sec authority over sipc

8/3/2019 SEC Authority Over SIPC

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JACOB W HELLERRICHARD F HOROWI_.ELi FE{TLAWRENCE J TOSCANOSTUART A, BLANDERSIGMUND S WISSNER-GROSSMAURICE W, HELLERALAN A HELLER

CLIFFORD J. BONDALLEN M. EtSEHBEROJOSEPH S SCHICKSARA D BOOKBINDER

HELLER, HOROWlTZ _ FELT, P.C.ATTORNEYS AT LAW

292 MADISON AVENUENEVVYORK, N.Y 10017

(2 12) 685-7600

July 3, 2003

By Hand DeliveryThe Hon. Chester J. Straub /The Hon. Rosemary S. Pooler (._The Hon. David N. HurdUnited States Court of Appeals for the Second Circuit40 Foley SquareNew York, New York I0007

(154650.1)NAHUM L GORDC)N

M ARm N _'_'E I NMAY ORENSTIEIN

COUNSEL

CABLE ADDRESSHELLFErrER. N Y,

TELECDPfER

(212) 69B-_;e_, Sg

WORLD WlOE WEBH'rrPT/_, HHAN DF, CQM

WRITER'S E'HAILSSWGROSS@MHANDF, CQM

Re: In re: New Times Securities, Docket No. 02-6166(Argument Date: June 26, 2003)

Members of the Court:This letter addresses the Court's request for the parties to brief the issue of the

deference owed to the position of the Securities and Exchange Commission (the "SEC"), as stated inthe Brief of the SEC. Amicus Curiae, In Partial Support of the Position Appellants and in PartialSupport of the Position of Appellees (the "SEC Brief'). The SEC Brief was filed with the Court inresponse to a request from the Court for the SEC to "generally address the case, including, inparticular, the applicability of the Series 500 Rules to the facts presented therein." Letter to Giovanni P.Prezioso, Esq., SEC General Counsel from the Clerk of the Court.

In its Brief, the SEC stated three positions on issues raised on appeal. First, the SECstated its opinion that appellees' claims should be classified under Section 9(a) of the SecuritiesInvestors Protection Act of 1970 ("SIPA" or the "Act") [SIPA 78fff-3(a)] as "claims for securities,"and are entitled to SIPA coverage up to $500,000. On this issue, the SEC, interpreting the Act inaccordance with, inter alia, the Act's legislative history, legislative purpose, legitimate expectations ofcustomers, and the goal of the Series 500 Rules, agreed with the customer-claimants' position ("SECPosition r'). The SEC, however, rejected the District Court's reliance on the account .^^.._._[il_statementsrsuch -he broker-dealer in valuing the customers' securities claims. The SEC stated that _c_uuilr


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claims should be valued by the actual amount of money deposited by the customer with the broker-dealer for the purchase of the securities. ("SEC Position II"). Finally, the SEC found the Series 500Rules were not applicable to resolve the question of classification of claims based upon fictitioussecurities ("SEC Position III"), while explaining that in its view the principle of reliance upon customerconfirmations and account statements to classify customer claims which is found in the Series 500 Rulesshould also be used as a guide to the interpretation ofSIPA 78fff-3(a) in this case. SEC Brief at 13.

As explained below, a significant degree of deference should be given to SEC PositionsI and II, as they are formal interpretive statements by the agency of the federal government which hasbeen entrusted by Congress to administer SIPA by, inter alia, the promulgation of rules interpreting theAct and by the exercise of plenary supervisory authority over SIPC. However, because (in appellees'view) the Series 500 Rules, by their plain language, unambiguously apply to the classification issuepresented here, appellees submit that this Court need not address the level of deference to be affordedto SEC Position III and can instead apply the Series 500 Rules to resolve the instant controversy. Inany case, for a variety of reasons discussed below, no deference can be given to statutory constructionsoffered by SIPC in support of claim determinations made by a SIPC-appointed Trustee in a SIPAliquidation proceeding.

A. SEC's Plenary Oversight Role With Respect to S/PC. As both the Act and itslegislative history reflect, Congress envisioned that although SIPC was established by an act ofCongress (SIPA 78ccc(a)(1)), the SEC would have plenary oversight of SIP(_. SIPC is not anagency of the federal government. SIPA 78ccc(a).

