We are called upon in this case to decide whether under the Investment Advisers Act of 1940 the Securities and Exchange Commission may obtain an injunction compelling a registered investment adviser to disclose to his clients a practice of purchasing shares of a security for his own account shortly before recommending that security for long-term investment and then immediately selling the shares at a profit upon the rise in the market price following the recommendation. The answer to this question turns on whether the practice-known in the trade as 'scalping'-'operates as a fraud or deceit upon any client or prospective client' within the meaning of the Act. We hold that it does and that the Commission may 'enforce compliance' with the Act by obtaining an injunction requiring the adviser to make full disclosure of the practice to his clients.
The Commission brought this action against respondents in the United States District Court for the Southern District of New York. At the hearing on the application for a preliminary injunction, the following facts were established. Respondents publish two investment advisory services, one of which-'a Capital Gains Report'-is the subject of this proceeding. The Report is mailed monthly to approximately 5,000 subscribers who each pay an annual subscription price of $18. It carries the following description:
'An Investment Service devoted exclusively to (1) The protection of investment capital. (2) The realization of a steady and attrative income therefrom. (3) The accumulation of CAPITAL GAINS thru the timely purchase of corporate equities that are proved to be undervalued.'
Between March 15, 1960, and November 7, 1960, respondents, on six different occasions, purchased shares of a particular security shortly before recommending it in the Report for long-term investment. On each occasion, there was an increase in the market price and the volume of trading of the recommended security within a few days after the distribution of the Report. Immediately thereafter, respondents sold their shares of these securities at a profit. They did not disclose any aspect of these transactions to their clients or prospective clients.
On the basis of the above facts, the Commission requested a preliminary injunction as necessary to effectuate the purposes of the Investment Advisers Act of 1940. The injunction would have required respondents, in any future Report, to disclose the material facts concerning, inter alia, any purchase of recommended securities 'within a very short period prior to the distribution of a recommendation * * *,' and '(t)he intent to sell and the sale of said securities * * * within a very short period after distribution of said recommendation * * *.'
The District Court denied the request for a preliminary injunction, holding that the words 'fraud' and 'deceit' are used in the Investment Advisers Act of 1940 'in their technical sense' and that the Commission had failed to show an intent to injure clients or an actual loss of money to clients. D.C., 191 F.Supp. 897. The Court of Appeals for the Second Circuit, sitting en banc, by a 5-to-4 vote accepted the District Court's limited construction of 'fraud' and 'deceit' and affirmed the denial of injunctive relief. 2 Cir., 306 F.2d 606. The majority concluded that no violation of the Act could be found absent proof that 'any misstatements or false figures were contained in any of the bulletins'; or that 'the investment advice was unsound'; or that 'defendants were being bribed or paid to tout a stock contrary to their own beliefs'; or that 'these bulletins were a scheme to get rid of worthless stock'; or that the recommendations were made 'for the purpose of endeavoring artificially to raise the market so that (respondents) might unload (their) holdings at a profit.' Id., 306 F.2d at 608-609. The four dissenting judges pointed out that '(t)he common-law doctrines of fraud and deceit grew up in a business climate very different from that involved in the sale of securities,' and urged a broad remedial construction of the statute which would encompass respondents' conduct. Id., 306 F.2d at 614. We granted certiorari to consider the question of statutory construction because of its importance to the investing public and the financial community. 371 U.S. 967, 83 S.Ct. 550, 9 L.Ed.2d 538.