In United States v. Miller, 2016 U.S. App. LEXIS 14847 (3d Cir. 2016), the Third Circuit, for the first time, interpreted the statutory definition of an “investment adviser” under the Investment Advisers Act of 1940 (“Advisers Act”).  The court adopted a broad facts-and-circumstances interpretation of being “in the business” of providing investment advice.

Miller was convicted of securities fraud for selling $41 million in phony promissory notes to investors.  He challenged the applicability of the investment adviser sentencing enhancement contending that he was not an “investment adviser” and not “in the business” of providing securities advice.  The disputed provision of the Advisers Act was the definition of “investment adviser” as “any person who, for compensation, engages in the business of advising others” on investing in securities. Section 202(a)(11).

The Court found that Defendant was “in the business” because he “h[eld] himself out as an investment adviser or as one who provides investment advice” to prospective clients and, therefore, was an “investment adviser.”  In support of its finding, the Court relied on a 1987 SEC Release stating that the SEC considers a person to be “in the business” if the person, among all relevant facts and circumstances, “holds himself out” as an investment adviser or “provides specific investment advice.” “Applicability of the Investment Advisers Act to Financial Planners, Pension Consultants, and Other Persons Who Provide Investment Advisory Services as a Component of Other Financial Services.” Investment Advisers Act Release No. 1092, 52 Fed. Reg. 38400, 38403 (1987) (the “1987 Release”).  The Court’s holding in Miller is consistent with the Seventh, Tenth, and Eleventh Circuits, which follow the same standard.  See Zinn v. Parish, 644 F.2d 360, 363 (7th Cir. 1981); Thomas v. Metro. Life Ins. Co., 631 F.3d 1153, 1163 (10th Cir. 2011); United States v. Elliot, 62 F.3d 1304, 1311 n. 8 (11th Cir. 1995).  Such prior cases have similarly held that holding oneself out as an investment adviser amounts to being “in the business” of providing investment advice.

The Third Circuit also upheld a broad definition of “compensation” as “any economic benefit, whether in the form of an advisory fee or some other fee relating to the total services rendered, commissions, or some combination of the foregoing.” Although the Advisers Act does not define “compensation,” the Third Circuit broadly interpreted the term as not requiring a discrete fee specifically earmarked as payment for investment advice.  This interpretation is also in line with decisions from other circuit courts.  See Elliot, 62 F.3d at 1311; accord Abrahamson v. Fleschner, 568 F.2d 862, 870 (2d Cir. 1977). The receipt of any economic benefit, whether in the form of an advisory fee or some other fee relating to total services rendered, including a portion of any profits, has typically satisfied this element.

A copy of the Third Circuit’s opinion is available here.  

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