SIPA provides, inter alia, that the Act itself is an amendment to the SecuritiesExchange Act of 1934 (SIPA 78bbb); the SEC has final review and say as to SIPC membership(SIPA 78ccc(a)(2)(B)), bylaws and rules (SIPA 78ccc(e)(1)-(3)), member assessments and SECloans to SIPC (SIPA 78ddd(c)(l), (d)(l), (g)); and the SEC can facilitate initiation of a SIPAproceeding by notifying SIPC (SIPA 78eee(1)) and has the fight to participate in any SIPAproceeding as a party-in-interest (SIPA 78eee(c)). _ Apart from the foregoing, the Act explicitlyprovides that the SEC has rule-making functions (SIPA 78 ggg(a)); that if SIPC fails to act for theprotection of customers, the SEC can obtain a court order requiring SIPC to discharge its obligations(SIPA 78ggg(b)); that the SEC has the authority to conduct examinations and inspections of SIPC(SIPA 78ggg(c)(l)); and that SIPC must provide yearly reports to the SEC (SIPA 78ggg(c)(2)).

i Here, the SEC, which filed the original civil action against Goren, New Age and New Times (JA-762),notified SIPC of the need for SIPC involvement and appeared in this proceeding as a party in interest from the outset.On the SEC's motion, the District Court referred this SIPA proceeding to the United States Bankruptcy Court for theEastern District of New York. JA-763. Thus, while the SEC submitted its amicus brief at the invitation of the Court,the SEC has been actively involved in this proceeding from the outset, and has had detailed familiarity with a//theissues involved throughout the course of the proceeding. This familiarity and involvement is an additional factorsupporting the deference that should be accorded the SEC Positions.


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B. Judicial Deference to Administrative Interpretations of Statutory Schemes.When a federal court is faced with the need to construe a statutory ambiguity or fill a gap in a statutewhich has been interpreted by an administrative agency to whom Congress has delegated interpretiveauthority, two Supreme Court cases, Chevron and Mead, cited infra, establish the means by which tomeasure the degree of judicial deference owed to expressions of such interpretive authority. The veryhighest level of deference is described in Chevron U.S.A, htc. v. Natural Resources DefenseCouncil, Inc., 467 U.S. 837, 843 (1984), which directs that courts must defer to such administrativeagency's interpretation provided always that such agency's interpretation is a permissible constructionof the statute, notwithstanding that other, better possible interpretations are presented. In Chevron, theCourt focused, as a prerequisite to deference, on need for a positive manifestation of Congressionalintent to delegate to an agency the primary interpretive authority with respect to the statute in questionand did not precisely delineate the forms which agency interpretive expressions could take. UnitedStates v. Mead Corp., 533 U.S. 218 (200 l) instructed that Chevron deference was warranted wherean agency interpretation was made "in the exercise of" the agency's rule-making authority. Mead, 533U.S. at 227. Thus, formal regulations promulgated pursuant to notice and comment procedures or theirequivalent have become the "gold standard" for Chevron deference. See, e.g., Community HealthCenter v. Wilson-Coker, 311 F.3d 132, 138 (2d Cir. 2002).

In Mead, the Court further explained that deference was not an "either-or" proposition,but that there existed degrees of deference. 533 U.S. at 220. 2 The Court observed that "agenciescharged with applying a statute necessarily make all sorts of interpretive choices, and while not all ofthose choices bind judges to follow them, they certainly may influence courts facing questions theagencies have already answered." 533 U.S. at 227. Vacating the Circuit Court's decision to give nodeference to the Customs Department ruling at issue in Mead, on the ground that the ruling was not theproduct of formal notice and comment rule-making procedures (and hence not entitled to Chevrondeference), the Court remanded to permit the court below to assess the degree of deference owed tothe ruling using factors identified by the Court in its earlier decision, Sla'dmore v. Swift & Co., 323U.S. 134 (1944). Under Mead/Sla'dmore, deference can be accorded to art agency's interpretation"whatever its form," including without limitation, "policy statements, agency manual and enforcementguidelines." Mead, 533 U.S. at 234. The degree of deference due to such administrativeinterpretations depends upon "the thoroughness evident in its consideration, the validity of its reasoning,

2 In addition to rejecting deference as an either-or choice, the Supreme Court in Mead also made clear thatit is not only regulations promulgated through formal notice and comments procedures that can be entitled toChevron deference. Id. at 2173 and n. 13 (noting that by long-standing precedent the deliberative conclusions of theComptroller of the Currency are entitled to deference). Even more recently, the Supreme Court confirmed thatChevron deference can be warranted in the absence of formal regulations. Barnhart v. Walton, 122 S.Ct. 1265, 1271(2002) ("[T]he fact that the [Social Securit)/Administration] previously reached its interpretation of through meansless formal than "notice and comment" rulemaking, [citation omitted] does not automatically deprive thatinterpretation of the judicial deference otherwise its due.")


