Lowe v. Securities and Exchange Commission

PETITIONER:Lowe
RESPONDENT:Securities and Exchange Commission
LOCATION:Parking Lot

DOCKET NO.: 83-1911
DECIDED BY: Burger Court (1981-1986)
LOWER COURT: United States Court of Appeals for the Second Circuit

CITATION: 472 US 181 (1985)
ARGUED: Jan 07, 1985
DECIDED: Jun 10, 1985

ADVOCATES:
Michael E. Schoeman – on behalf of Petitioners
Rex E. Lee – on behalf of Respondent

Facts of the case

Question

Audio Transcription for Oral Argument – January 07, 1985 in Lowe v. Securities and Exchange Commission

But if you’re bound by that case, you’re client is covered?

Rex E. Lee:

In the case of investment advisers, they are capable of prescribing, if you will, or giving their advice on which people will rely all at once and doing so with a greater effect.

Michael E. Schoeman:

That’s right.

Rex E. Lee:

That is, typically for the lawyer the advice is one on one.

What if he had gone out door to door, office to office, in the typical way dealers would engage in their activity of not only advising, but selling securities, after all of his licenses had been revoked?

Mr. Solicitor General, along that line, could the legislature of a state pass a law that no disbarred lawyer can publish a paper?

Could a court enjoin that activity?

Rex E. Lee:

Absolutely not, Justice Marshall.

Michael E. Schoeman:

If he went door to door selling his publication?

You’re getting awful close.

Well, usually they did it by telephone, but that he continued doing just what he had done as a dealer after his license had been revoked.

Rex E. Lee:

The difference is this–

Now, that includes a great deal of verbal activity, doesn’t it?

Couldn’t a lawyer publish an article, a column in the newspaper?

Michael E. Schoeman:

Yes.

Rex E. Lee:

–Clearly he could, clearly he could.

Michael E. Schoeman:

If all he was doing was selling the publication–

Could he give legal advice in that column?

No, not the publication.

Rex E. Lee:

I think that he could.

I’m talking about securities.

Rex E. Lee:

The difference is this: The persons who purchase that newspaper are purchasing a collection, are purchasing it for a collection of reasons.

Michael E. Schoeman:

–Ah, if he were selling securities.

Rex E. Lee:

In that newspaper is advice on food, on travel, on who should be number one in the football polls, and also perhaps is an article by a lawyer.

I’m moving away.

Well, suppose it’s only legal news.

He’s acting as a dealer, selling securities, advising people and selling securities, calling them on the phone, having conferences with them, just as any dealer does.

Rex E. Lee:

If it is only legal news, that becomes a much harder case.

And then his license is revoked and he continues, and the court enjoins him.

You mean that the legislature could pass a law saying that a disbarred lawyer may not participate in any transmission of legal advice by newspaper?

Can the court enjoin his First Amendment right, as you put it, to speak to these customers and potential customers?

Rex E. Lee:

That statute I think would be unconstitutional.

Michael E. Schoeman:

I think that if his talking to the customers and giving them literature is still part of his effort to engage in the selling and buying of securities, then it’s very much in the nature of promotional advertising, I think, in which he is promoting securities and his objective is to get people to make purchases through him.

Rex E. Lee:

The hardest, the hardest is the other hypothetical that you just asked, where the legislature… and this gets very close to Justice Rehnquist’s hypothetical… where the legislature passes a law saying that it is a violation of what we perceive to be a fiduciary relationship between disbarred lawyers and anyone within the state with regard to the–

Michael E. Schoeman:

I think that it then comes within the analysis of Bolger against Youngs Drug Products, for example, in which some of the material was informational and yet the objective of the material was to get people to use the product that was involved there.

Well, you can’t have a fiduciary relationship between a disbarred lawyer and the general public, no way.

Well, what if your client in this case had given personal advice to a group of potential purchasers on a one to one basis, but it was not published, but it was nonetheless nothing that he intended to get any profit out of?

Rex E. Lee:

–Well, regardless of whether you call it a fiduciary relationship, position, or a relationship of special trust and confidence, I think the hardest case is whether the legislature could say that a disbarred lawyer may not publish a… may not publish a newsletter that deals exclusively with legal advice, which will be subscribed to expressly for the purpose of obtaining legal advice.

He would not get any commissions for any stock that was sold.

Rex E. Lee:

That is a harder case than is the case where he just publishes one column which is a part of a column in a newspaper.

Michael E. Schoeman:

Well, the Act itself requires that the activity be done for compensation.

Rex E. Lee:

And it is a much harder case than is this case, and the reason is that Congress, as a result of what can only fairly be described as the greatest financial calamity that our nation has ever undergone, concluded that a contributing cause to that was the practices of unscrupulous persons acting as investment advisers.

Well, but I mean he would bill them, you know, a certain amount an hour and say, given your portfolio, I think you ought to pick up a few shares.

Well, General Lee, if the purpose that Congress has in mind is to protect the public from unscrupulous advisers in the financial field, why isn’t that interest fully served by simply requiring full disclosure of the background of this publisher?

Michael E. Schoeman:

I think if an individual gives a speech at a public meeting at which he is giving his own opinions, he is protected by the First Amendment.

Rex E. Lee:

For the same reason, Justice O’Connor, that the public interest is not fully served by requiring that I as a disbarred lawyer, before I exercise speech in the way that I’m exercising it right now, in representing a client, in doing legal work, disclose to that client and to the public at large that I’m a crook.

