In several investor alerts, the SEC has warned the public about investment newsletters. The SEC has expressed its concern regarding the objectivity of these publications and alerted investors that the newsletter may be receiving compensation for touting certain companies.
The SEC has also warned the public about investment newsletters that offer “auto-trading.” Auto-trading programs enable the subscriber to receive fast execution of trades that were recommended in the investment newsletter.
In an administrative proceeding dated June 22, 2006, the SEC took action pursuant to the Investment Advisers Act of 1940 against a newsletter publisher offering auto-trading. The SEC sanctioned Weiss Research Inc. for failing to register as an investment advisor. Although newsletter publishers are usually exempt from registration as an investment advisor, enabling subscribers to utilize auto-trading caused Weiss Research to lose its exemption.
Section 202 of the Investment Advisers Act does authorize an exemption for publishers of investment newsletters, as long as they give advice aimed at a general audience. The safe harbor created under Section 202 is referred to as the publisher’s exemption from registration as an investment advisor.
Section 202(a)(11)(D) of the Investment Advisers Act limits the exemption to “the publisher of bona fide newspaper, news magazine or business or financial publication of general and regular circulation.” The purpose of the exemption is to ensure First Amendment protection of financial and investment publications. On the other hand, the exemption does not permit an individual to circumvent the Investment Advisers Act by becoming a publisher.
The principal case offering guidance on Section 202 is Lowe v. Securities and Exchange Commission, 472 U.S. 181 (1985). In this case, the Supreme Court allowed the petitioners to publish impersonalized investment advice and commentary in securities newsletters without requiring them to register as investment advisors under Rule 203(c) of the Investment Advisers Act. The Supreme Court ruled that these newsletters fell within the statutory exclusion for bona fide publications.
The Supreme Court reached this conclusion, because the newsletters were completely disinterested and offered to the public on a regular schedule. They were not published in response to some type of market activity. These publications did not offer individualized advice attuned to a specific portfolio or to any client’s particular needs.
The Supreme Court held that a bona fide newsletter must contain disinterested commentary and analysis. It must not publish promotional material that is used to tout specific securities.
Under the holding of Lowe v. Securities and Exchange Commission, a publication must satisfy three elements to qualify for the publisher’s exemption:
1. The publication must offer only impersonal advice, which is advice that is not tailored to the individual needs of a specific client, group of clients, or portfolio.
2. The publication must be "bona fide” in that it contains objective analysis. A publication is not bona fide if it touts lists of stocks that are certain to go up or distributes information in conjunction with personalized investment services.
3. The publication must be published regularly, rather than in response to events affecting the securities industry.
State securities laws have created a similar publisher’s exemption. Section 401(f) of the Uniform Securities Act, which is the basis for a majority of state securities laws, excludes from the definition of investment adviser “a publisher of any bona fide newspaper, news column, newsletter, news magazine, or business or financial publication or service, whether communicated in hard copy form, or by electronic means, or otherwise, that does not consist of the rendering of advice on the basis of the specific investment situation of each client.” Therefore, as a general rule, a bona fide newsletter publisher is not viewed as an investment advisor that is required to register under state securities laws.
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