OFFICIAL OPINION No. 6

OFFICIAL OPINION No. 6 !lwest111ent Co111pa11y Act uf l.'J.J.:1-Pe11nsylmnia ScC11rities Act of 197:2-lmplied Repeal-Section 1 !JI l(b) and (c) uf the Statutory Constrnction Act of 197:2. 1. The Investment Company Act of 193:3. 7 P.S. § 6051 et. seq. was not impliedly repealed by the Pennsylvania Securities Act of 1972. 70 P.S. § 1-101, et seq. 2. Although the Pennsylvania Securities Act purports to be uniform with regard to the issuance of all securities. it does not regulate investment companies as defin- ed by the Investment Company Act of 1933 with regard to securing the funds of persons who contribute as investors to investment companies. Hence. the Penn- sylvania Securities Act of 1972 did not impliedly repeal the Investment Com- pany Act of 1933 under Section 1971 (b) of the Statutory Construction Act of 1972. 1 Pa. S. § 1971 (b). 3. The Pennsylvania Securities Act of 1972 and the Investment Company Act of 1933 are not irreconcilable. Hence. the Investment Company Act of 1933 was not impliedly repealed under Section 1971 (c) of the Statutory Construction Act of 1972. 1 Pa. S. § 1971 (c). Mr. James Breslin Chairman Pennsylvania Securities Commission Harrisburg, Pennsylvania Dear Mr. Breslin: Harrisburg, Pa. January 28, 1974 You have. request~~ our opinion with regard to whether the ~enn_sylvama Securities Act of 1972, 70 P.S. § 1-101 et seq., impliedly repealed the Investment Company Act of May 15 1933 P.~ .. 788, No. 113, as amended, 7 P.S. § 6051 et seq. We are' of th~ opm10n that the Investment Company Act was not impliedly repealed by the Pennsylvania Securities Act of 1972. The I.nvestment 9?ml"lany Act was designed to eliminate certain abuses m the securities mdustry, abuses that may have contributed OPINIONS OF THE ATTORNEY GENERAL 23 to the 1929 financial crash and the depression of the 1930's. Like the Federal legislation in this area, the Investment Company Act was meant to provide another step toward a return to the understanding that those who manage other people's money are fiduciaries acting for others. A reading of the substantive parts of the Act, coupled with the attendant circumstances under which the Act was passed, reveals that the Legislature intended to provide a comprehensive regulatory scheme to correct and prevent certain abusive practices in the management of investment companies for the protection of persons who contribute money to be invested by such companies on their behalf. The particular form of investment company treated appears to be the "face-amount certificate" company, ancestor of today's mutual funds. The regulatory scheme devised by the Legislature in the Invest- ment Company Act requires that these investment companies operating within the Commonwealth be licensed by the Penn- sylvania Securities Commission. Section 2 of the Act, 7 P.S. § 6053. The Securities Commission is required to investigate each applica- tion for licensure, screening the applicant for financial stability. Additionally, the licensee must post a bond of $100,000 in the form of obligations of the United States, the Commonwealth, or any of its political subdivisions to assure that its obligations can be met. Sec- tion 3, 7 P. S. § 6053. The Securities Commission can require ad- ditional security, if, in its discretion, such is required. Section 7, 7 P.S. § 6057. Moreover, the Act requires that the licensee submit an- nual reports detailing its financial status (Section 6, 7 P.S. § 6056); and the licensee must make available its business records for the scrutiny of the Commission (Section 8, 7 P.S. § 6058). In the event that a licensee decides to discontinue doing business in the Com- monwealth, the Act mandates that the licensee petition the Com- monwealth Court for dissolution at which time it must include its assets and liabilities and a complete list of holders of its contracts and obligations. Finally, penal sactions are provided for each viola- tion of the Act. It is apparent, therefore, that the regulatory scheme of the Invest- ment Company Act is aimed at securing the investment of the con- tributor by assuring that the investment company will be in a posi- tion to fulfill its contracts and obligations at the maturity date of its contributor's certificate. The question that faces us, however, is whether this regulatory scheme has been preempted by the Penn- sylvania Securities Act of 1972. Section 1971 of the Statutory Construction Act of 1972, Act of December 6, 1972, P.L. 1339, 1 Pa. S. §1971, provides in pertinent part: IMPLIED REPEAL BY LATER STATUTE * * * (b) Whenever a general statute purports to establish !'l- un- iform and mandatory system covering a class of subJects, 24 OPI N IO NS OF THE ATTORNEY GENERAL such statute shall be construed to supply and therefore to repeal pre-existing local or special statutes on the same class of subjects. (c) In all other cases, a later statute shall not be construed to supply or repeal an earlier statute unless the two statutes are irreconcilable." Hence, if the class of subjects regulated by the Pennsylvania Securities Act of 1972 includes investment companies, then the In- vestment Company Act is implicity repealed according to Section 197 l(b) of the Statutory Construction Act. If the Securities Act does not include investment companies, a determination must be made as to whether the two statutes are irreconcilable, thereby causing a repeal of the