SEC v. Capital Gains Research Bureau

Supreme Court of the United States · 1963 · Corporations

375 U.S. 180 (1963)

Updated August 22, 2026

CorporationsSecurities regulationInvestment advisersDisclosureFiduciary dutyFraud and deceitInvestment Advisers Act of 1940Section 206(2)

Facts

Respondents published an investment advisory service, A Capital Gains Report, which they described as devoted to protecting investment capital, generating income, and accumulating capital gains through timely purchase of undervalued corporate equities. On six occasions between March and November 1960, respondents bought shares of a security shortly before recommending it in the Report for long-term investment, and after the recommendation the market price and trading volume rose within a few days. Respondents then immediately sold their shares at a profit. They disclosed none of these purchases, sales, or intentions to their clients or prospective clients.

Issue

Whether, under the Investment Advisers Act of 1940, the SEC may obtain an injunction requiring a registered investment adviser to disclose a practice of purchasing a security for its own account shortly before recommending it to clients and then selling it at a profit shortly after the recommendation. More specifically, the question was whether this scalping practice operates as a fraud or deceit upon clients or prospective clients within the meaning of the Act.

Rule

Under the Investment Advisers Act of 1940, an investment adviser occupies a fiduciary relationship to clients and must provide disinterested advice through full and fair disclosure of material facts. A practice that creates a material conflict of interest and is concealed from clients, including trading on the market effect of the adviser's own recommendations, may operate as a fraud or deceit under § 206(2) without proof of intent to injure, actual injury, misstatements, or unsound advice, and may be enjoined through prophylactic disclosure relief.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Blue Mesa Advisory Letter, a registered investment adviser based in Denver, buys shares of a small energy company for its own account on Monday. On Wednesday it sends subscribers a bulletin calling the stock a strong long-term buy, and on Friday it sells its shares after the price jumps, without telling subscribers about the prior purchase or planned sale.

If the SEC seeks an injunction requiring future disclosure of this practice, which is the strongest argument that the adviser engaged in a practice operating as a fraud or deceit under § 206(2)?

Explanation. The majority held that an investment adviser is a fiduciary obliged to provide disinterested advice through full and fair disclosure of material facts. Secretly buying before a recommendation and selling after the recommendation's market effect creates a material conflict that may operate as fraud or deceit under § 206(2), even without proof of intent to injure, actual loss, misstatements, or unsound advice.