422 F.2d 1371 (2nd Cir. 1970), 296, S.E.C. v. Wall St. Transcript Corp.

Docket Nº:296, 33350.
Citation:422 F.2d 1371
Party Name:In the Matter of an Application to Enforce Administrative Subpoena Duces Tecum of the SECURITIES AND EXCHANGE COMMISSION, Applicant-Appellant, v. WALL STREET TRANSCRIPT CORPORATION, by Richard A. Holman, Respondent-Appellee.
Case Date:February 02, 1970
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

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422 F.2d 1371 (2nd Cir. 1970)

In the Matter of an Application to Enforce Administrative Subpoena Duces Tecum of the SECURITIES AND EXCHANGE COMMISSION, Applicant-Appellant,


WALL STREET TRANSCRIPT CORPORATION, by Richard A. Holman, Respondent-Appellee.

Nos. 296, 33350.

United States Court of Appeals, Second Circuit.

February 2, 1970

Argued Nov. 17, 1969.

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[Copyrighted Material Omitted]

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David Ferber, S.E.C., Washington, D.C. (Philip A. Loomis, Jr., Gen. Counsel, Theodore Sonde, Special Counsel, and Harvey L. Pitt, S.E.C., Washington, D.C., Richard V. Bandler, Associate Regional Administrator, Edwin H. Nordlinger, Special Counsel, and Michael S. Leo, New York Regional Office, S.E.C., New York City, on the brief), for appellant.

Samuel N. Greenspoon, New York City (Martin I. Kaminsky, Jonathan S. Gaynin, and Pollack, Greenspoon & Singer, New York City, on the brief), for appellee.

Before LUMBARD, Chief Judge, and DANAHER [a1] and ANDERSON, Circuit Judges.

ANDERSON, Circuit Judge:

On July 27, 1967, the Securities and Exchange Commission ordered an investigation of the Wall Street Transcript Corp., pursuant to § 209(a) of the Investment Advisers Act of 1940, 15 U.S.C. § 80b-9(a), to determine whether it was acting as an investment adviser in violation of § 203 of that Act, 15 U.S.C. § 80b-3, the registration provision. This action resulted, not from any specific complaint received, 1 but from a staff report concerning the nature of the appellee's publication, The Wall Street Transcript, issued weekly in a newspaper format, 2 and the advertising used in its sale to the public. 3

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The Transcript's principal operating officer, Richard A. Holman, appeared at a hearing July 29, 1968, in response to the Commission's subpoena duces tecum. On the advice of counsel, Holman refused to produce any documents or answer any questions whatsoever other than to state his name, addresses, and telephone numbers. The Commission then applied to the district court pursuant to § 209(c) of the Act for enforcement of its subpoena, which called for the production of certain advertising materials and correspondence with subscribers, prospective subscribers, and suppliers of securities reports published in the Transcript. 4

The court below refused enforcement, SEC v. Wall Street Transcript Corp., 294 F.Supp. 298 (S.D.N.Y.1968). It concluded that the Transcript is a 'bona fide newspaper' or 'financial publication of general and regular circulation' which is expressly excluded from the definition of 'investment adviser' by § 202(a)(11) (D) of the Act itself, 15 U.S.C. § 80b-2(a)(11)(D), 5 and therefore

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need not register. It held that under the circumstances of this case the court, rather than the administrative agency, was the proper body to make the initial determination concerning the question of exclusion from coverage by the Act:

'Where, as here, a publisher which presumptively is entitled to the protection of the First Amendment can make virtually an unrebutted showing that it is a bona fide newspaper and financial publication, a federal court should stay the hand of the investigating agency. An entirely different question would be presented if the SEC had complaints or other evidence of conduct by the publisher outside the normal functions of compiling and distributing an excluded publication.' 294 F.Supp. at 307.

Since the district court's opinion also contained a reference to the 'all-encompassing nature of the subpoena sought,' the SEC asked for a 'reargument or clarification' to determine whether a more limited subpoena or one with protective provisions might be enforced. The court concluded that these arguments were 'clearly answered' by its original opinion, which had interpreted the Act to mandate exclusion of the Transcript from coverage or even investigation in the absence of some evidence of non-newspaper-like conduct.