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its consistency with earlier and later pronouncements, and all those factors which give it power topersuade[.]" Mead, 533 U.S. at 219 (quoting Skidmore).

C.. Under Mead/Skidmore Analysis, the SEC's Interpretation of SIPA Is Oweda Significant Measure of Deference. It is beyond dispute that Congress has manifested theclear intent to delegate to the SEC the authority to interpret SIPA by promulgating rules carrying theforce of law. Chevron, 467 U.S. at 843-44; In re Adler. Colemen Clearing Corp., 218 B.R. 689,699 (Bankr. S.D.N.Y. 1998) (rules promulgated by the SEC under SIPA have the force and effect oflaw). Congress expressly afforded the SEC p!enary rule-making authority under SIPA: "the [SEC]may, by such rules as it determines to be necessary or appropriate in the public interest or to carry outthe purposes of [SIPA], require SIPC to adopt, amend, or repeal any SIPC bylaw or rule, wheneveradopted." SIPA 78tee(e); see also, SIPA 78ggg(a); Securities Investor Protection Corp. v.Barbour, 421 U.S. 412, 417 (1975) (describing the SEC' s rule-making authority under SIPA). Basedupon these statutory manifestations alone, it is clear that Congress intended the SEC to have primaryinterpretational authority under the Act and the Court is obligated to carry out this Congressional intent.Mead, 533 U.S. at 230, n.l 1. Accord Community Health Center, 311 F.3d at 138.

As explained infra, the SEC Brief is the product of a deliberative and formal processand represents the official position of the SEC. Assuming, however, that it is not the equivalent ofregulations promulgated under Congressionally delegated law-making authority, under Mead, it isnecessary for the Court to assess the deference due to the SEC Brief by applying Skidmore factors.Following Skidmore, the Court must consider the form in which the interpretive position is expressed,its consistency, the. persuasiveness of the agency's position and the expertness of the agency on theissue subject to interpretation. Some aspects of the statutory interpretation found in the SEC Brief,which are pertinent to Sk_'dmore analysis - i.e., formality, consistency, persuasiveness and expertise -are summarized as follows:

Form. Judicial deference has frequently been afforded to administrative interpretationsrendered as am icus curiae. In A uer v. Robbins, 519 U.S. 452 (1997), the Supreme Court rejectedthe argument that the interpretations of the Secretary of Labor, in the form of an amicus brief were"unworthy of deference." See also Demaria v. Andersen, 318 F.3d 170, 175 (2d Cir. 2003) (holdingthat the Second Circuit was "bound by the SEC's interpretations of its regulations in its amicus brief,unless they are 'plainly erroneous or inconsistent with the regulations'"). Here, as in Auer, because theamicus brief was filed at the request of the Court, there can be no "no reason to suspect that theinterpretation does not reflect the agency's fair and considered judgment on the matter in question." ld.at 462. Just as the Court in Auer observed that the position asserted in the amicus brief was not a"post hoc rationalization advanced by an agency seeking to defend past agency action against attack,"id., so too in this case, no self-serving motive can be attributed to SEC.


