firms for publication in Stock Market Magazine. Editors Brennan and Gropman are employees of public relations firms for whose clients they write stories. Brown also occasionally free-lances company stories for publication in Stock Market Magazine. When an individual free-lances a company story, he writes the story for publication in Stock Market Magazine and in turn receives a fee from the company's public relations firm. None of the contributing editors is registered with the SEC as an investment adviser.
Stock Market Magazine's total revenues are based on subscriptions, newsstand sales, sale of reprints, advertising, and rental of its mailing list. Stock Market Magazine is currently delivered to approximately 12,000 paid subscribers and has some newsstand sales. The subscription price for Stock Market Magazine is $15.00 per year. An individual issue sells for $1.50.
In 1977, a major portion of Defendant's total revenue was based on the sale of feature article reprints and advertising to the featured companies. Some of the public relations agents of the featured companies as well as some of the Defendant's contributing editors testified during depositions that there was a generally understood quid pro quo arrangement whereby the company or its agent agrees to purchase reprints of the company feature article for publication in Stock Market Magazine. Further, according to Brown, the featured companies purchase ads for publication in Stock Market Magazine at the rate of $250 to $960 because they are "so grateful at having obtained exposure through favorable stories in the magazine."
Until April 1983, the following objective of Stock Market Magazine appeared in its masthead: "The Stock Market Magazine is published to inform the individual investor at every economic level." The masthead further noted that "feature articles are based on thorough research and first-hand interviews with company officials, economists, security analysts, tax accountants and other experts. Comments from readers are welcomed."
Brown admits, however, that in some instances he conducted no interviews regarding the article drafts supplied by the featured companies, their public relations agents, and the contributing editors other than to telephone company officials to verify company figures. He also admits that in some instances he conducted no research for these articles other than to check the annual report and other background material supplied by the featured company. In many instances, Stock Market Magazine publishes the drafts received from the featured companies or public relations firms verbatim. In deposition, Brown stated that he assumes the public relations firm or contributing editor does the research and interviewing described in the masthead.
According to Brown the purpose of the masthead statement is to reassure Stock Market Magazine readers that its feature stories are authentic, objective and in keeping with high standards of journalism. Prior to July 1980 the masthead also stated that its objective was "to help him [the investor] to make intelligent investment decisions." Until April 1983 the masthead also announced the magazine as the "Voice of the Small Investor."
Stock Market Magazine is 36 pages in length. Articles in each issue are characterized as "Features" or "Departments." There are usually six-to-eight feature stories and eight-to-nine departments. Interspersed among the features and departments to fill out page space are general news items and ads.
During the period covered by this action, the following columns have appeared regularly as "departments" in Stock Market Magazine: The Wall Street Scene, Green Chips, Low Priced Stock of the Month, Technical Viewpoint, Market Mirror, Ray Dirks on Stocks, and Off Wall Street. According to Brown all of these columns give (a) advice and/or recommendations regarding the value of certain securities; (b) advice and/or recommendations as to the advisability of investing in certain securities, and (c) an analysis of certain stocks and the market in general. The feature articles in each issue of Stock Market Magazine consist of (a) specific company features devoted to a single publicly held company, (b) general features devoted to a number of publicly held companies in an industry or to general investment information and (c) guest articles. Many of the feature stories published profiling specific companies are written and supplied by the companies or their public relations agents.
In a subscriber profile published in 1982, Stock Market Magazine described its readers as follows: all but 2% own securities, 70% own over $15,000 and 44% own over $25,000 in securities, 97% own common stock, and 34% are aged 45-to-65. Readers have responded to Stock Market Magazine's invitation to write to its editor for more personalized information regarding the stock market in some instances. Some readers also have expressed their displeasure at the tardiness of Stock Market Magazine recommendations due to the late arrival of the magazine. In response to this complaint, Brown advises readers that because "time is of the essence" in order for many of Stock Market Magazine articles and stock suggestions to be "helpful" for reader investment decisions, a subscription at first-class mail rates should be purchased.