Michael E. Schoeman:

The distinction would be whether he solicited or obtained specific questions from people about their personal situations, because at that point he would then start rendering personalized advice to people.

Well, no, in the context of the publication of investment advice newsletters, not the person to person selling of securities.

But of course that’s nonetheless speaking.

Rex E. Lee:

Well–

Michael E. Schoeman:

Yes, it is.

As applied to the publications we have here, which are, after all, apparently available for the purchase of anyone who wants to subscribe, whether they were formerly clients or not.

Michael E. Schoeman:

And it’s just a distinction it seems to me that’s been drawn.

Rex E. Lee:

–Well, but the point is that they become clients when they do subscribe.

Michael E. Schoeman:

Lawyers are regulated, even though many of them just give advice and perform no services in court, for example.

Rex E. Lee:

They are not clients simply when they purchase it as a part of a newspaper.

Michael E. Schoeman:

And I think the basis of the distinction is that the lawyer is addressing only the specific interests of his client.

Rex E. Lee:

They are asking Mr. Lowe for his specific advice as to how they should invest their money.

Michael E. Schoeman:

He’s talking just about his client’s needs and he has entered into a dialogue with his client.

Rex E. Lee:

And the point, the crucial point to decision in this case, is that that is the fiduciary relationship that Congress identified.

Michael E. Schoeman:

A publisher doesn’t know what his client’s needs are.

Rex E. Lee:

Now, to come more directly to your question, that’s always a question of how far you need to go, is disclosure sufficient or is a more effective remedy needed under the circumstances.

Michael E. Schoeman:

He doesn’t know who his readers are, except possibly by name where there’s a subscription list.

Well, isn’t that the test we’ve employed for commercial speech, which you argue this is?

Michael E. Schoeman:

He’s expressing his own views, and it’s up to the readers and the public at large to determine whether that piece of advice fits their situation or does not.

Don’t we look at that very thing?

I can see the factual difference, but why does that make a difference when you’re interpreting the First Amendment?

Rex E. Lee:

Certainly not in the professional discipline context.

Michael E. Schoeman:

Because the First Amendment I think is certainly concerned with public discussion.

Rex E. Lee:

Take the Capital Gains Research case itself.

Michael E. Schoeman:

It also reaches private speech when that private speech is for compensation.

Rex E. Lee:

If the Petitioners were correct, then the result in the Capital Gains case would have had to have been different, and the reason is as follows.

Michael E. Schoeman:

We have a tradition in this country of regulation of those kinds of communications as professions, and I suppose that there could be all manner of professions.

Rex E. Lee:

The position for which the Petitioners contend is summarized in their reply brief: “The power to license professionals”–

Michael E. Schoeman:

But there has to be a line drawn between personalized communication to individual persons based on their needs and public discussion.

What page, please?

Michael E. Schoeman:

Otherwise you would have what the Government is arguing for in this case, that all Congress needs to do is professionalize a subject matter and they can then license not only the personal relationship, but they can license public discussion.

Rex E. Lee:

–Excuse me?

Michael E. Schoeman:

And that’s what this Act has done.

Page 2.

Michael E. Schoeman:

It’s 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 be permitted to discuss that subject matter.

I’m sorry.

Would you agree that every disbarment or suspension of a lawyer from practice has some collision with the First Amendment propositions that you’re advancing?

“The power to license professionals extends only to persons who render personal service or advice and cannot under the First Amendment include persons who merely publish.”

Michael E. Schoeman:

It doesn’t have any collision with the lawyer’s or the disbarred lawyer’s right to publish.

Now, if that statement is correct that under the First Amendment Government is powerless to regulate those who merely publish, as opposed to those who give in person advice, then Government would have been powerless to do exactly what it did in the Capital Gains case, namely to require the disclosures that were required in that case.

Well, to speak.

And the reason is that, while there is the difference that in this instance what the Government has done is prohibit publication and in Capital Gains it required publication, this Court has made it very clear in cases like the West Virginia flag salute case and the New Hampshire license plate case… this is a direct quote from the license plate case… that

Michael E. Schoeman:

The thing that the lawyer… the lawyer is not prevented, I think, from advising people if he doesn’t hold himself out to be a lawyer or if he doesn’t accept compensation.

“The First Amendment includes both the right to speak freely and the right to refrain from speaking at all.”

Michael E. Schoeman:

He can still speak, but there is a restriction on the lawyer’s right–

So that the line that Congress drew, we submit, is an appropriate one and is a constitutional one, that there is a difference between the effectiveness of requiring Lowe simply to disclose what he has done in the past and to prohibit him from publishing at all.

I should have made my hypothetical, my question, a little more clearly.

That was the effect, that was the precise effect of what happened in Capital Gains.

Doesn’t the disbarment interfere with the lawyer’s right to speak to clients for compensation and fees?

Mr. Lee, you may be right about Capital Gains, but I’m not sure that your colleague an the other side would agree with you that the result would be different in Capital Gains.

Michael E. Schoeman:

–Yes, it does.

I thought he said that if an investment… if a publisher of this information, of this newsletter, touted stock and then bought in and then sold out when the price went up, that that could be… that the Commission could stop that.

Michael E. Schoeman:

But it does not–

Rex E. Lee:

Yes, but he would also… I don’t want to put words in his mouth, but I do–

And how do you distinguish that from this situation?

Suppose he doesn’t agree with you, then, because Capital Gains could easily have come out the same way under that view?

Michael E. Schoeman:

–Because it does not interfere with that lawyer’s or ex-lawyer’s right to publish a law review article on how to comply with the takeover statute.

