Amicus Curiae Brief — Jocelyn M. Murphy, et al., Petitioners v. Securities and Exchange Commission

No. 22-1241

In The

Supreme Court of the United States

________________

JOCELYN M. MURPHY, MICHAEL S. MURPHY, AND

RICHARD C. GOUNAUD,

Petitioners,

v.

SECURITIES AND EXCHANGE COMMISSION,

Respondent.

________________

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

________________

BRIEF OF INVESTOR CHOICE ADVOCATES

NETWORK AS AMICUS CURIAE IN

SUPPORT OF PETITIONERS

________________

Nicolas Morgan

Counsel of Record

PAUL HASTINGS LLP

515 S. Flower Street

Twenty-Fifth Floor

Los Angeles, CA 90071

(213) 683-6181

nicolasmorgan@paulhastings.com

Attorney for

Amicus

Curiae

Investor

Choice

Advocates

Network

-iTABLE OF CONTENTS

Page

IDENTITY AND INTEREST OF AMICUS

CURIAE ......................................................... 1

SUMMARY OF THE ARGUMENT......................... 2

ARGUMENT ............................................................ 2

I.

The SEC Silences Investors

When It Pursues Jurisdictional

Expansion Through Litigation ........... 2

II.

An Overbroad Interpretation of

“Broker” is Against Public

Policy And Will Adversely

Impact Investors ................................. 4

III.

The Ninth Circuit’s Opinion

Departs from Precedent ..................... 6

IV.

The Ninth Circuit’s Opinion

May Require Broker

Registration for Large Swathes

of the Market Not Currently

Registered ........................................... 8

A.

The Ninth Circuit’s

Opinion May Require Investment

Clubs to Register as Brokers

8

B.

The Ninth Circuit’s

Opinion Could be Read to Require

Some Investment Advisers to Register

as Brokers 11

CONCLUSION ....................................................... 15

-iiTABLE OF AUTHORITIES

Page(s)

Cases

Digital Realty Trust, Inc. v. Somers,

583 U.S. ___ (2018) ................................................. 3

FinancialPlanning Ass'n v. SEC,

482 F.3d 481 (D.C. Cir. 2007) ................................ 3

Goldstein v. SEC,

451 F.3d 873 (D.C. Cir. 2006) ................................ 3

Levine v. SEC,

407 F.3d 178, 183-184 (3d Cir. 2005) ................... 12

SEC v. Almagarby,

479 F. Supp. 3d 1266 (S.D. Fla. 2020), appeal

pending, No. 21-13755 (11th Cir.) ......................... 3

SEC v. Everest Mgmt. Corp.,

475 F.2d 1236 (2d Cir. 1972) .................................. 3

SEC v. Feng,

935 F.3d 721 (9th Cir. 2019) .................................. 6

SEC v. Hansen,

No. 83 Civ. 3692, 1984 U.S. Dist. LEXIS 17835

(S.D.N.Y. Apr. 6, 1984) ....................... 6, 7, 8, 12, 14

SEC v. Keener,

2020 WL 4736205 (S.D. Fla. Aug. 14, 2020),

appeal pending, No. 22-14237 (11th Cir.) ............. 3

-iiiStatutes

15 U.S.C. § 78c(a)(4)(A) ............................................... 7

Dodd-Frank Act ........................................................... 3

Exchange Act

§ 3(a)(4) ................................................................... 6

§ 15 .................................................................... 4, 12

§ 15(a)................................................................ 6, 13

Other Authorities

Adam Ritt, How to Start a Stock Investment Club,

BetterInvesting (Aug. 5, 2019),

https://www.betterinvesting.org/learn-aboutinvesting/investor-education/joining-aninvestment-club/how-to-start-a-stock-investmentclub ........................................................................ 10

AngelList LLC, SEC No-Action Letter, 2013 WL

1279194 (Mar. 28, 2013)....................................... 13

BetterInvesting: Who We Are,

https://www.betterinvesting.org/ ......................... 10

David A. Lipton, A Primer on Broker-Dealer

Registration, 36 Cath. U. L. Rev. 899

(1987) ............................................................ 4, 7, 11

FundersClub Inc. & FundersClub Mgmt. LLC, SEC

No-Action Letter, 2013 WL 1229456

(Mar. 26, 2013) ..................................................... 13

-iv“Investment Clubs and the SEC,”

https://www.sec.gov/reportspubs/investorpublications/investorpubsinvclubhtm.html .......... 9

Richard Eisenberg, Why You May Want to Start, or

Join, An Investment Club, Forbes (Aug. 13, 2021),

available at

https://www.forbes.com/sites/nextavenue/2021/08/

13/why-you-may-want-to-start-or-join-aninvestment-club/?sh=2aa4f6da9bdb .................... 11

Securities Industry Association, The Costs of

Compliance In the U.S. Securities Industry (Feb.