Defendant promotes the sale and advertising of Stock Market Magazine through its "Best Picks" column, renewal letters, published advertisements, direct mail campaigns, press releases and unsolicited newspaper publicity. All of these promotion gimmicks tout Stock Market Magazine as a reliable investment guide to investors. For instance, the "Best Picks" column lists 10-to-15 stocks selected by Brown as the best performers of the approximately 50 company stocks analyzed in Stock Market Magazine feature articles during the prior year. The purpose of the list, according to Brown, was to promote Stock Market Magazine to new subscribers, to emphasize to "readers what they are getting from Stock Market Magazine, why they should be reading the magazine." He further noted that the column "merely tells the reader what companies were analyzed, reviewed, written about, in the Stock Market Magazine."
Similarly, renewal letters sent to expiring subscribers promote Stock Market Magazine as a reliable investment guide and encourage subscribers to renew based on the money they can make by following its advice. The following is an example of language found in a renewal letter:
Would you pay 89 cents per month for information from proven and respected authorities on the stock market? . . . . SMM brings you first-hand reports on the nation's most successful small and medium-sized companies and regular columns. . . . Other newsletters charge from $150 to as much as $2,000 for what purports to be similar information. . . . Our overall batting average in forecasts of market behavior is impressively high . . . the value to you will more than justify your modest investment.
An appeal to the "Investor" is also made in Defendant's published advertisements, direct mail campaigns and newspaper publicity.
Given these undisputed material facts, it is clear that Defendant meets the definitional elements of adviser status found in § 80b-2(a)(11) of the Act, i.e., compensation, business and publication. Defendant engages in the business of publishing Stock Market Magazine on a monthly basis. It receives compensation from the sale of Stock Market Magazine at a subscription rate of $15.00/year to approximately 15,000 subscribers. Its contributing editors have also received fees from public relations firms for writing feature company stories. It has limited newsstand sales and also receives consideration from the sale of advertising and reprints of Stock Market Magazine.
The only pivotal question left, therefore, is whether, in conjunction with the foregoing elements, Defendant gives advice as to the value of securities or as to the advisability of investing in securities, or issues or promulgates analyses or reports concerning securities.
Defendant's publication on its face suggests that it provides advice as to the value or advisability of investing in securities. Until April 1983, after this action had been filed and pending for nine months, the title page proclaimed Stock Market Magazine as the "Voice of the Small Investor." Until July 1980, after Plaintiff first notified Defendant to register, its masthead claimed to provide information to the small investor to assist him "to make intelligent investment decisions."
Brown also admits that the Stock Market Magazine columns give advice and/or specific recommendations regarding the value or advisability of investing in securities. A review of the magazine compels such an admission. Allan Marshall's "Green Chips" and Jerry Kass' "Low Priced Stock of the Month" columns analyze and recommend stocks selling at less than $25.00. Dr. Goldstein analyzes, recommends and reviews prior recommendations for approximately 12 New York Stock Exchange Securities in his monthly column "Market Mirror." Grossman's "Off Wall Street Column" analyzes and recommends stocks identified by regional brokers. Dirks' column "Ray Dirks on Stocks" gives pointers on investments in common stocks and the new issues market and insurance stocks.
Given the above facts, it is clear that Defendant gives advice as to the value or advisability of investing in securities. However, even were Defendant not clearly giving advice as to the value or advisability of investing in securities, it meets the second prong of the definition of investment adviser. The second prong defines an investment adviser as any person who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.
Initially, a review of the feature articles and columns devoted to specific publicly held company securities leads to the swift conclusion that these articles constitute analyses or reports concerning securities. A recent SEC no-action letter indicates the type of information not contemplated by the SEC to be included within the second prong of the definition of investment adviser:
It is our view that a provider of information relating to securities will be deemed neither to furnish investment advice nor to issue or promulgate an analyses or report concerning securities when the information provided is readily available in its raw state, the categories of information are not highly selective, and the information provided is not organized or presented in a manner which suggests the purchase, holding, or sale of any security or securities.
