The Supreme Court ruled yesterday that the Securities and Exchange Commission acted improperly when it tried to stop a convicted felon from publishing a newsletter offering investment advice.
The ruling, which largely sidestepped First Amendment questions that had been raised about the SEC's efforts, nevertheless may undercut the agency's ability to regulate financial newsletters before publication, and could force it to drop similar pending cases.
The SEC had argued that its actions were justified by the 1940 Investment Advisers Act, which regulates and licenses financial advisers. The SEC revoked the registration of adviser Christopher L. Lowe after he was convicted of misappropriating a client's funds, stealing from a bank and tampering with evidence.
When Lowe continued to publish his semimonthly investment advice newsletter, the SEC went to court to stop him, contending that he could not publish without its authorization.
A federal judge refused to intervene, saying the First Amendment gave Lowe the right to publish the newsletter, and that the newsletter was unrelated to his criminal convictions and was not fraudulent or misleading.
The 2nd U.S. Circuit Court of Appeals in New York reversed that decision, saying that Lowe's newsletter was not a "bona fide" newspaper and therefore was exempt from the 1940 law, and that his publication was "potentially deceptive commercial speech," which did not merit full First Amendment protection.
The case had been seen as a major First Amendment test and an opportunity for the court to further refine the law regarding "commercial" speech. It turned out to be neither.
"The question," as Justice Byron R. White put it in an opinion joined by Chief Justice Warren E. Burger and Justice William H. Rehnquist, "is whether the First Amendment permits the federal government so to prohibit [Lowe's ]publication of investment advice."
But Justice John Paul Stevens, writing for six justices, said there was no reason to decide, and therefore the court should not decide, whether the First Amendment barred the SEC from trying to stop Lowe from publishing his newsletter.
Lowe was giving advice not to individual clients but rather to any subscriber interested in his views, Stevens said, and the newsletter circulated regularly to the public at large.
"The dangers of fraud, deception, or overreaching that motivated the enactment of the statute are present in personalized communications but . . . not . . . in publications that are advertised and sold in the open market," Stevens said.
"Thus [Lowe's] publications do not fit within the central purpose of the act," Stevens concluded, and the SEC could not regulate them. Constititutional and other issues did not need to be resolved.
White, in a 26-page opinion, agreed with the result but said, "One does not have to read the court's opinion very closely to realize that its interpretation of the act is in fact based on a thinly disguised conviction that the act is unconstitutional as applied to prohibit publication of newsletters by unregistered advisers."
SEC general counsel Daniel L. Goelzer said he was "disappointed by the decision," but noted that the court left intact the SEC's powers to prosecute anyone who publishes fraudulent or misleading advice.
Goelzer said the court, in deciding that Lowe's newsletter could not be stopped, rejected the SEC's "longstanding interpretation of the bona fide publication exclusion." As a result, he said, the commission will be required to review its administration of the 1940 act "with respect to advisory publishers."
"We will have to look at and analyze our pending cases," he said, to gauge the impact of the ruling.