2006)........................................................................ 5

Sup. Ct. R.

37.2 .......................................................................... 1

37.6 .......................................................................... 1

IDENTITY AND INTEREST OF AMICUS

CURIAE1

Amicus curiae Investor Choice Advocates

Network (“ICAN”) is a nonprofit organization

seeking to expand investor opportunities to

participate in the capital markets and reduce

regulatory barriers to entry to those markets. ICAN

is concerned that the Ninth Circuit’s opinion may

create just such a barrier to participation in the

capital markets.

Requiring registration as a

securities broker imposes costs, costs ultimately

borne by investors, and the Ninth Circuit’s ruling

creates ambiguity regarding who must register and

bear those costs. As a result, some potential market

participants will simply not participate in some

investment activity out of fear of violating an

ambiguous regulatory requirement. Other market

participants will incur the expense necessary to

register as securities brokers in situations where

such registration yields no corresponding benefits to

investors. Preventing obligations (or the perception

of potential obligations) to register as a broker

beyond what the federal securities laws require is an

issue of great importance for the public and ICAN.

Pursuant to Supreme Court Rule 37.6, counsel for amicus

curiae states that no counsel for a party authored this brief in

1

whole or in part, and no party or counsel for a party, or any

other person other than amicus curiae or its counsel, made a

monetary contribution intended to fund the preparation or

submission of this brief. Counsel for amicus curiae provided

notice of this brief’s filing to counsel for the parties more than

10 days before its filing. See Sup. Ct. R. 37.2.

-2SUMMARY OF THE ARGUMENT

The Ninth Circuit’s opinion in this case holds in

relevant part that Petitioners were required to

register with Respondent Securities and Exchange

Commission (“SEC” or “Commission”) as brokers

because Petitioners put a third party’s capital at risk

and acted as his agents. The Ninth Circuit’s opinion

appears at times to abandon the long-standing

framework for determining whether conduct creates

an obligation to register as a broker.

While

ostensibly deriving its result directly from statutory

text, the Ninth Circuit’s new framework in fact goes

beyond what the statutory text supports (and

appears to exceed any standard articulated by the

SEC in the underlying case). Ambiguities in the

Ninth Circuit’s opinion could be read to create a new,

dramatically

sweeping

broker

registration

obligation for segments of the economy that even the

SEC has not suggested require such registration.

Such a result would impose costs on investors,

reduce choices available to investors, and,

accordingly, would be against public policy.

ARGUMENT

I.

The SEC Silences Investors When It Pursues

Jurisdictional Expansion Through Litigation

The Commission’s action in this case appears

designed to expand its jurisdiction through

piecemeal litigation involving the term “broker”

rather than through rulemaking or by seeking

statutory authority from Congress.

-3When the SEC attempts to increase or decrease

its jurisdiction through rulemaking, the public

(including investors) has the opportunity to

comment, and challenge in court, the extent of

applicable statutory authority in a transparent and

predictable manner. See, e.g., Digital Realty Trust,

Inc. v. Somers, 583 U.S. ___ (2018) (SEC

promulgated rule expanding “whistleblower” beyond

statutory limitations in Dodd-Frank Act); Goldstein

v. SEC, 451 F.3d 873 (D.C. Cir. 2006) (SEC

promulgated rule expanding “client” beyond

statutory authority in Investment Advisers Act

of 1940); FinancialPlanning Ass’n v. SEC, 482 F.3d

481 (D.C. Cir. 2007) (SEC promulgated rule defining

“investment adviser” in a manner inconsistent with

the Investment Advisers Act of 1940).

In sharp contrast to the broadly public,

transparent rulemaking approach to jurisdictional

questions, in recent years the Commission has

brought numerous enforcement actions urging

expansive definitions of jurisdictional terms that, if

adopted by courts, would have an enormous impact

on the investing public. See, e.g., SEC v. Almagarby,

479 F. Supp. 3d 1266 (S.D. Fla. 2020), appeal

pending, No. 21-13755 (11th Cir.) (SEC pursuing

expanded definition of “dealer”); SEC v. Keener,

2020 WL 4736205 (S.D. Fla. Aug. 14, 2020), appeal

pending, No. 22-14237 (11th Cir.) (same).

In SEC litigation, as opposed to SEC

rulemaking, the SEC actively excludes investors

from participating. See, e.g., SEC v. Everest Mgmt.