Jack Sonner, (pub. avail. March 11, 1983). Defendant's specific company articles and columns profiling specific companies are by their very nature highly selective because they focus on a single company only. Finally, the information presented regarding earnings, stock dividends and price range is presented and organized in such a fashion to suggest purchase of the company security.
The Investment Advisers Act exempts from registration certain investment advisers. Defendant in this action relies on the exemption found in § 80b-2(a)(11)(D) which exempts from registration "a bona fide newspaper, news magazine, or business and financial publication of general and regular circulation." Defendant argues that the SEC has acted unconstitutionally in denying it status within the exclusion because the language of the exclusion on its face provides inadequate standards and the SEC has not promulgated any regulations or guidelines to govern its determination of a publication's status under the exclusion.
Initially, it is important to note that Defendant has the burden of proving that it falls within the exclusion. SEC v. Wall Street Transcript Corp., 454 F. Supp. 559, 566 (S.D.N.Y. 1978). It is well-established under both the Securities Act of 1933 and the Securities Exchange Act of 1934 that the burden of proving entitlement to an exception should properly fall on the claimant thereof because "public policy strongly supports registration." Quinn & Co. v. SEC, 452 F.2d 943, 946 (10th Cir. 1971), cert. denied, 406 U.S. 957, 32 L. Ed. 2d 344, 92 S. Ct. 2059 (1972).
The case law construing the "bona fide newspaper, news magazine, or business and financial publication" exclusion is sparse. The leading case is Wall Street Transcript Corp., 422 F.2d 1371 (2d Cir.), cert. denied, 398 U.S. 958, 26 L. Ed. 2d 542, 90 S. Ct. 2170 (1970). In that case, the Court stated that a "bona fide newspaper includes those publications which do not deviate from customary newspaper activities to such an extent that there is a likelihood that the wrongdoing which the Act was designed to prevent has occurred." Id. at 1377. The Court further noted that the determination of whether or not a publication is within the "bona fide newspaper" exclusion must turn on the nature of its practices rather than upon the purely formal "indicia of a newspaper" which it exhibits on its face and in the size and nature of its subscription list. Id.
The Wall Street Transcript case arose in the context of a petition by the Securities and Exchange Commission for enforcement of a subpoena duces tecum issued pursuant to an investigation under the Investment Advisers Act. In reversing and remanding the decision of the trial court to deny the petition, the court pointed to several factors which would be pertinent in deciding whether the publication fits within the "bona fide newspaper" exclusion: (1) whether most of its published material consists of reprinted reports assessing various securities issues; (2) whether the publication places emphasis on particular issues and companies; (3) whether the publication is compensated by brokerage houses whose reports it publishes; (4) whether the publication alone determines the location of the articles that it publishes on the basis of its editor's news judgment alone; and (5) whether the articles are offered as investment advice. Wall Street Transcript Corp., 422 F.2d at 1377-78. "What matters is whether or not a specific publication is engaged in practices which the Act was intended to regulate, such as the offering of professional investment advice without revealing the possibility of personal gain to the publisher from what he reports or how he presents it." Id. at 1378.
In SEC v. Wall Street Transcript Corp., 454 F. Supp. 559 (S.D.N.Y. 1978), the action which was brought by the SEC subsequent to the subpoena enforcement proceeding discussed above, the court found that Defendant could avail itself of the statutory exclusion for "bona fide newspapers." The Court found the following factors important to its decision: (1) a large percentage of each publication was devoted to the reproduction of brokerage house reports or speeches given by financial analysts, either verbatim or in summary form; (2) defendants never received any compensation from any party for publishing or positioning a report or speech; (3) defendants never published any item for the purpose of affecting any security; (4) defendants never traded in any of the securities mentioned in the publication; and (5) the sole determination of what material was published in the publication was the editor's independent judgment as to newsworthiness within the limitations of space. Wall Street Transcript Corp., 454 F. Supp. at 566-67. The court concluded that given these facts, it was "clear that Defendants do not engage in practices which the Investment Advisers Act was intended to regulate and that they may avail themselves of the statutory exclusion in § 202(a)(11)(D)." Id. at 567.