Rex E. Lee:

–Well, there are many things with which Mr. Schoeman and I disagree in this case.

Michael E. Schoeman:

I’m free to publish a law review article in California telling people how to do various things under the law, although I’m not a lawyer in California.

Yes, yes.

Michael E. Schoeman:

I can’t practice there, but I can publish there; and that’s the distinction.

Rex E. Lee:

But I am simply saying that the thrust of the position that is taken in the reply brief, that the power of Government to regulate professionals is limited to the face to face in person context, simply will not wash, because that’s exactly what happened in Capital Gains, this Court did uphold it.

Do you think you would be free in California to publish a newsletter to subscribers interpreting recent decisions say of the Supreme Court of California, or trends in California law, and collect from them on an individual basis for it?

Rex E. Lee:

Now, I’ll grant you that the Court did not pass in the precise First Amendment issue in that case because they didn’t have to.

Michael E. Schoeman:

Absolutely.

Rex E. Lee:

But the point is that the result would have been… the result would have had to have been otherwise.

Well then, a disbarred lawyer in California could do the same thing?

Rex E. Lee:

And in Ohralik, Ohralik was clearly prohibited, not just required to disclose, but was clearly prohibited from engaging in speech.

Michael E. Schoeman:

Yes, sir.

Rex E. Lee:

Dr. Barsky, if you will, when he was disqualified from practicing medicine for six months was disqualified from engaging in speech.

Michael E. Schoeman:

What he can’t do is advise people based on their specific situations.

Rex E. Lee:

In short, once you get over the threshold that this case is a prior restraint case because it involves professional discipline, then we submit that Congress was constitutionally entitled to draw the line at the place that Congress in fact drew it.

Michael E. Schoeman:

He cannot evaluate whether Mr. X should have a will or shouldn’t have a will, or should have an inter vivos trust or shouldn’t.

Rex E. Lee:

Many of the arguments that are advanced by the Petitioners and their amici are addressed to cases other than this one.

Michael E. Schoeman:

But he can, like Mr. Dacey in New York County Lawyers against Dacey, publish a book which says people should have inter vivos trusts in order to avoid probate.

Rex E. Lee:

They are arguments that are designed to make this case more difficult than it is.

Michael E. Schoeman:

This question has come up.

Rex E. Lee:

There is a rather clean dividing line.

Michael E. Schoeman:

Every time it’s come up in state supreme courts it’s been decided on the basis of the distinction that I’m suggesting here.

Rex E. Lee:

Fortunately, it is a line that has been marked out by Congress.

Michael E. Schoeman:

Personalized communication based on the individual situation of a client is subject to regulation, but publication to the public in general not based on the particular situation of readers–

Rex E. Lee:

It is that Government is entitled to maintain the integrity of the channels of communication between the fiduciary and those persons whom the fiduciary serves; and in the event that there is a communication occurring within that channel, then Congress can control it.

Well, Mr. Schoeman, can a non-lawyer publish how-to-do-it forms telling people how to tailor their own situation to, for instance, get their own divorce or probate their own will?

Rex E. Lee:

Now, there are differences in that respect between the kinds of fiduciary relationships between a lawyer and his client and between an investment adviser and his clients, but the again the significance of the Capital Gains case is its determination, is its approval of Congress’ determination, that that was and is a fiduciary relationship.

Michael E. Schoeman:

–Certainly.

Mr. Solicitor General, let me go back for a moment, because I’m still wrestling with this in my mind, to the hypothetical about your mailing list of the trade association, is what prompted the question.

And furnish the forms and describe how you can do that for yourself?

Supposing you had a law review published by law students who were not admitted to the bar, just writing on recent developments in tax law, and people who were interested in tax law began to subscribe to it.

Michael E. Schoeman:

Yes.

Could the state prohibit the publication of that?

Even though you’re not licensed?

Rex E. Lee:

It could.

Michael E. Schoeman:

Yes.

You say it could?

And the same with a medical practice?

Rex E. Lee:

Justice Stevens, that is right at the very edge of–

Michael E. Schoeman:

Yes.

Rex E. Lee:

[Laughter]

As a non-licensed physician, you can publish directions to people as to how to treat their illness?

Rex E. Lee:

–of what is permissible and what is not permissible.

Michael E. Schoeman:

That’s right, because the legislature can’t say that certain subjects are fit for public discussion and certain subjects are not.

It seems to me it has the same fiduciary definition–

Michael E. Schoeman:

Whether I rely on Mr. Lowe’s newsletter or someone else’s newsletter or I rely on my broker or who I rely on, that’s up to me.

Rex E. Lee:

No, it does not.

Michael E. Schoeman:

Congress cannot cut off public discussion.

–that your concept does.

Michael E. Schoeman:

It can, based on a long tradition of regulating of professions, limit and control to some extent the private rendering of advice to individuals based on their individual circumstances.

Rex E. Lee:

No, it does not have the same fiduciary relationship, because there is nothing to establish a fiduciary relationship between law students or even lawyers and a person who has never sought cut that person’s advice.

Do you think that Congress… assuming that we agreed with your basic proposition that the First Amendment protects the circulation of the newsletter, in this circumstance he’s been twice convicted of felonies, hasn’t he?

Rex E. Lee:

That’s the way a fiduciary relationship comes into existence in our profession.

Michael E. Schoeman:

Four times.

Well, supposing you had a group of business school students who got interested in the stock market and they started to publish a counterpart to a law review on investments in utility stocks or trends in the gold market or something like that and they publicize it, and either with the sponsorship of the school or just independently to make some money.

