922 F.3d 468
D.C. Cir.2019Background
- The Robare Group (TRG), an SEC-registered investment adviser, received revenue-sharing payments from Fidelity from 2004–2013 tied to clients’ investments in certain non‑transaction‑fee funds on Fidelity’s platform (≈$400,000; ~2.5% of TRG revenue).
- TRG principals Mark Robare (83%) and Jack Jones (17%) acknowledged the arrangement created potential conflicts of interest but disputed that they steered clients to receive payments.
- The SEC Enforcement Division charged TRG and the principals with failing to disclose these conflicts to clients (violating Advisers Act §206(1) and (2)) and willfully omitting material facts from Forms ADV filed with the Commission (violating §207).
- An ALJ dismissed the charges, finding no scienter and insufficient proof of negligence or willfulness; the Commission reviewed the record de novo and reversed on negligence but affirmed lack of scienter for §206(1).
- The Commission found negligent violations of §206(2), willful violations of §207, issued cease-and-desist orders, and imposed $50,000 penalties on TRG and each principal; the D.C. Circuit reviewed the Commission’s findings for substantial evidence and legal correctness.
Issues
| Issue | Petitioner (TRG) Argument | Respondent (SEC) Argument | Held |
|---|---|---|---|
| Whether TRG negligently failed to disclose Fidelity revenue-sharing to clients (Advisers Act §206(2)) | Disclosures in Forms ADV, brochure, and Fidelity agreement were adequate; ALJ found no negligence | Disclosures were vague/insufficient for years; advisers had fiduciary duty to fully disclose conflicts | Court: Substantial evidence supports SEC finding of negligence — petition denied as to §206(2) violations |
| Whether TRG acted with scienter or intent to defraud (Advisers Act §206(1)) | No intent to deceive; ALJ credited witnesses | SEC found no scienter; treated conduct as negligent | Court: Commission correctly found no scienter; §206(1) not violated |
| Whether omissions on Form ADV were "willful" under §207 | Willfulness requires subjective intent to omit material facts; same facts the Commission deemed negligent cannot support willfulness | Commission: filing and intentional selection of language shows willfulness; subjective belief irrelevant | Court: Willfulness under §207 requires intentional omission; negligent omissions cannot sustain §207 liability — petition granted as to §207 violations |
| Appropriate remedy and sanctions | Challenged both liability and penalties | SEC imposed cease-and-desist and monetary penalties for both violations | Court: Vacated §207-based sanctions; remanded for SEC to reevaluate remedies and sanctions addressing only §206(2) violations |
Key Cases Cited
- SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180 (1963) (advisers’ fiduciary duty requires full and fair disclosure of material conflicts)
- Transamerica Mortg. Advisors, Inc. v. Lewis, 444 U.S. 11 (1979) (Advisers Act imposes federal fiduciary standards)
- SEC v. Steadman, 967 F.2d 636 (D.C. Cir. 1992) (scienter required for Exchange Act anti-fraud provisions; negligence suffices for certain advisers’ violations)
- Wonsover v. SEC, 205 F.3d 408 (D.C. Cir. 2000) (definition of "willfully" as intentionally committing the act that constitutes the violation)
- Marrie v. SEC, 374 F.3d 1196 (D.C. Cir. 2004) (extreme recklessness may satisfy intent standards)
- Vernazza v. SEC, 327 F.3d 851 (9th Cir. 2003) (recklessness can support Form ADV willfulness in some circumstances)
- ZPR Inv. Mgmt., Inc. v. SEC, 861 F.3d 1239 (11th Cir. 2017) (willfulness supported by high degree of scienter or knowing dissemination of false information)