In Person v. New York Post Corp., 427 F. Supp. 1297 (E.D.N.Y.), affirmed without opposition, 573 F.2d 1294 (2d Cir. 1977), one of the other few cases to construe the "bona fide newspaper" exception to the Investment Advisers Act, plaintiff brought an action against the New York Post after the paper refused to publish one of its tombstone advertisements. Plaintiff alleged that because defendant had a policy of selective publication of tombstone ads based on its evaluation of the merits of a proposed offering, it was acting as an undisclosed investment adviser in violation of the Investment Advisers Act because it was not registered.
The court rejected plaintiff's claim under the Investment Advisers Act finding that defendant was a newspaper of general circulation and therefore, not subject to the Investment Advisers Act. In reaching this conclusion the court noted that defendant had been published daily except Sunday since it was founded in 1801, and even if such were not the case, such a widely known fact would be a fit subject for judicial notice. Person v. New York Post Corp., 427 F. Supp. at 1303.
The Investment Advisers Act recently withstood a constitutional challenge in SEC v. Lowe, 725 F.2d 892 (2nd Cir. 1984), petition for cert. filed, 52 U.S.L.W. 3892 (U.S. June 12, 1984) (No. 83-1911). There, an investment adviser registered under the Act was convicted on three different occasions of misconduct in connection with his investment advisory business. Pursuant to the Act, the SEC revoked his registration because of his convictions. Defendant, nevertheless, continued to publish and sell newsletters containing investment advice and the SEC brought an action to enjoin this activity. The issue presented in the case was whether the publication of such advice is protected by the First Amendment so as to preclude the SEC from seeking to enjoin its continuance. SEC v. Lowe, 725 F.2d at 894.
Relying on Wall Street Transcript, the Court initially concluded that Defendant could not avail itself of such exclusion because Lowe's publications "are not engaged primarily in 'customary newspaper activities,' but rather in the activities that the Investment Advisers Act is intended to regulate." SEC v. Lowe, 725 F.2d at 898. The Court further held that the Act's application to the Lowe newsletters did not violate the First Amendment.
In reaching this decision, the Court reaffirmed its earlier decision in Wall Street Transcript that the Act on its face did not violate the First Amendment because
it is not necessary to enlarge the category of 'bona fide' newspaper into an exclusion for all publications which could conceivably be brought within the term 'typical newspaper' in order to avoid the seeds of a constitutional controversy . . . or to base a construction of the Act on the assumption that the activities involved in giving commercial investment advice are entitled to the identical constitutional protection provided for certain forms of social, political or religious expression.
SEC v. Lowe, 725 F.2d at 898, quoting, Wall Street Transcript, 422 F.2d at 1378-79. The Court also reasoned that the case of Virginia State Board of Pharmacy v. Virginia Citizens Consumer Council, Inc., 425 U.S. 748, 48 L. Ed. 2d 346, 96 S. Ct. 1817 (1976), in which the Supreme Court invalidated a Virginia statute prohibiting pharmacists from advertising their prices, did not affect the decision in Wall Street Transcript because the "provisions of the Investment Advisers Act at issue here are precisely the kind of regulation of commercial activity permissible under the First Amendment." SEC v. Lowe, 725 F.2d at 900.
In addition to the case law discussed above, the SEC issued a release in 1977 stating when it would apply the bona fide newspaper exception. It announced that such exception would be applicable "only where, based on the content, advertising material, readership, and other relevant factors, a publication is not primarily a vehicle for distributing investment advice." Applicability of Investment Advisers Act to Certain Publications, 42 Fed. Reg. 2953 n.1 (1977) (codified at 17 C.F.R. § 276) (citing Wall Street Transcript, 422 F.2d at 1371).