Four times.

I suppose they… how do you compare that with the–

And they are felonies related somehow to the securities business?

Rex E. Lee:

If you had… I think it would depend on two things.

Michael E. Schoeman:

Three of them involve worthless checks, one was tampering with physical evidence.

–And why is one a fiduciary and the other not?

Well, wasn’t the worthless checks conviction related to some… he got $10,000 from some client to invest and–

I guess that’s my question.

Michael E. Schoeman:

That was a is demeanor.

Rex E. Lee:

For two reasons.

–Oh, was that it?

Rex E. Lee:

One is that you do have in this instance perhaps the most careful and extensive determination that Congress could have made, extending over a period of seven years in which it examined the causes of a financial calamity that occurred in this country, and it reached the conclusion that… that conclusion has been affirmed by this Court… that there was under those circumstances a fiduciary relationship.

I see.

Rex E. Lee:

Now, the reason that I hesitate in applying that analogy to other circumstances is that I think you’d have to have, in order to justify applying that to another context, you’d have to have something like that kind of history, supported by something like that kind of Congressional determination, in the overall context of the general rule that in making those kinds of determinations, and particularly drawing those dividing lines, that Congress and legislatures in general are entitled to great deference.

My question is this: Could the Commission have a regulation that says that, while we can’t stop you from circulating this newsletter, we require that you include in the newsletter a statement that you’ve been convicted of these felonies?

Rex E. Lee:

Now, let me just say in that regard, any way you decide this case you’re going to have to make some very tough dividing lines, and you’re going to have some tough hypotheticals that are going to be on the one side or on the other.

Michael E. Schoeman:

I don’t think they can do that.

Rex E. Lee:

And I would simply submit that in approaching that overall very important, and in this case frankly very difficult task, that the Court should find it helpful to rely on a couple of general mooring places.

Why not?

What was your other reason?

Michael E. Schoeman:

I think the chilling effect of that on scaring away readers and on scaring away Mr. Lowe from publishing would be too severe.

Are you going to get to that?

Michael E. Schoeman:

The Government charged that–

You said for two reasons.

Have you any precedent to suggest that?

Rex E. Lee:

Well, the one is… the one is that Congress has made that determination; and the second is that there was an unusually good Congressional record, an unusually good factual record supporting what Congress had done.

Michael E. Schoeman:

–No, I do not.

Rex E. Lee:

And I think probably both of those are required.

Well, you mean you don’t have a precedent in the securities field?

Rex E. Lee:

Now, one of these foundation stones is the general proposition that in marking out dividing lines Congress is entitled to broad discretion.

Michael E. Schoeman:

That’s correct, that’s correct.

Rex E. Lee:

The other is that if you look at what’s involved on both sides of this case, from the standpoint of avoiding inhibitions on speech I have never been able to understand how it is that First Amendment values are really advanced by protecting written published advice over in person advice, which is more likely to be oral.

Well, a disbarred lawyer is chilled from talking to clients for pay, isn’t he?

Rex E. Lee:

Both are speech, and I’m unaware of anything in this Court’s jurisprudence suggesting that written speech enjoys a preference over oral.

Michael E. Schoeman:

He is prohibited.

Rex E. Lee:

And from the standpoint of Congress’ objective, which was to prevent repetition of the kinds of conduct that led to one of the greatest financial crises in our nation’s history, if any distinction between these two is to be drawn it would not favor the protection of the criminally convicted defrauder to influence large numbers of people rather than just a few.

Michael E. Schoeman:

That’s an outright prohibition.

Rex E. Lee:

If Lowe can be subjected to Government regulation when he recommends securities to one client, as Mr. Schoeman says that he can, then we submit that he may also be subjected to regulation when he sends these recommendations by publication to 100 clients or 1,000 or 3,000.

Michael E. Schoeman:

I wouldn’t call that chilling.

Rex E. Lee:

Thank you very much.

Michael E. Schoeman:

He’s prohibited from doing it.

Warren E. Burger:

Mr. Schoeman.

Well, it chills him from trying it again.

Michael E. Schoeman:

I think the Solicitor General listed two reasons as to why investment advisers and regulation of publications containing investment advice are different from the legal situation.

Yes, sir.

One was that Congress made the determination.

[Laughter]

That of course is exactly what the First Amendment prohibits Congress from doing.

Well, how far does your position go?

Michael E. Schoeman:

Congress may not abridge freedom of speech or freedom of the press.

Taking Justice Brennan’s line, suppose… does the First Amendment protect false reports in these investment newsletters?

Michael E. Schoeman:

It’s not for Congress to draw the line.

Michael E. Schoeman:

It protects untrue reports, yes.

The line is drawn by the Constitution.

To the same extent as it protects other untrue–

Michael E. Schoeman:

Secondly, the Solicitor General said there is an unusually good record, and I think he is intimating that the Depression was caused in some way by financial publications.

That’s correct.

There’s an exceptionally poor record on that, for that proposition.

–So that just because this newsletter has several times contained or regularly contains false reports would be no basis for an injunction?

Michael E. Schoeman:

There’s almost nothing in the legislative history of the 1940 Act that in any way relates to these publishers.

That’s correct.

They were included, apparently, without very much attention being paid to it.

In fact, there was no finding or even allegation that it ever contained any false information.

None of them testified.

Well, I know, but that’s not my question.

Michael E. Schoeman:

There’s no record of what any of them were doing.

But that certainly is what the Court held in Near against Minnesota, that here was something that was regularly published and found to have regularly contained defamatory material, but nevertheless the publication of that newspaper could not be enjoined in the future.