Corp., 475 F.2d 1236, 1240 (2d Cir. 1972) (upholding

order granting SEC’s opposition to investors’ motion

-4to intervene in SEC enforcement action). In other

words, when the SEC seeks to expand its jurisdiction

through piecemeal litigation rather than through

rulemaking, the SEC intentionally excludes

investors from the process.

The SEC does not appear to have solicited any

investor input in litigating this case. Indeed, the

SEC did not allege any harm to investors caused by

the Petitioners’ conduct. As a result, no one

advocating on behalf of investors had an opportunity

to provide input on the public policy impact of the

SEC’s proposed expansion of the term “broker” as

would have been the case had the SEC pursued such

an expansion through public rulemaking.

II.

An Overbroad Interpretation of “Broker” is

Against Public Policy And Will Adversely

Impact Investors

Requiring SEC registration as a broker comes at

considerable burden and expense—a burden and

expense borne by investors in the form of increased

expenses and decreased options when selecting

intermediaries for investment transactions.

Registration as a broker under Section 15 of the

Exchange Act “triggers numerous other sections of

that Act, as well as rules promulgated pursuant to

those sections.” Lipton, A Primer on Broker-Dealer

Registration, 36 Cath. U. L. Rev. at 907. Among

other things, registered brokers must file a Form BD

and a statement of financial condition; registering

brokers, and all natural persons associated with

them must meet regulatory standards of competency

-5and training by, for example, adequate performance

on examinations administered by self-regulatory

organizations. Once registered, a broker must

comply with specific record keeping, financial

compliance, and financial reporting requirements,

including maintenance of numerous records

regarding,

among

other

things,

securities

transactions, position held in securities, orders

received and given, as well as the receipt and

disbursement of various funds.

Brokers must

prepare and file quarter financial reports and

certified annual reports. Brokers are subject to

rigorous net worth and capital requirements, must

join an insurance program to cover certain customer

losses, and must join a self-regulatory organization.

This incomplete list of regulatory burdens imposed

on brokers should not be imposed lightly,

particularly in a case in which the SEC does not

allege any harm to investors or any complaints

regarding the absence of such registration.

One industry study and report concluded that

firms in the securities industry spent $23.2 billion

in 2004 on regulatory compliance, and “[t]he costs

incurred by firms in the securities industry to

comply with the increasing volume of regulatory and

legislative initiatives may ultimately be passed on to

investors through higher prices and fewer choices.”

Securities Industry Association, The Costs of

Compliance In the U.S. Securities Industry

(Feb. 2006) (emphasis added).

In short, an overly-inclusive definition of

“broker” imposes regulatory costs. To be sure, those

costs are borne in part by those who choose to be

-6securities “brokers,” but the costs are also borne

indirectly by those who forgo becoming securities

brokers or forgo economic activity that falls outside

of any reasonable definition of the term “broker”

because of uncertainty created by an ambiguous

definition in the hands of an assertive regulator.

This case—a case in which no investor was harmed

and no investor ever sought the protections that the

Ninth Circuit’s opinion seeks to impose—is not the

right case in which to create an overly expansive

definition of the term “broker.”

III.

The Ninth Circuit’s Opinion Departs from

Precedent

The Ninth Circuit’s opinion opens with a

laudable premise: beginning its analysis with the

relevant statutory language rather than with the

significant body of case law that has developed

around the statutory language. 18a & 19a. The

Ninth Circuit contrasts the “broad,” case-driven

“totality-of-circumstances approach” set forth in

SEC v. Feng, 935 F.3d 721, 732 (9th Cir. 2019)

(alteration in original) (citation omitted) (applying

SEC v. Hansen, No. 83 Civ. 3692, 1984 U.S. Dist.

LEXIS 17835, at *25 (S.D.N.Y. Apr. 6, 1984) (the

“Hansen factors”) with the “straightforward”

language in Sections 3(a)(4) and 15(a) of the

Securities Exchange Act of 1934 (“Exchange Act”).

Id.

As the Ninth Circuit’s opinion notes, Exchange

Act Section 3(a)(4)’s definition of “broker” is very

simple on its face: “any person engaged in the

business of effecting transactions in securities for

-7the account of others.” 15 U.S.C. § 78c(a)(4)(A)

(quoted at 18a). Although the SEC did not request

the Ninth Circuit to reject the Hansen factors, the

Ninth Circuit’s opinion “does not rely on the Hansen

factors,” and the concurring opinion would jettison

25a and 41a.

the Hansen factors altogether.

However, the Hansen factors arose to fill gaps left by

the statutory definition’s superficial simplicity.