Recently in SEC v. Suter, [current] 732 F.2d 1294, FED. SEC. L. REP. P 91,423 (7th Cir. 1984), the Seventh Circuit found that an investment newsletter was subject to the Investment Advisers Act and could not avail itself of the bona fide newspaper exclusion. In reaching this decision, the court relied on Wall Street Transcript and the 1977 SEC release discussed above. The court observed that the SEC merely adopted the subjective approach of Wall Street Transcript in its 1977 release. This Court agrees with that observation.
The nature of Defendant's magazine and Defendant's practices prevent Defendant from availing itself of the bona fide newspaper exception to the definition of investment adviser. It is clear from the undisputed facts that Stock Market Magazine is engaged in "practices which the Act was intended to regulate, such as the offering of professional investment advice without revealing the possibility of personal gain to the publisher from what he reports or how he presents it." Wall Street Transcript Corp., 422 F.2d at 1378. The content, promotion, and readership of Stock Market Magazine, support this conclusion. The material facts which are not in dispute and discussed above demonstrate that (1) Defendant promotes Stock Market Magazine as a reliable investment guide to individual investors and the investment community; (2) the readers of Stock Market Magazine are investors and subscribe to the magazine for investment ideas; and (3) the content of Stock Market Magazine is devoted to profiling specific publicly held companies, profiling an industry and the top publicly held companies in that industry and/or providing general investment advice.
In the words of Wall Street Transcript, the Defendant cannot avail itself of the exclusion because: (1) Stock Market Magazine places emphasis on particular issues and companies; (2) many of the contributing editors are compensated by public relations firms for writing articles about companies and issues that are published in Stock Market Magazine; and (3) the articles in Stock Market Magazine are offered as investment advice. Id. at 1377-78.
Defendant's contentions that the language of the exclusion on its face provides inadequate standards and therefore, the SEC has acted unconstitutionally in denying the Magazine status within the exclusion because it has no standards or procedures for making such a determination is unsupported and without merit. As is abundantly clear, there are substantive standards under the Investment Advisers Act which serve as guidance for any publisher who might have questions about its practices. These standards are set forth in the Act itself and, contrary to Defendant's unsupported contention, are self-operative and do not require formal agency rule-making since Congress did not include statutory provisions which would make the sections of the Act in issue inoperative without promulgation of agency rules, regulations or orders.
In addition, the standards have been defined by the courts and are further defined by Commission releases. They also have been interpreted and explained by agency examination and application in individual cases raised by no action letters. It is important to note that the Commission's interpretation of its statutes and regulations are entitled to substantial deference. The Supreme Court has long held that "such deference is particularly appropriate where. . . . Congress has not acted to correct any misperception of [an agency's] statutory objectives. Unless and until Congress does so we are reluctant to disturb a longstanding administrative policy that comports with the plain language, history, and prophylactic purpose of the Act." United States v. Rutherford, 442 U.S. 544, 553-554, 61 L. Ed. 2d 68, 99 S. Ct. 2470 (1978).
For the reasons set forth above, the Court finds that Stock Market Magazine is "primarily a vehicle for distributing investment advice" to the investment community. Accordingly, summary judgment is appropriate for Plaintiff under Count One of the complaint. Defendant is an investment adviser as defined by § 202(a)(11) of the Act and is subject to the registration provisions of § 203.
The second cause of action alleged in the complaint charges Defendant with violation of § 206 of the Advisers Act, 15 U.S.C. § 80b-6, which contains proscriptions against fraudulent practices by investment advisers. The violations allegedly arise out of false and misleading statements published in Stock Market Magazine regarding the source and objectivity of Stock Market Magazine feature articles and Defendant's failure to disclose consideration received in connection with the publication of Stock Market Magazine feature articles.
The antifraud provisions of § 206 of the Advisers Act relevant to the second cause of action in the Complaint read:
It shall be unlawful for any investment adviser, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly --
(1) to employ any device, scheme or artifice to defraud any client; and
(2) to engage in any transaction, practice or course of business which operates as a fraud or deceit upon any client or prospective client. . . .