earlier statute pursuant to Section 1971(c)oftheAct. The Pennsylvania Securities Act of 1972 was designed to prohibit fraudulent practices in the securities industry by requiring, among other things, the registration of all broker dealers, agents, invest- ment advisers and securities. The Act does not purport to regulate investment companies except to the extent that the securities issued by investment companies are necessarily included in the require- ment that all securities be registered. Section 201 of the Penn- sylvania Securities Act, 70 P.S. § 1-201. The regulatory scheme adopted by the Pennsylvania Securities Act is directed at prohibiting fraudulent disclosures at the time of issuance of securities. On the other hand, the Investment Company Act is directed at assuring the financial stability of its regulated companies during the time that investment contributions are held and at the time of maturity of the investment certificates in addition to the time of issuance. Hence, though the Pennsylvania Securities Act of 1972 purports to be uniform with regard to securities, it makes uniform only the law with respect to disclosure made at the time of issuance of securities. It therefore does not repeal the Invest- ment Company Act under§ 1971(b). The Investment Company Act regulates those business associations which accept contributions ·or payments as considera- tion for the performance of a contract or other obligation to repay said contributions at some fixed maturity date. Simply stated the associations regulated se ll face-amount securities to their customers. The securities are for a fixed amount of money to be paid at some future maturity date at a stated rate of interest. The invest- ment company will then invest the money that it has received in ?ther securities to make its profit and to discharge the oblis-ations mcurred by the sale of the face-amount securities in the first in- stance. At the_point of issuance of the face-amount securities the Pennsylvania S e<; uriti~s Act. operates to foreclose the possibility of fraudu_lent or m1sleadmg disclosures. However, after issuance is authorized by the Securities Commission, under the Securities Act there is no further regulation of the investment company designed OPINIONS OF THE ATTORNEY GENERAL 25 sol~ly to ass_ure that the company's obligations will be honored on the1r. Il!atm:1ty date. The Investment Gompany Act fills this void by reqmrmg hcensure of the company, a substantial bond ufon licen- sure, financial reporting requirements during the life o the com- pany, and court supervision upon the discontinuance of the com- pany. The Securities Act does not require that an investment com- pany !~gister itself .. o~ly that the investment company register its securities. Hence, 1t 1s apparent that while the Securities Act serves to regulate securities, the Investment Company Act serves the function of policing the solvency of face-amount investment companies to insure that these investment companies will not fail without satisfying their contributors. It has been suggested that an investment company within the con- templation of the Investment Company Act may be an "investment adviser" under the Securities Act of 1972, 70 P.S. § 1-102(j). The Securities Act defines an "investment adviser" as, " ... any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing or selling securities, or who, for compensation and as a part of a regular business, issues or promulgates analyses or reports concerning securities." 70 P. S. § 1-102 (j). As noted above, an investment company within the contempla- tion of the Investment Company Act does not advise persons with regard to the purchase and selling of securities. On the contrary, it takes contributions from investors for the purpose of investing same without any obligation of informing its contributors with regard to what investments will be made. Hence, an "investment adviser" can not be construed to include an "investment company." Accordingly, the two acts are not irreconcilable and the Invest- ment Company Act was not impliedly repealed by the Securities Act under Section 1971 (c) of the Statutory Construction Act. Moreover, the fact that an issuer of face-amount securities is sub- ject to the regulatory schemes of two different acts will not alone render the two acts irreconcilable under Section 1971 (c) of the Statutory Construction Act. On two previous occasions we have sustained the validity of regulatory schemes involving two different statutes. See, Opinion of the Attorney General No. 49 (1972) and Opinion of the Attorney General No. 99 (1972). Additionally, there exists on the national level a similar dual regulatory scheme with regard to investment companies and securities. See Investment Company Act of 1940, 11 U.S.C. §§ 72, 107, 15 U.S.C. § 80a-1 et seq. and the Securities Exchange Act, 15 U.S.C. § 77b et seq. These two acts have co-existed in recognition of the necessity to regulate these two separate and distinct asp~cts of an investment. company's ac- tivities, the issuance of securities and the preservat10n of the funds of its investors. 26 OPINIONS OF THE ATTORNEY GENERAL For the foregoing reasons, we are of th~ ?Pinion, and yo~ are hereby advised, that the Pennsylvania Securities Act of 1972 did not impliedly repeal the Investment Company Act of 1933. Sincerely, Walter Roy Mays, III Deputy Attorney General Israel Packel Attorney General