As the court below recognized, it has long been established that the question of the inclusion of a particular person or entity within the coverage of a regulatory statute is generally for initial determination by an agency, subject to review on direct appeal, rather than for a district court whose jurisdiction is invoked to enforce an administrative subpoena. So long as an agency establishes that an investigation 'will be conducted pursuant to a legitimate purpose, that the inquiry may be relevant to the purpose, that the information sought is not already within (its) possession, and that the administrative steps required * * * have been followed,' no showing of probable cause need be made to the district court unless a statute indicates otherwise. United States v. Powell, 379 U.S. 48, 57-58, 85 S.Ct. 248, 255, 13 L.Ed.2d 112 (1964); FTC v. Crafts, 355 U.S. 9, 78 S.Ct. 33, 2 L.Ed.2d 23 (1957); Oklahoma Press Pub. Co. v. Walling, 327 U.S. 186, 66 S.Ct. 494, 90 L.Ed. 614, 166 A.L.R. 531 (1946); Endicott Johnson Corp. v. Perkins, 317 U.S. 501, 63 S.Ct. 339, 87 L.Ed. 424 (1943); 1 Davis, Administrative Law, § 3.12 (1958). If these criteria are satisfied, the court will order enforcement unless there is danger that its process may be abused. United States v. Powell, 379 U.S. at 58, 85 S.Ct. 248.

Despite the absence of a finding that the subpoena was deficient in any of these respects, the district court felt that unique facts distinguish the instant case from this 'substantial' line of precedents concerning initial determination of coverage by an agency. These circumstances were held to include not only the 'virtually unrebutted showing' that the appellee qualified for a statutory exclusion, but also the fact that First Amendment considerations required a prompt court ruling upon coverage:

'In the case at bar, I reason that the Commission's broad inquiry under the Act can end only in restraint of expression by the Wall Street Transcript. If a newspaper operates under the threat of disclosure to a government agency of its news sources and subscribers' identities, for example, it will be cautious, to say the least, about what it prints. Its 'caution' will only increase when its advertisers become apprehensive and its subscribers become intimidated by government scrutiny. This is classic restraint of expression which needs no further elaboration here. Plainly, neither the First Amendment nor the powers conferred by Congress in the Act upon the

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SEC permit an inquiry which can only lead to such a restraint of expression by a newspaper.' 294 F.Supp. at 304.

Detecting 'the seeds of a constitutional controversy' in 'the Commission's possible intention to apply the Act to what appears to be a bona fide newspaper,' the court interpreted the statute to permit it to bar an investigation which it felt 'goes to the jugular of the Transcript as a publishing firm.' The Commission disputes this admittedly unprecedented interpretation and argues that the determination of 'bona fide newspaper' status by the court was both premature and incorrect. The appellee argues, on the other hand, that not only the statute but the First Amendment as well bars enforcement of the subpoena.

As the Supreme Court has stated, 'The Investment Advisers Act of 1940 was the last in a series of Acts designed to eliminate certain abuses in the securities industry, abuses which were found to have contributed to the stock market crash of 1929 and the depression of the 1930's.' SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 186, 84 S.Ct. 275, 280, 11 L.Ed.2d 237 (1963). The Act's general objective, as summarized by the Senate Report upon the bill amending it in 1960, is 'to protect the public and investors against malpractices by persons paid for advising others about securities.' 1960 U.S.Code, Cong. & Admin.News p. 3503. It 'reflects a congressional recognition 'of the delicate fiduciary nature of an investment advisory relationship,' as well as a congressional intent to eliminate, or at least to expose, all conflicts of interest which might incline an investment adviser--consciously or unconsciously-- to render advice which was not disinterested.' SEC v. Capital Gains Research Bureau, supra, at 191-192, 84 S.Ct. at 282. (Footnote omitted.)

The core of the Act is its registration provision, § 203, which renders it unlawful for a non-registered investment adviser to make use of the mails or any instrumentality of interstate commerce in connection with his business. In addition, substantive provisions contained in §§ 205, 206 and 207 of the Act are designed to eliminate several specific practices labelled as abuses found to have existed at the time of the law's enactment. See, e.g., SEC v. Capital Gains Research Bureau, Inc., supra; Marketlines, Inc. v. SEC, 384 F.2d 264 (2 Cir. 1967); see also Loomis, The Securities Exchange Act of 1934 and the Investment Advisers Act of 1940, 28 Geo. Wash.L.Rev. 214, 244-245 (1959); 1960 U.S.Code, Cong. & Admin.News p. 3503.

The definition of 'investment adviser' given in the Act, § 202(a)(11), 15 U.S.C. § 80b-2(a)(11), is broad and comprehensive but is followed by a series of exclusions, (A) through (F), of which (D) is 'the publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation.' 6 In the absence of any legislative history which would shed light upon congressional intent in adding this newspaper exclusion or which might affect the scope of the definition, itself, 7 the court below concluded that this exclusionary clause was simply a recognition 'that Congress was aware that it could not lawfully command or authorize regulation and licensing by the SEC of bona fide newspapers in the light of the teaching of the First Amendment.' 294 F.Supp. at 307. Thus the district court and the...

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