They were not covered by the SEC survey.

The fact that someone commits a wrong in the past or several wrongs doesn’t tell you what it is he’s going to publish tomorrow.

There may be circumstances, conceivably, in which, for reasons of national security or some other great crisis, you have to have more regulation of publications in some regard.

May I ask a question that’s prompted by Justice Brennan’s question.

Michael E. Schoeman:

But that certainly is not this case.

Am I correct that the only administrative order was the one that cancelled his registration?

Michael E. Schoeman:

What the Petitioners are doing is simply publishing and talking about a subject which is a matter of legitimate public interest.

There’s no administrative order directing him not to publish these papers?

Michael E. Schoeman:

It’s a subject that’s widely discussed, without licensing I may add, in newspapers and magazines and on television and radio.

It’s the result of separate litigation?

Michael E. Schoeman:

You may not always be able to find out what the President of the United States has said on any given day, but you can always find out the trading price of IBM stock.

Yes, but may I qualify.

It is a subject that’s widely discussed, and there’s no reason why Mr. Lowe cannot participate along with everybody else in the public discussion–

The SEC’s order revoked the registration of Lowe Management Corporation, which is one of the Petitioners, and it ordered that Mr. Lowe not be associated with any investment adviser in the future.

May I ask you–

And who is the investment adviser that he is being associated with now?

Michael E. Schoeman:

–of this topic.

Well, it’s the other Petitioners.

–a question on that, that subject.

The corporate entities?

Supposing that the revocation of his registration had been based on publishing misleading information in these very publications and touting stock and then profiting from it himself and that sort of thing, so that he’d misused these publications.

Michael E. Schoeman:

Yes.

I really don’t think that would make a difference.

And so presumably, even if there had been no criminal violations of any kind, they could be enjoined from publishing these papers because they are acting as investment advisers and they’re not registered, is that right?

That was going to be my question.

Michael E. Schoeman:

As the statute apparently reads, for two of the corporate Petitioners they have never had any administrative action taken against them.

You’d say even then they could not require that he cease publishing these papers?

Michael E. Schoeman:

They simply–

The fact that–

Had they ever qualified as investment advisers?

Disassociate himself from them for the future?

Michael E. Schoeman:

–No, they never attempted to.

–Yes, sir.

Well then, I’m not quite clear on the relevance of the criminal proceeding.

Michael E. Schoeman:

The fact that in, I believe it was, Vance against Universal Amusement Company, Universal Amusement Company had shown a pornographic movie, that’s no basis on which to shut down the movie house.

Is the case any different than if just some stranger who had never been an investment adviser started to publish these papers?

Michael E. Schoeman:

Simply the fact that Mr. Near published repeatedly this defamatory material, that’s no ground on which to shut down his activity in the future.

The relevance of the criminal proceeding is to demonstrate to the Court how we fit directly under the disqualifications of the statute.

The fact of past misconduct has no necessary relationship to the contents of a future publication.

But the net effect of all that is that they justify the revocation of your registration.

So you do agree that Capital Gains would have to come out differently if you win this case?

And why is that legally any different than if you had never even applied for registration?

Michael E. Schoeman:

No.

Legally it is not, since we didn’t have to apply for registration.

In Capital Gains, all they did was, as I read it, was require disclosure of his trading activity.

If that’s true, then is the criminal proceeding even relevant?

Yes.

I’m a little puzzled.

Michael E. Schoeman:

He was allowed to continue to publish.

the criminal proceeding is relevant just to show that we fit within the statute, that’s all, in terms of the disqualifications.

So Capital Gains would come out the same way, even if you win?

So you fit within it because you’re not registered.

Michael E. Schoeman:

Yes, yes.

Well, it might be that someone who just starts a newsletter without registering, it may be that he might be treated different constitutionally than someone who’s been convicted of a crime after registration.

And you concede that… you concede that they could require this disclosure if the activity he engaged in was the activity in Capital Gains?

Michael E. Schoeman:

I don’t–

Yes, I think so, although I would think that the Court might want to add some First Amendment consideration to that subject.

I would think the Government’s argument would equally fit the person who starts a newsletter without registration and he has no criminal record.

Michael E. Schoeman:

But I would not be troubled with that result.

–That is correct.

What precise disclosure is that?

Michael E. Schoeman:

That is correct, because this Act applies to all publishers except for those who have been exempted under the statute.

Past criminal–

Michael E. Schoeman:

And apparently there are some 500 of then who are registered.

Well, if a person is actually committing a fraud through the use of his publication, as was the case in Capital Gain, he could be required in some way to disclose that he is committing that fraud, because speech is not his only activity.

Who are registered.

Michael E. Schoeman:

Fraud is his activity.

I’m sorry, Mr. Justice, I didn’t hear you.

–Well then, he in the publication would have to say, I’m committing a fraud by publishing this?

Or who are registered.

Michael E. Schoeman:

No, he would have to describe, as he was required to in Capital Gain, that the publisher has purchased securities discussed in this publication and may be selling them if the price goes up.

Yes.

How about… but you say he could not be required to say whether or not he is a registered investment adviser under the Act?

Michael E. Schoeman:

It seems to us that this statute is an amalgam of the worst features that the Court has identified over the years in connection with First Amendment licensing.

No, I’m not… I think that the state can adopt regulations that say, if you want to call yourself a lawyer you better be one, if you want to call yourself a registered investment adviser–

Michael E. Schoeman:

It’s based on status, it’s got a great degree of discretion.

