375 U.S. 180 (1963)
Capital Gains Research Bureau, Inc. published the monthly investment advisory service A Capital Gains Report.1 The Report was mailed to approximately 5,000 subscribers who each paid an annual subscription price of $18.2
Between March 15, 1960, and November 7, 1960, on six different occasions the respondents purchased shares of a particular security shortly before recommending it in the Report for long-term investment.3 On each occasion the market price and volume of trading of the recommended security increased within a few days after distribution of the Report.4 The respondents immediately sold their shares at a profit without disclosing any aspect of these transactions to their clients or prospective clients.5
The Securities and Exchange Commission brought this action in the United States District Court for the Southern District of New York.6 It requested a preliminary injunction that would have required the respondents, in any future Report, to disclose the material facts concerning any purchase of recommended securities within a very short period prior to distribution of the recommendation.7 The injunction would also have required disclosure of the intent to sell and the sale of those securities within a very short period after distribution.8 The District Court denied the request for a preliminary injunction.9 The Court of Appeals for the Second Circuit, sitting en banc, affirmed the denial by a 5-to-4 vote.10
The Supreme Court granted certiorari to consider the question of statutory construction because of its importance to the investing public and the financial community.11
Whether under the Investment Advisers Act of 1940 the Securities and Exchange Commission may obtain an injunction compelling a registered investment adviser to disclose to his clients a practice of purchasing shares of a security for his own account shortly before recommending that security for long-term investment and then immediately selling the shares at a profit upon the rise in the market price following the recommendation?12
Section 206 of the Investment Advisers Act of 1940 makes it unlawful for an investment adviser to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client, and the Act empowers the Commission to seek injunctive relief to enforce compliance; Congress intended this prohibition to receive a broad remedial construction that reaches nondisclosure of material conflicts of interest by fiduciaries, without requiring proof of intent to injure or actual injury to clients.13
Yes. The Investment Advisers Act of 1940 substitutes a philosophy of full disclosure for caveat emptor in the securities industry and recognizes the delicate fiduciary nature of the investment advisory relationship.14 Capital Gains Research Bureau, Inc. published A Capital Gains Report mailed to approximately 5,000 subscribers.15 On six occasions between March 15, 1960, and November 7, 1960, the respondents purchased shares shortly before recommending them for long-term investment.16 They sold immediately after the resulting price increase at a profit and failed to disclose any aspect of the transactions.17
This practice creates a conflict of interest with significantly greater potential for abuse than ordinary trading.18 The adviser may be motivated to recommend a security for its short-run market effect rather than its long-run value to clients.19 The failure to disclose therefore operates as a fraud or deceit within the meaning of the statute.20 The Commission may obtain an injunction requiring disclosure of the practice in future reports.21
The Securities and Exchange Commission may obtain an injunction compelling disclosure of the scalping practice under the Investment Advisers Act of 1940.22
Related opinions on this issue
Justice Harlan would affirm the judgment of the Court of Appeals.23 He reads the en banc opinion as requiring at least some proof that an investment adviser's recommendations are not disinterested rather than confining the statute to traditional common-law concepts of fraud.24 In his view the nondisclosed facts show only that respondents personally profited from the foreseeable reaction to sound and impartial investment advice. There is no evidence that the recommendations were motivated by anything other than a belief in their soundness.25
Harlan distinguishes the cases cited by the majority on the ground that they involved bribes, mark-ups unknown to customers, or other dishonest dealing vital to the transactions, whereas here no such factors appear.26 He finds no authority in the statute or legislative history for the absolute disclosure rule fashioned by the Court and notes that Congress omitted the express disclosure provision present in the Securities Act of 1933.27 Harlan concludes that the Court should have exercised judicial restraint, particularly at the interlocutory stage, because the Commission might still have made out a case under the statute as written.28