## Facts

- Arleen W. Hughes operated E. W. Hughes & Company as a sole proprietor securities business with approximately 175 clients in multiple states, using the mails in interstate commerce.
- Hughes was registered as both a broker-dealer (under the Securities Exchange Act of 1934) and an investment adviser (under the Investment Advisers Act of 1940).
- After registering as an investment adviser, Hughes required clients to sign an agreement stating she would act as principal in client transactions unless otherwise agreed, and setting a schedule of charges.
- Clients relied heavily on Hughes’s advice and generally followed her recommendations.
- To fill client purchase instructions, Hughes either supplied securities from her own inventory or bought securities for her own account and resold them to clients as principal.
- Hughes did not disclose to clients her acquisition cost, current market price, or prevailing bid-ask quotations for securities sold to them.
- The SEC instituted administrative proceedings and revoked Hughes’s broker-dealer registration, finding her nondisclosure in principal transactions was fraudulent or deceptive.
- Hughes sought judicial review; many clients supported her position as amici, stating they were satisfied and believed they understood her role.

## Issues

1. Whether an investment adviser who recommends securities and sells to clients as principal owes fiduciary duties requiring full and fair disclosure of conflicts and material facts.
2. Whether a generalized written agreement stating the adviser will act as principal constitutes adequate disclosure and informed consent for principal transactions.
3. Whether substantial evidence and applicable law supported the SEC’s conclusion that Hughes’s practices were fraudulent or deceptive and warranted revocation.

## Decision

- The court affirmed the SEC’s order revoking Hughes’s broker-dealer registration.
- The court held that, given client trust and reliance, Hughes occupied a fiduciary relationship requiring utmost good faith and full and fair disclosure.
- The court agreed that Hughes’s blanket disclosure that she would act as principal was insufficient without transaction-specific disclosure of material pricing facts and the adviser’s adverse interest.
- Client satisfaction and amici support did not defeat the SEC’s finding of a disqualifying conflict and inadequate disclosure.
- The court concluded the SEC acted within its statutory authority and its findings were supported by the evidence.

## Legal Principles

- A registered investment adviser who recommends transactions and trades with clients as principal stands in a fiduciary relationship and must act with utmost good faith.
- In a fiduciary setting, antifraud standards require full and fair disclosure of all material facts, including conflicts of interest and the adviser’s adverse financial stake.
- Informed consent requires more than generalized, pre-printed consent; it requires disclosure sufficiently concrete to permit a client to evaluate the fairness of the transaction.
- When an adviser sells as principal to a client, material disclosure may include the adviser’s cost and relevant market pricing information needed to assess the transaction.
- Courts will uphold SEC sanctions when the agency’s legal interpretation is reasonable and its findings are supported by substantial evidence.

## Conclusion

The court upheld the SEC’s revocation of Hughes’s broker-dealer registration, holding that an investment adviser who sells securities to advised clients as principal must provide full, transaction-specific disclosure of conflicts and material pricing facts and obtain informed consent; a general contractual statement that the adviser acts as principal does not satisfy that duty.


Hughes v. SEC, 174 F.2d 969 (D.C. Cir. 1949)