Brian Smith never registered his investment newsletter. So, he says, the Securities and Exchange Commission -- through litigation -- drove him out of business. But doesn't the First Amendment give everyone the right of free speech? Not if you're selling advice on investing, the SEC contends.
Mr. Smith, publisher of the now-defunct Investment Intelligence newsletter, along with many members of the financial press, charges that the SEC is in the midst of an overzealous crackdown. It's not clear whether the agency is using its powers as Congress intended.
In the wake of widespread market abuses in the late 1920s and early '30s, Congress passed the Investment Advisers Act of 1940. The act requires investment advisers to register with the SEC and follow strict bookkeeping and advertising rules. Failure to do so can result in license revocation and a fine.
An investment adviser is anyone who is paid by more than 14 individuals for advice on buying or selling securities. ``I don't care if he calls himself a guru or an astrologer, he's got to register,'' says Ira Sorkin, SEC regional administrator in New York.
Such a sweeping category raises questions about whether investment columns in newspapers could one day be included under the definition. For years the act was enforced spottily. But in the last three years, the SEC has beefed up enforcement efforts. Mr. Sorkin says, ``There are more and more people out there who are investment advisers but are not registered and are not fulfilling their fiduciary responsibilities.''
In fact, the number of investment newsletters has ``risen dramatically,'' says Frederick Goss, executive director of the Newsletter Association. He estimates there are now 500 to 600 periodicals offering investment advice.
The SEC contends that this proliferation of newsletters -- as well as new financial instruments and millions of new investors during a decade of deregulation -- has multiplied the potential for abuse.
The SEC points out that Brian Smith ran false advertising claims about Investment Intelligence, in addition to not registering. Smith, president of KCI Communications, which publishes three other, registered financial newsletters, admits, ``I made a mistake. I did something in violation of their rules.''
Still, he and numerous other newsletter publishers question the SEC's regulation of their activities. ``You can't deny future speech on the grounds of past misconduct. You prosecute for false advertising but don't deny him from publishing,'' says Glen King Parker of Fort Lauderdale, Fla., publisher of the Market Logic newsletter.
``If you were convicted of shoplifting 10 years ago, the SEC can use that as grounds for denying a license,'' he adds. ``Once you do register, you can have your license revoked for as little as not having a checkbook balanced -- there are strict rules governing bookkeeping.'' Mr. Parker is also chairman of the Freedom of the Press Committee of the Newsletter Association of America.
The nub of the issue: Is an investment adviser entitled to free speech, or is he another creature under the law, subject to certain restraints because he can potentially manipulate stock prices and destroy investors' confidence in the market?
Earlier this month, the Supreme Court heard oral arguments in Lowe v. SEC, a pivotal case that should draw the line between the financial press and investment advisers.
In 1981, the SEC yanked Christopher Lowe's license to practice as an investment adviser after he was convicted of two felonies and two misdemeanors in connection with his conduct as an adviser.
Mr. Lowe had stopped investing clients' money for them but continued to publish two newsletters offering advice on investing in the stock market. this might be the best CHO to chop the one line that's over So the SEC took him to court.
Lowe has garnered widespread support from at least 10 newspaper and magazine trade organizations. The press is concerned that if the SEC's powers are confirmed, their enforcement efforts may reach into the financial press.
``Money magazine, Forbes, and Barron's, for starters, all publish the same kind of information as we did,'' Brian Smith complains. ``But they're not required to register.''
There is an exclusion in the Investment Advisers Act for a ``bona fide newspaper, newsmagazine, or business or financial publication of general or regular publication.''
Yet, The Stock Market Magazine, another unregistered publication being sued by the SEC, contends it is a general publication. Only half of its articles are related to investing in individual companies.
The SEC counters that the magazine is a good example of the need for registration. Some of the articles on companies were written by and paid for by those companies.
Will the SEC eventually require general-publication writers who are in a position to influence stock prices to register as investment advisers? ``That's the fear you've been reading about in the press, but it's without basis,'' says Mr. Sorkin at the SEC. ``Columnists do not have to register, and the SEC has always recognized that.''
But future SEC practices may change if the commission wins the Lowe case, says Tamar Frankel, a securities law professor at Boston University. ``I think it may try to evaluate the position of financial reporters. And I think they should do it very carefully. For instance, you don't have to regulate the whole magazine, just the part that issues buy-and-sell advice. Or maybe the reporter himself will have to register.''
The outcome of the SEC suits against Investment Intelligence and The Stock Market Magazine hinges on the Supreme Court ruling, expected by May.
``I can't believe the Supreme Court would allow newsletters to be printed without some sort of fiduciary regulation -- that is, disclosure to readers of what stocks are held by the publisher. You must protect investors or they will withdraw from the market,'' Ms. Frankel says.
But as Lowe's attorney, Michael E. Schoeman, agrued before the Supreme Court: ``. . . the right to publish is guaranteed by the First Amendment to the Constitution, and the [Investment Advisers] Act . . . is an attempt by Congress to select a particular subject matter in which Congress has an interest and to say that only certain people are to discuss that subject matter.''
The SEC's stand: Investment advice is investment advice; the method for conveying it is immaterial to determining regulation. The Supreme Court has ``held that the government does not lose its power to regulate commercial activities deemed harmful to the public where speech is a component of that activity,'' SEC enforcement chief John Fedders has said.
In the meantime, the SEC continues to enforce the act. ``A lot of people are under informal investigations at this point,'' says publisher Smith. ``I met with 10 other financial publishers in Florida recently who said the SEC had paid them a visit. Howard Ruff [who is not registered] just gave them five or six boxes' worth of personal trading records.''
And the SEC clampdown has yielded results, says Sorkin. Some 9,000 people registered as investment advisers in 1984, up from 7,200 in '83.