Goldstein v. Securities and Exchange Commission case brief

Goldstein v. Securities and Exchange Commission case brief summary
451 F.3d 873 (2006)

CASE SYNOPSIS

Petitioners, investment firm and hedge fund, sought review of respondent Securities and Exchange Commission's (SEC) regulation of hedge funds under the Investment Advisers Act of 1940, 15 U.S.C.S. § 80b-1 et seq. Previously exempt because they had fewer than 15 clients, most advisers to hedge funds now had to register with the SEC if the funds they advised had 15 or more shareholders, limited partners, or members. 17 C.F.R. § 275.203(b)(3)-2(a).

DISCUSSION

• Upon concluding that its regulatory program for hedge fund advisers was inadequate, the SEC promulgated the Hedge Fund Rule, which specified that for purposes of § 203(b)(3) (15 U.S.C.S. § 80b-3(b)(3)) of the Investment Advisers Act of 1940, 15 U.S.C.S. § 80b-1 et seq., you must count as clients the shareholders, limited partners, members, or beneficiaries of the fund. 17 C.F.R. § 275.203(b)(3)-2(a). 
• The court found that even if the Advisers Act did not foreclose the SEC's equation of "client" with "investor", the interpretation fell outside the bounds of reasonableness where the SEC's interpretation came close to violating the plain language of the statute since § 206 (15 U.S.C.S. § 80b-6) of the Advisers Act made it unlawful for any investment adviser, registered or not, to engage in any transaction, practice, or course of business which operated as a fraud or deceit upon any client or prospective client, and the SEC could not explain why "client" should mean one thing when determining to whom fiduciary duties were owed, and something else entirely when determining whether an investment adviser had to register under the Act. 
• Therefore, the Rule was an arbitrary rule.

CONCLUSION
The petition for review was granted, and the Hedge Fund Rule was vacated and remanded.


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