HEDGE FUNDS
LAWS FOR ADVISERS & FUNDS: WEBSITES/FINANCIAL

Financial Newsletters

The SEC has no jurisdiction over investment newsletters as long as certain conditions are met and you are not registered as an investment advisor. However, your state securities administrators may claim jurisdiction and force you to register as an investment advisor. The state rules are beyond the scope of this page, but a review of the federal rules will be instructive.

If you are registered as an investment advisor, you are subject to rules on your investment newsletters. If your newsletter falls outside the conditions defined by case law and SEC rules and laws, you must register as an investment advisor with either your state or the SEC. Where you register will depend on your activities (under most circumstances, you will register with your state).

See additional background information on Registered Investment Advisors (RIA) at www.greencompany.com/HedgeFunds/Registration.shtml.

Publisher’s Exemption

Under the Investment Advisors Act of 1940, 202(a)(11)(D), the definition of an Investment Advisor excludes:

the publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation (see this link for the full text: www.law.uc.edu/CCL/InvAdvAct/sec202.html)

The other SEC rules or regulations that apply to this area are:

www.law.uc.edu/CCL/34Act/sec10.html
www.law.uc.edu/CCL/34ActRls/rule10b-5.html
www.law.uc.edu/CCL/33Act/sec17.html
www.law.uc.edu/CCL/InvAdvAct/sec206.html

SEC v. Lowe, 472 U.S. 181 (1985), is a Supreme Court case that defines the law related to investment newsletters. Here’s a quick summary: The Supreme Court held that the Investment Advisers Act of 1940 (the "Advisers Act") did not permit the SEC to regulate publishers of impersonal investment advice.

See the complete SEC Supreme Court decision here: http://caselaw.lp.findlaw.com/scripts/getcase.pl?court=us&vol=472&invol=181

Based on the summaries regarding Lowe’s activities on the SEC’s Web site and Lowe’s other court convictions, it seems clear that Lowe was not an upstanding citizen. The SEC brought an action against him to stop him from “publishing, for paid subscribers, purportedly semi-monthly newsletters containing investment advice and commentary.” The SEC lost the case. Here is the summary of the court’s finding:

Held:

Petitioners' publications fall within the statutory exclusion for bona fide publications, none of the petitioners is an "investment adviser" as defined in the Act, and therefore neither petitioners' unregistered status nor the SEC order against Lowe provides a justification for restraining the future publication of their newsletters. Pp. 190-211. [472 U.S. 181, 182]

(a) The Act's legislative history plainly demonstrates that Congress was primarily interested in regulating the business of rendering personalized investment advice, including publishing activities that are a normal incident thereto. On the other hand, Congress, plainly sensitive to First Amendment concerns, wanted to make clear that it did not seek to regulate the press through the licensing of nonpersonalized publishing activities. Pp. 203-204.

(b) Because the content of petitioners' newsletters was completely disinterested and because they were offered to the general public on a regular schedule, they are described by the plain language of 202(a)(11)(D)'s exclusion. The mere fact that a publication contains advice and comment about specific securities does not give it the personalized character that identifies a professional investment adviser. Thus, petitioners' newsletters do not fit within the Act's central purpose because they do not offer individualized advice attuned to any specific portfolio or to any client's particular needs. On the contrary, they circulate for sale to the public in a free, open market. Lowe's unsavory history does not prevent the newsletters from being "bona fide" within the meaning of the exclusion. In light of the legislative history, the term "bona fide" translates best to "genuine"; petitioners' publications meet this definition. Moreover, the publications are "of general and regular circulation." Although they have not been published on a regular semimonthly basis as advertised and thus have not been "regular" in the sense of consistent circulation, they have been "regular" in the sense important to the securities market. Pp. 204-209.

As a SEC Associate Director of Investment Management put it during a roundtable discussion (see www.sec.gov/divisions/investment/roundtable/iadvrndt.htm, click on Edit, Find and search for Newsletter):

“As a result, the Commission has no jurisdiction whatsoever over investment newsletters.”

However, for that to be true, you need to ensure that your newsletter does not provide specific advice to an individual and that the newsletter has a “general and regular circulation.” Sending the same newsletter out to your entire client list or putting a newsletter up on a Web site makes it a generalized publication, and allows it to fall under the conditions for exemption. These “conditions” are very important for you to follow.

Also remember that it is possible your state has a rule on its books that requires a very different conclusion for your location. You need to have an expert review the state rules to ensure that you also meet your state’s exemptions from registration (if they exist).

Fraudulent Activities

Note that in the “Tokyo Joe” case, the courts held that Tokyo Joe’s fraudulent actions did not allow him to fall under the conditions for exemption. Tokyo Joe was forced to pay significant fines. See this page from the SEC’s site for additional information on what happened to Tokyo Joe: www.sec.gov/litigation/litreleases/lr16925.htm.

If you are an RIA

If you are an RIA, your newsletters will fall under the SEC’s purview, and you will be subject to the rules defined in the links above (see www.sec.gov/divisions/investment/roundtable/iadvrndt.htm, click on Edit, Find and search for Newsletter).