Could you require him to say whether he ever was and why he isn’t now?

Michael E. Schoeman:

It’s discriminatory and discriminating among different kinds of publications.

–Well, then I think you start getting into the chilling effect.

It’s a content-based regulation, singling out a particular subject.

Well, I know you start, but are we there or not?

What would you say if the newsletter touted a bunch of stocks and it was shown that it provoked buying and then the publisher made a profit off of it, off of the stock?

Michael E. Schoeman:

No, I don’t think you’re there.

He bought stocks and then sold them.

So you could require him to say, I was an investment adviser but I no longer am?

Michael E. Schoeman:

Well, I think in that case he could be subject to regulation, because–

I think the chilling effect would prohibit that, because it would lead him not to publish and it would tend to have people not read the publication.

But not for publication?

Michael E. Schoeman:

What’s important is is the publication a valid thing to be read, is it something that people ought to read or at least ought to have available, or should they be pushed away from it by chilling effects?

–Not for publication.

And I distinguish between the case where a man is committing a a fraud… that you could require a disclosure about… and the case where a man is not committing a fraud.

But for manipulation.

Well, even if there’s no fraud, would you agree he could be compelled to disclose his financial interest in all the securities that he discusses in his publication, his recent trading in the securities?

Michael E. Schoeman:

Because it’s the manipulation, because of his other activity.

Yes, I’m not troubled by that.

The speech in that situation I think would be deemed a subordinate part of his other activities.

Without any necessary fraud?

Just like a broker-dealer.

Michael E. Schoeman:

Although, although that’s a hard question, because he may not be engaged in fraudulent activity.

That’s correct.

He may simply be a rich man who owns a lot of stock.

But that’s certainly not the case here.

Well, I’m assuming he’s not in my question.

Michael E. Schoeman:

There’s no indication of any such conduct.

I’m assuming he’s not.

Michael E. Schoeman:

It seems to me the Commission’s argument basically puts no limit on Congressional power, and all that it comes down to is that Congress thought that there was a good reason for licensing people who talk about this subject.

I think there’d have to be some kind of rule that would allow us to determine the likelihood of a fraud actually being committed.

I have no problem with them licensing people who talk for compensation on a personalized basis on this subject.

The mere fact that I may own some IBM stock shouldn’t necessarily require me to list that on my publication.

But when they then try to extend that concept to public discussion in a newsletter distributed impersonally, that’s when they violate the prohibition on abridgment of the freedom of the press and freedom of speech.

The question is whether I’m engaging in a fraudulent activity, and not what securities I may happen to own, certainly.

Do you think it makes any difference whether they sell that publication or give it away?

Michael E. Schoeman:

Thank you.

I don’t think it makes any difference, because the Court has on numerous indications indicated that the sale of a publication or the fact that a publication is distributed for profit doesn’t take away the First Amendment rights of the publisher.

Warren E. Burger:

Thank you, gentlemen.

Michael E. Schoeman:

And that’s certainly throughout the United States.

Warren E. Burger:

The case is submitted.

Michael E. Schoeman:

Almost everything that’s published you have to pay for.

I do want to touch for a moment on this question of whether we’re involved in commercial speech.

I say we are not involved in commercial speech, that commercial speech essentially means advertising, and that the distinguishing characteristic of commercial speech is speech which is associated with the speaker’s effort to sell his own product or services, and we do not fall at all within that category.

I ask the Court to reverse the decision of the court below.

I’d like to reserve the balance of my time.

Warren E. Burger:

Very well.

Mr. Solicitor General.

Rex E. Lee:

Mr. Chief Justice and may it please the Court:

The key to decision in this case is the perspective from which it is approached.

The Petitioners would view it as a single dimensional case involving exclusively First Amendment issues.

It’s a perspective that would bring into play our historical aversion to prior restraints and a perspective which would draw no distinction between, on the one hand, the right of any person to publish to the world at large and, on the other hand, the right of a fiduciary to publish for the benefit of the very group to whom he or she owes the fiduciary obligation.

But it is a quite different case if it’s considered for what it really is, and that is a professional discipline case, because prior restraints of the clearest kind have been upheld by this Court in cases like Barsky versus the Board of Regents and Ohralik versus the Ohio State Bar Association in order to assure that unworthy persons not serve in certain fiduciary capacities.

In this case the person affected is a five-time convicted criminal whose offenses have included stealing a client’s funds and then falsifying the evidence in an attempt to convince the court that he had made restitution when in fact he had not, and that particular offense was a felony.

Mr. Solicitor General, this is the question I asked your adversary: Would it not be the same case if he had never committed a crime and had never applied for registration, just published precisely what he’s published here?

Rex E. Lee:

From our standpoint it would, because he’s unregistered and the statute requires registration.

So really the criminal history is totally irrelevant?

Rex E. Lee:

Well, except that… except in this sense, Justice Stevens.

Absent the criminal conduct, registration as a practical matter is virtually automatic following the 45-day period.

Rex E. Lee:

You can look at the documents that surround the application and in the event there is no problem then registration becomes automatic.

But you could have an eccentric publisher who just doesn’t believe in licensing the press.

Rex E. Lee:

And never apply.

And never apply.

Rex E. Lee:

And never apply.

That would be the same case?

Rex E. Lee:

That is correct, that is correct.

The starting point for analysis, I submit, is that the Petitioners have effectively conceded that this is a professional discipline case, because the remedy that–

Mr. Solicitor General, I take it that your case depends on that, doesn’t it?