David A. Lipton, A Primer on Broker-Dealer

Registration, 36 Cath. U. L. Rev. 899 (1987)

(describing multi-decade development of broker

definition and concluding, “Initially, the answer to

that question (of who is a broker) appears relatively

simple.

. . .

Unfortunately, this common

understanding of the broker-dealer does not provide

guidance for determining broker status in other

than the customary securities industry situation”).

The Ninth Circuit’s opinion implicitly recognizes

that the statutory definition alone provides

insufficient structure to address the facts of the

present case. Rather than limiting its analysis to

the bare statutory language, the Ninth Circuit’s

opinion creates what appears to be a new, two-factor

test in place of the Hansen factors:

First . . . when Appellants traded

securities and shared a portion of the

profits and losses with Riccardi, they

traded for his account because another

person—Riccardi—bore some risk of a

loss.

Second, Appellants traded ‘for’ Riccardi

because they acted as his ‘agents.’ . . .

-8[because] Appellants acted on Ricardi’s

behalf and subject to his control.

20a & 21a.

Unfortunately, replacing the seven Hansen

factors with what would undoubtedly become known

in subsequent cases as the two Murphy factors does

little to assist predictability of results and may do

harm by inadvertently including business models

that no one (including, apparently, the SEC) believes

require registering as a broker.

IV.

The Ninth Circuit’s Opinion May Require

Broker Registration for Large Swathes of the

Market Not Currently Registered

The Ninth Circuit’s opinion may be read to

require broker registration for (1) a group of

individuals sharing trading in profits and losses,

and (2) when one or more members of such a group

executes trades through a prime brokerage account.

Such a registration requirement would come as a

surprise to many investment clubs and investment

advisers.

A.

The Ninth Circuit’s Opinion May

Require Investment Clubs to Register

as Brokers

The SEC’s Office of Investor Education and

Advocacy describes an investment club as “a group

of people who pool their money to invest together.

Club

members

generally

study

different

investments and then make investment decisions

together – for example, the group might buy or sell

-9based on a member vote.”2 The SEC OIEA goes on

to advise that while the “SEC generally does not

regulate investment clubs,” certain regulatory

requirements may exist depending on the structure

of a specific club. The listed potential “registration

requirements” include (1) registration of the offer

and

sale

of

club

membership

interests,

(2) registration of the club as an investment

company, and (3) registration as an investment

adviser for any person paid for providing advice

regarding the club’s investments. Conspicuously

absent from list of “registration requirements” is the

possibility that the member tasked with executing

the club’s transaction through a brokerage firm

must herself be registered as a broker.

To be sure, the SEC OIEA description of

potential

investment

club

“registration

requirements” is not meant to be legal advice from

the SEC, but the absence of any mention that

investment club members may need to register as

securities brokers is telling: it would be more than

surprising to suggest a broker registration

requirement for a member of a group of people who

share in the profits and losses generated from an

investment pool because that person executed

transactions for the group.

Such a registration requirement would

apparently also surprise the National Association of

Investors

(a/k/a

BetterInvesting),

a

“Investment Clubs and the SEC,”

https://www.sec.gov/reportspubs/investorpublications/investorpubsinvclubhtm.html

2

available

at

-10national 501(c)(3) nonprofit established in 1951 that

“has helped more than 5 million people from all

walks of life learn how to improve their financial

future.”3 In its publication, “How to Start a Stock

Investment Club,” BetterInvesting observes that

“investing in the stock market is easier when

sharing investing ideas and pooling investments as

part of an investment club,” and “When club

members pool money and make investment

decisions, the club treasurer can endorse member

checks over to the club’s broker.” Adam Ritt, How to

Start a Stock Investment Club, BetterInvesting

(Aug. 5, 2019).4 Nowhere does BetterInvesting

suggest to its members that club members who

execute trades through the club’s brokerage account

should register as brokers themselves. Again,

BetterInvesting is not providing legal advice to its

members, but the absence of any reference to the

possibility that broker registration might be

required suggests that the longstanding national

leader in this area does not perceive that such a

registration requirement risk is worth a passing

mention.

One nonprofit, CLIMB (Communities Learning

to Invest and Mobilize for Business), highlights the

important role investment clubs can play in

creatively and effectively connecting underserved

BetterInvesting:

Who

We

https://www.betterinvesting.org/.

3

Are,

available

at

Available at https://www.betterinvesting.org/learn-aboutinvesting/investor-education/joining-an-investment-club/howto-start-a-stock-investment-club.

4

-11youth and families to financial education programs

and resources.5 Lack of financial education and

literacy is a significant public policy issue: for

example, one recent report found that only 31% of

baby boomer generation workers said they have a

great deal or quite a bit of understanding of asset

allocation principles. Id.

