus School of Law

operate as a fraud or deceit upon the purchaser.” 508 Section 17(a) does not apply to purchases ofsecurities. An individual is a seller under Section 17(a) even though he does not own the securitybeing sold, so long as: (1) he solicits the transaction and (2) his solicitation is motivated bypersonal financial gain. 509 The second prong is satisfied if the person anticipates a share of theprofits, even though he may not receive a salary or a commission for his selling efforts. 510In addition, Section 9(a)(4) of the SEA Act of 1934 provides guidance on false or misleadingstatements. Section 9(a)(4) makes it unlawful for any dealer or broker “to make, regarding anysecurity registered on a national securities exchange, for the purposes of inducing the purchase orsale of such security, any statement which was at the time and in the light of the circumstancesunder which it was made, false or misleading with respect to any material fact, and which heknew or had reasonable grounds to believe was so false or misleading.” 511 Section 9(a)(4), unlikeSection 17(a), applies to both fraudulent purchases and sales. 512 However, the scope of 9(a)(4) isnarrower than Section 17(a) in that: (1) it applies only to exchange-listed securities; (2) itprohibits fraudulent misstatements but not omissions; (3) it requires that the broker have thespecific purpose of inducing the purchase or sale of the security; and (4) it expressly requires thatthe broker know or have reason to know of the falsity of the statement. 513B. Fiduciary Duties Owed by Investment Advisors:In stark contrast to the duties owed by brokers, investment advisors are held to a fiduciary dutystandard—regardless of the degree of control investment advisors exercise over a client’saccount. The principal that investment advisors owe their clients a fiduciary duty is not expresslymandated by the IAA, but in SEC v. Capital Gains Research Bureau, Inc., 514 the United StatesSupreme Court held that Section 206 of the Act imposes fiduciary duties on investment advisorsby operation of law. 515 Section 206 of the IAA states, in relevant part, “[i]t shall be unlawful forany investment adviser, by use of the mails or any means or instrumentality of interstatecommerce, directly or indirectly—(1) to employ any device, scheme, or artifice to defraud anyclient or prospective client; (2) to engage in any transaction, practice, or course of business whichoperates as a fraud or deceit upon any client or prospective client.” 516 An investment advisor mayviolate Section 206(2) if he fails to act with “the utmost good faith” with respect to his clients,and or fails to satisfy its affirmative duty to disclose all material facts and conflicts of interest. 517In general there are three main fiduciary duties which are enforceable under IAA §206: (1)disclosure; (2) best interests of clients; and (3) fairness. 518Disclosure. The first fiduciary duty, of disclosure, requires investment advisors to disclose allmaterial facts about the advisory relationship. 519 The standard for materiality is: whether there isa substantial likelihood that a reasonable client would attach importance to it. 520508 SEA of 1933 §17(a), 15 U.S.C. §77q.509 Norman S. Poser, Broker-Dealer Law and Regulation, 3 rd Ed. (supplemented 2005), §3.01[B].510 Id., citing Meadows v. Securities and Exch. Commn., 119 F.3d 1219, 1225-1226 (5 th Cir. 1997).511 SEA of 1934 §9(a)(4), 15 U.S.C. §78i(a)(4).512 See Poser, supra note 114.513 Id.514 375 U.S. 180, 191 (1963).515 Investment Advisors: Law & Compliance, Matthew Bender & Company, Inc. (2005), §9.02.516 15 U.S.C. §80b-6.517 See SEC v. Capital Gains, supra note 119 at 192; and Investment Advisors, supra note 117.518 See Investment Advisors, supra note 120.519 Id.85