Rex E. Lee:

–Excuse me?

Being viewed as a professional discipline case?

Yes.

Rex E. Lee:

Yes, it does, Justice Blackmun.

And if you cannot achieve that your case is down the drain.

Rex E. Lee:

Yes.

But in effect, Justice Blackmun, we’re over that hurdle, because both sides are treating it as a professional discipline case, the remedy for which Mr. Schoeman is contending is one that involves an oral… excuse me… a prior restraint of the clearest kind, because he agrees that because of the crimes committed by Mr. Lowe he can be enjoined from giving in person investment advice.

So that the only real question in this case–

Either in writing or orally?

Rex E. Lee:

–That is correct.

So that the only real question is one of line-drawing.

Now, the Petitioners for their part contend that the line to be drawn between those whose speech is to be previously restrained and those whose speech is not to be previously restrained is a line between advice delivered on an individualized basis for compensation and published advice for compensation.

The line marked out by Congress is different.

Congress extended the registration requirement to all investment advisers, including those who publish, but it excluded publishers of bona fide newspapers, magazines, or other financial or business publications of general and regular circulation.

And our case comes down to this: Since prior restraints are a constituent element of everybody’s test and since therefore the only question is where the line is to be drawn, we submit that Congress, for whom the fashioning of dividing lines lies at the very core of its constitutional stewardship, was entitled to mark out its own boundary and was not constitutionally required to pick the one preferred by Petitioners.

And that proposition is strengthened when we examine the line that Congress… the decision that Congress made against the background of the problem that it faced.

As this Court stated in SEC versus Capital Gains, the Investment Advisers Act of 1940 was the last in a series of acts designed to eliminate certain abuses in the securities industry which were found to have contributed to the stock market crash of 1929 and the Depression of the 1930’s.

That statement was made in the context of a case involving the precise form of investment advice that is involved here, namely an investment advisory letter.

The series of six statutes extending from 1933 to 1940 dealt with many phases of the securities industry, and concern over the practices of investment advisers surfaced early in the process.

In 1934 a Senate report revealed widespread abuses by publishers of financial publications and, contrary to Petitioners’ assertion, these included practices of publishers of investment advisory services and those are set forth in footnotes 11 and 13 of our brief and in footnote 15 of this Court’s Capital Gains opinion.

But even so, Congress did not act immediately.

Warren E. Burger:

We’ll hear arguments first this morning in Lowe against the Securities and Exchange Commission.

Rex E. Lee:

The 1940 Act was passed only after another report, undertaken pursuant to the Public Utility Holding Company Act of 1935, confirmed the presence of the problem in the investment advisory profession.

Warren E. Burger:

Mr. Schoeman, you may proceed whenever you’re ready.

Rex E. Lee:

Plainly, we ought not criticize Congress for proceeding slowly and carefully one step at a time.

Michael E. Schoeman:

Mr. Chief Justice, and may it please the Court:

Rex E. Lee:

But ultimately, it concluded that national regulation of investment advisory publishers was necessary because of two types of injury that it found to have been caused by unscrupulous publishers in the absence of regulation.

Michael E. Schoeman:

The issue in this case is whether publishers of disinterested information and opinion about securities may be prohibited from publishing on the ground that they are not registered under the Investment Advisers Act as investment advisers.

Rex E. Lee:

The first was harm to investors generally trading in the market; and the second was direct harm to the individual subscribers caused by the investment advice that they received.

Michael E. Schoeman:

We say that Petitioners’ right to publish on a matter of legitimate public interest is guaranteed by the First Amendment to the Constitution and that the Act as applied to publishers is an unconstitutional system of licensing of the financial press.

Rex E. Lee:

Even so, the actual regulatory scheme selected by Congress was a fairly modest one.

Michael E. Schoeman:

The facts are not in dispute.

Rex E. Lee:

At the core of what it did was its determination that investment advisers are fiduciaries, and this also lies at the core of our case; that they occupy, as this Court stated in Capital Gains,

Michael E. Schoeman:

The Petitioners are publishers and that is their only activity.

Rex E. Lee:

“a relationship of trust and confidence with their clients.”

Michael E. Schoeman:

They publish newsletters that are distributed to subscribers by mail, and these publications contain information about the stock market, recommendations and opinions and facts about specific securities.

Rex E. Lee:

And necessarily, given the language of the Investment Advisers Act, “their clients” means those who subscribe to published investment advisory letters.

Michael E. Schoeman:

There is no evidence of any personal contact with any readers, no evidence of any personal advice or handling of clients’ funds.

Rex E. Lee:

Congress did not impose either financial or educational qualifications on investment advisers, as it had, for example, in the case of broker-dealers.

Michael E. Schoeman:

There’s no allegation of trading or ownership of securities.

Rex E. Lee:

Rather, it required only that they file, that they register, and it made the continuing entitlement to registration conditioned on the applicant not having engaged in certain specified misconduct relevant to that special fiduciary relationship.

Michael E. Schoeman:

There’s no allegation that any of the advice contained in the publications is fraudulent or misleading or untruthful.

Rex E. Lee:

In short, the central thrust of the statute was to maintain the integrity of the fiduciary channel, the channel of communication between the adviser and those who had specifically sought out and paid for his advice, by preventing criminals and other wrongdoers from having access to those channels.

Michael E. Schoeman:

The only ground on which Petitioners are to be enjoined is that they are not registered under the Act.

I suppose that’s no different generally than the decision of any state to regulate the lawyers practicing in it.