The Ninth Circuit’s opinion would create

uncertainty for investment club members who

execute trades through a brokerage account and

share profits and losses with other members.

Imposing a broker registration requirement (or the

perception that one might exist) would decrease

learning opportunities and worsen financial literacy.

For the avoidance of doubt on this issue, the Court

should grant Petitioners’ petition.

B.

The Ninth Circuit’s Opinion Could be

Read to Require Some Investment

Advisers to Register as Brokers

The Ninth Circuit’s opinion concludes that

because Riccardi shared in the economic risks of

Appellants’ trades, Appellants traded for Riccardi’s

account and thus acted as unregistered brokers.

20a.

Having relegated the Hansen factor of

“transaction based compensation” to dicta (25a), the

panel cites an inapposite speech by former SEC

Why You May Want to Start, or Join, An

Investment Club, Forbes (Aug. 13, 2021), available at

5 Richard Eisenberg,

https://www.forbes.com/sites/nextavenue/2021/08/13/why-youmay-want-to-start-or-join-an-investmentclub/?sh=2aa4f6da9bdb

-12Division of Trading and Markets (the “Division”)

Chief Counsel David Blass in support of the idea

that sharing in profits and losses is the same as

“transaction based compensation,” but Mr. Blass’s

speech does not support that conclusion. 25a

(quoting Blass, A Few Observations in the Private

Fund Space, “compensation that depends on the

outcome or size of the securities transaction”). While

Mr. Blass’s speech does not support the panel’s

conclusion equating profit and loss sharing with

“transaction based compensation,” the Ninth

Circuit’s reliance on the speech highlights a market

segment that may be impacted by the panel’s

opinion: the private fund space.

Rather than relying on the Hansen “transaction

based compensation” factor, the Ninth Circuit’s

opinion instead looks for support of its conclusion

from a Third Circuit opinion interpreting an

Exchange Act provision not at issue in this case. 20a

(citing Levine v. SEC, 407 F.3d 178, 183-184 (3d Cir.

2005) and Exchange Act § 11(a)). However, the

Ninth Circuit did not have to travel so far afield to

encounter very common situations in which the very

same SEC staff member relied on by the Ninth

Circuit twice (18a and 25a), Mr. Blass, determined

that sharing in the risk of trades did not create the

need for securities broker registration.

In a pair of “no-action letters” issued by

Mr. Blass, the Division stated that it would not

recommend enforcement action under Section 15(a)

of the Exchange Act if the parties engaged in the

-13described activities without registering as brokers.6

Of relevance here, the Division found particularly

compelling the fact that the investment adviser “will

receive compensation equal to a portion of the

increase in value, if any, of the investment as

calculated at the termination of the investment in

the Investment Vehicle (i.e., carried interest).” . The

Division further notes that an adviser who receives

such carried interest compensation “will not receive

any transaction-based compensation.” Id. In other

words, receiving compensation in the form of a

portion of profits is not “transaction-based

compensation” in the context of private funds and

does not cause an investment adviser to become a

broker requiring registration under Exchange Act

Section 15(a).

While the facts of the current case can be

distinguished from the facts present in the

AngelList and FundersClub No Action Letters (e.g.,

presence of a registered investment adviser; profits

and losses shared on individual transactions rather

than from a pooled investment), the Ninth Circuit’s

opinion leaves open the possibility that it could be

used in the future to expand the broker registration

requirement into the private fund space.

AngelList LLC, SEC No-Action Letter, 2013 WL 1279194

(Mar. 28, 2013) (“AngelList No Action Letter”); FundersClub

Inc. & FundersClub Mgmt. LLC, SEC No-Action Letter, 2013

WL 1229456 (Mar. 26, 2013) (“FundersClub No Action Letter”).

Contrary to the statement in Opn. fn 6, No Action letters are

statements by SEC staff rather than “clarification from the

SEC” itself.

6

-14The foregoing example involving carried interest

compensation in a pooled investment is only one

example of shared profits and losses in the

investment adviser space. To conclude, as the Ninth

Circuit’s dicta does, that sharing in transaction

profits and losses is equivalent to “transaction based

compensation” under Hansen, creating an obligation

to register as a broker would upend long-standing

economic relationships that heretofore have not

required such registration.

-15CONCLUSION

The petition for a writ of certiorari should be

granted.

Respectfully Submitted,

NICOLAS MORGAN

COUNSEL OF RECORD

PAUL HASTINGS LLP

515 S. Flower Street

Twenty-Fifth Floor

Los Angeles, CA 90071

(213) 683-6181

nicolasmorgan@paulhastings.com

Attorney for Amicus Investor

Choice Advocates Network

July 27, 2023