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Nor is the filing of a "Brief of the Securities and Exchange Commission, AmicusCuriae," treated casually by the SEC. Such a brief represents the formal position of the SEC and weare advised that no such brief will be filed without the approval of the Commission, by formal vote. Weare also advised that prior to formulating its position in response to the Court's request, the Staffmetwith both parties and participated in structured deliberations to arrive at its recommendations to theCommission. The fact that an agency which could have promulgated regulations clarifying the matter inquestion has not done so, does not argue against deference on interpretation which first appears in anamicus brief. See, Cedar Rapids Community School District v. Garret F., 526 U.S. 66, 75, n.6(although agency's position had been unclear and despite authority to do so it had not promulgatedregulations on matter at issue, the Court deferred to position expressed in amicus brief); CommunityHealth Center, 311 F.3d at 137, n.8 ("[a]lthough our conclusion ultimately turns on an interpretation ofthe Medicaid statute itself, we note that any interpretation of the Medicaid regulations in an amicusbrief form is entitled to some deference from the court"). 3

Validity; Persuasiveness. According to the SEC, SIPC's position in this case,"[D]isregards the legislative purpose of [SIPA 78fff-3(b)]," "defeats the reasonable expectations ofbroker-dealer customers," and "undermine[s] the fundamental goal of SIPA." SEC Brief at 14. TheSEC Positions derive their power from the SEC's administrative expertise, the SEC's role in theenactment of SIPA, the SEC's neutrality in this proceeding and by the persuasive power of the SEC'sarguments. First, based upon its own close examination of the provisions relied upon by SIPC, theSEC rejects SIPC's purported "strict construction" of the Act as incorrect and misguided. At the coreof SIPC's construction is its argument that the cash/securities coverage distinction found in SIPA 78fff-3(b) pervades the Act, is "integral" to it and is purposefully interrelated with other provisions ofthe Act [principally SIPA 78fff-2(b) and SIPA 78111(1 I)] pertaining to the Trustee's duties indischarging the obligations of the debtor. The SEC analysis of the legislative history, however,demonstrates that the view of SIPC that the cash/securities distinction is "integral" to the Act, ishistorically incorrect. As explained by the SEC, the different coverage levels for cash and securitieswere grafted onto a single provision of the Act [SIPA 78fff-3(b)] in the final moments prior toSIPA's enactment for extrinsic reasons unrelated to the Act's principal remedial purposes and onlyafter the supposedly interrelated provisions had already been finalized. SEC Brief at 11-12. However"reasonable" SIPC's desire to find "cash-versus-securities" consistency within disparate statutory

3 We also note, as SIPC has conceded, that the issue presented on appeal is a matter of first impression inthe Circuit. Although SIPC suggests that the claim classification of fictitious securities has been routinely litigated,such is not the case. Given the unpersuasive and distinguishable sparse judicial record on the question presentedon appeal (as noted by the SEC, SEC Brief at 15), it is hardly surprising that the SEC hm not "weighed in" on thesespecific issues in the past. As reflected in the SEC's amicus position in this case, the SEC believes that the issuesraised can be resolved as a matter of statutory construction, absent the need for promulgation of any furtherregulations. Given the SEC's undisputed supervisory role over SIPC, the fact that the SEC (although a party to theseproceedings) has chosen to express its views through the amicus filing does not detract from the weight to beaccorded such views.


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provisions serving very different purposes, the effort results in "undermin[ing] the fundameiatal goal ofSIPA[.]" SEC Brief at 14.

Furthermore, the SEC's analysis implicitly rejects the "policy reasons" pertaining to thewider issues of securities regulation (as to which the SEC has singular expertise) which were used by.SIPC to support its approach and instead properly takes into account the actual remedial purpose ofthe Act. The SEC Position also draws the power of persuasion from the ameliorative effect of the SECapproach on the grossly disparate treatment of like-situated customers which results from SIPC'sposition. This Circuit has consistently been attentive to the admonition of the Supreme Court thatstatutes should be interpreted to avoid to avoid untenable distinctions and unreasonable resultswhenever possible. Elliot Associates, L.P. v. Banco de la Nacion, 194 F.3d 363,371 (2d Cir.1999) (citing American Tobacco Co. v. Patterson, 456 U.S. 63, 71 (1982)).

Consistency. The positions taken by the SEC Brief are consistent with thelongstanding policy, which finds expression in the Series 500 Rules, that the overarching purpose of theAct - promoting confidence in the securities markets- is best served when customers of broker dealersare protected in their reliance upon written confirmations and account statements. In contrast, theSIPC position is at odds with this fundamental purpose and gives unseemly consequence to thecapricious and criminally motivated conduct of the broker-dealer rather than to any cognizable criterionpertaining either to customer conduct, losses or expectations. Thus, the SEC is now articulating, at therequest of the Court, a uniform approach to all claims involving the purported (but non-occurring)purchase of securities (actual and fictitious) on behalf of statutory customers of a broker dealer. Underthese _ircumstances, there is no reason to withhold deference merely because the SEC has notpreviously publically weighed in on this infrequently litigated issue.