Michael E. Schoeman:

At one point–

Now, consistent with your view, I suppose a state could prohibit a disbarred lawyer or a non-lawyer, if the criminal history is irrelevant, from writing a newsletter for subscribers about recent developments in California law.

Mr. Schoeman, you did not petition on the basis of an argument raised below, which was that Mr. Lowe was exempt from the provisions of the Act; is that correct?

Rex E. Lee:

I would draw the line at this point, Justice Rehnquist.

Michael E. Schoeman:

–That’s correct.

Rex E. Lee:

My general principle, the governing principle, is that disbarred persons or otherwise unqualified persons may not have access to the special fiduciary channels.

Michael E. Schoeman:

We believe that, unfortunately, Capital Gains Research Bureau, in I think it’s 375 U.S., resolved the question of whether an impersonal publisher is subject to the Act, and we felt that that was controlling.

Rex E. Lee:

Now let’s take the disbarred lawyer, and I’ll refer to your example, your present example, and also the one that you posed to Mr. Schoeman.

I guess maybe that question might be open in this Court?

Rex E. Lee:

Here I think is the case in which the state can regulate.

Michael E. Schoeman:

Well, it’s–

Rex E. Lee:

During the time that I was in practice in Arizona, I represented a number of trade association clients and also other groupings of clients.

I mean, if we decided the exemption question and determined that the Act didn’t cover this type of publication or that it was exempt, then we wouldn’t reach the constitutional issue, is that correct?

Rex E. Lee:

Because of those representations, from time to time when there would be general developments, either opinions of this Court, as for example in the agricultural labor context, I would send out letters to all of my clients telling them of general developments in the law.

Michael E. Schoeman:

–That is correct.

Rex E. Lee:

Now, the reason that I did that was because of a previously established fiduciary relationship between me and them.

Do we have an obligation, then, to consider that in an effort to avoid the constitutional issue?

Rex E. Lee:

There is little doubt in my mind that the day that I was disbarred from practice is the day that I could no longer do that because of this previously established fiduciary relationship.

Michael E. Schoeman:

Yes, I think the Court should do everything it can to avoid reaching the constitutional question.

Rex E. Lee:

Now, the harder case is the one that you posed to Mr. Schoeman, where I simply pick people out of the phone took without this previously established fiduciary channel.

And yet you didn’t raise it.

Well, then under your analysis would it be different in this case if Mr. Lowe had had no previous financial dealings with the particular people who subscribed to his newsletter?

Are you satisfied that there is no exemption under the Act?

He just sets up shop and says: I know a lot about stocks, I’m publishing a newsletter, you can have it for 25 bucks a week.

Michael E. Schoeman:

I don’t think that the Petitioners necessarily feel that they can only exercise their rights if they publish on a regular basis.

Rex E. Lee:

It would not, and here is the reason.

Michael E. Schoeman:

Petitioners have a right to publish a book, for example, containing the same information, and yet that doesn’t come within the terms of the exception.

Rex E. Lee:

The analogy between lawyers and investment advisers carries you to a certain point, but does not solve all the problems.

Michael E. Schoeman:

I would think the real problem with Capital Gains Research Bureau I think is that it misread the legislative history.

Rex E. Lee:

The crucial, ultimate inquiry is, does a fiduciary relationship exist or not?

Michael E. Schoeman:

I think when you read the legislative history, particularly the excerpt from the House report that we quote on page 7 of our brief, it is clear, to me at least, that what Congress was trying to regulate was the personalized services of investment advisers, because that’s what they said.

Well, it seems to me your answer with respect to lawyers is quite different from your answer with respect to securities.

Michael E. Schoeman:

And it’s also true that in the SEC study on which the Act is based there really was no consideration given to publications that distribute to you personally by mail.

Rex E. Lee:

No, it is not, and here is the reason.

Are we dealing here with regular publications, though?

Rex E. Lee:

The fiduciary relationship exists with respect to investment advisers because of Congress’ express determination, made in the context of a publication that went out, of an investment advisory letter that went out to thousands of people, that there was a fiduciary relationship between the publisher of an investment advisory letter and those who sought out and paid for that particular advice.

Michael E. Schoeman:

Well, that’s an unclear question, because Congress didn’t really define what “regular” means.

But a state legislature could make precisely that determination with respect to a disbarred lawyer or an unlicensed lawyer who simply solicited people for a newsletter, although he never advised them in any legal sense.

Well, but I’m talking about the publications of Mr. Lowe.

And that would make that the same case, unless there’s a difference between securities brokers and lawyers.

Michael E. Schoeman:

Well, Mr. Lowe’s publications are scheduled on a regular basis, but they haven’t been published on a regular basis.

Rex E. Lee:

There is one difference between securities brokers and lawyers in my view.

Like law reviews.

Rex E. Lee:

The state, if it made such a determination, I think it would lie within the authority of a state legislature to determine that there is a sufficient fiduciary relationship between a disbarred lawyer who is giving legal advice of the kind that you talk about and these general types.

[Laughter]

Rex E. Lee:

This is a situation in between, of course, where he simply publishes a book or is a syndicated columnist.

Michael E. Schoeman:

Yes, sir.

Rex E. Lee:

But where he publishes to subscribers, I think that that would lie within the prerogative of the state.

Michael E. Schoeman:

I would… I think what Capital Gains failed to do is to interpret the statute in the light of the First Amendment problems that that case was creating, because it wasn’t argued there, apparently.

Rex E. Lee:

But there is also… this case is also distinguishable in this sense, and this relates to the difference between the way that lawyers do their work and the way that investment advisers do their work.