It’s a Wonderful Hypo: What if the Bailey Bros. Building & Loan Was a SEC Registered Investment Adviser?
In the 1946 film “It’s a Wonderful Life,” George Bailey is despondent after a series of mishaps — including his family member and colleague, Uncle Billy, misplacing $8,000 that Uncle Billy had intended to deposit in Mr. Potter’s bank — leads George’s firm to the brink of failure and George facing the threat of being arrested. However, with the help of a wacky angel (sans wings), a visit to an alternative timeline, and the townspeople ultimately rallying around George to save his firm and keep him from jail, George learns the greatest of lessons: it is a wonderful life.
Below we walk through a whimsical twist on this holiday classic: did George Bailey and his family firm have exposure to being charged by the U.S. Securities and Exchange Commission (SEC) with federal securities laws violations, if they were a SEC registered investment adviser instead of a savings and loan association?
Short Answer: Yes.
The Bailey Bros. Building & Loan (BBB&L) happened to be in the middle of an examination on that Christmas Eve day. In fact, the lead examiner Mr. Carter was growing irritable as he was looking to wrap up the fieldwork to “to spend Christmas in Elmira with [his] family.” Nevertheless, a SEC examiner would undoubtedly dig deeply into a missing $8,000 in 1945. (By way of perspective, $8,000 in 1945 is worth approximately $145,000 in 2025, an amount that a SEC examiner such as Mr. Carter would likely view as material to BBB&L’s financial statements.)
Regarding Uncle Billy: while his character was likeable, sympathetic, and provided comic relief, he clearly needed to be under heightened supervision. His practice of tying strings around his fingers to remember his important tasks is insufficient for a personalized set of control functions. George knew of Uncle Billy’s deficiencies his whole life, and then George started working at BBB&L around 1928, giving him well over a decade of supervisory responsibility over Uncle Billy. Thus, in addition to BBB&L’s firm-level supervisory failures, George had personal exposure for failing to supervise Uncle Billy.
Mr. Potter, the crotchety and miserly antagonist to George, was of course the real “bad guy” in this story (he is notably ranked #6 on the American Film Institute’s 2003 list of all-time movie villains). When Uncle Billy misplaces the deposit, Mr. Potter finds the $8,000 and keeps it. If the SEC uncovered his thievery, then Mr. Potter would need to be referred to the criminal authorities for a parallel criminal investigation for larceny. Returning to BBB&L and George, such a shortfall in the firm’s financials would have initially created liability exposure for violating their fiduciary duties and Section 206(2) of the Investment Advisers Act of 1940.
With Mr. Carter’s referral to the Division of Enforcement for these supervisory and Section 206(2) violations, George and BBB&L would need counsel from an experienced and angelic enforcement defense attorney, who, for purposes of this holiday hypo, we have named “Clarence.” With the supervisory violations being difficult to defend and the viability of the Section 206(2) violations perhaps being dependent upon whether 1945 was a “regulation by enforcement” era at the SEC, Clarence would need to focus his efforts on the remedial efforts undertaken by George’s wife, Mary, and his brother, Harry. In the movie, through Mary’s initiative and leadership, the $8,000 was repaid in full by donations from friends and family, and no BBBL&B clients suffered any financial harm. (Proving, as movie-Clarence wrote to George, “[that] no man is a failure who has friends.”)
Holiday Hypo Clarence would then turn from angelic to aggressive, working closely with the criminal authorities so that Mr. Potter is charged and (hopefully) imprisoned for his theft of the $8,000. With this alternative ending and Mr. Potter facing punishment for his crime, all is well that ends well!
Happy Holidays from your Friends with Foley & Lardner’s Securities Enforcement & Litigation Group!