Expertise. The SEC is the agency charged with oversight of the nation's securitiesmarkets. PBW Stock Exchange, lnc. v. S.E.C., 485 F.2d 718, 722 (3d Cir. 1973) ("It]he ExchangeAct was carefully structured to give the [SEC] powers sufficiently broad that it could effectively overseethe securities industry"). The SEC's broad oversight, of which its oversight of SIPC is a part, extendsto the regulation of broker-dealers, the administration of securities exchanges, and the protection of theinvesting public. See Robert W. Stark, Jr., Inc. v. New York Stock Exchange, Inc., 346 F. Supp.217, 227 (S.D.N.Y. 1972); S.E.C.v. Blinder, Robinson & Co., Inc., 681 F. Supp. 1, 4 (D.D.C.1987) ("It]he SEC is charged with overseeing the securities industry and preventing fraud in the tradingof stocks and bonds"); Chris-Craft Industries, Inc. v. Piper Aircraft Corp., 480 F.2d 341 (2dCir. 1973) (the SEC entrusted with "primary responsibility of protecting the public interest under thefederal securities laws").

The SEC thus has vast experience and great expertise in respect of the issues andpolicies presented in this case. Clearly, the SEC is uniquely qualified to express an opinion as to what


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sort of investments should constitute claims "for securities" under SIPA and to weigh the broaderimpact of the treatment of these customers'claims on the nation's securities markets.

D. The Court Alternatively Need Not Reach the Issue of Deferenceto be Afforded to the SEC's Opinion on the Applicability of the Series 500 Rules; the Rulesare Clear on their Face. As formal regulations promulgated aRer a notice and comment procedureby an agency (the SEC) entrusted to administer a statutory scheme (SIPA) and to which there isexpress Congressional authorization to engage in rule-making, the Series 500 Rules are precisely thekind of agency interpretation of a statute which calls for full Chevron deference. Before even reachingthe issue of deference, however, in interpreting a regulation promulgated in accordance with acongressional delegation of rule-making authority, a court must find that the regulation is ambiguous asto application to the issue in controversy. Christensen v. Harris County, 529 U.S. 576, 588 (2000)(declining to accord deference to agency interpretation of its own regulation where regulation, on itsface, was not ambiguous); Shalala v. St. Paul-Ramsey Medical Center, 50 F.3d 522 (Sth Cir. 1995)(although exceptionally deferential standard applies to an agency's interpretation of its own regulation,agency is not permitted to imply additional unstated requirements). It is respectfully submitted that theSeries 500 Rules apply on their face to the issue on appeal and are not ambiguous. As the DistrictCourt held and as argued by Claimants in their Brief on appeal, the Series 500 Rules, by their plainlanguage, apply to the classification issue presented here. Brief for Claimants Appellees at pp. 11-14.While that the SEC points out that the history of the promulgation of the Rules shows that the Ruleswere directed to uncertainties arising with respect to trades which straddled the filing date, thisregulatory history does dot permit the application of the Rules to be limited to such circumstanceswhere the plain language of the regulation has a broader application. Notably, in support of its positionthat the Series 500 Rules do not apply here, the SEC Brief relies exclusively on the circumstances oftheir adoption and makes no arguments based on the text of the Rules themselves. See SEC Brief at18.

Like the SEC, SIPC relies primarily on the promulgating history of the Series 500 Rulesto argue that they do not apply here. SIPC Brief, at pp. 31-32. Additionally, SIPC makes a textualargument based upon Rule 500 of the Series 500 Rules which states that the Series 500 Rules "will beapplied in determining whether a securities transaction gives rise to a 'claim for cash' or a 'claim forsecurities[.]'" 17 C.F.R. 300.500 (emphasis added). SIPC's only textual argument consists of anassertion that it is implicit in the language of Rule 500 that the applicability of the Rules is limited to an"actual" securities transaction or that "a 'securities transaction' must exist." Id. This assertion as to thelimiting implications of the term "securities transaction" cannot withstand examination of the Rules. Tothe contrary, the Series 500 Rules are explicitly directed to "non-existent securities transactions" --circumstances where a customer has authorized a transaction (either a purchase or sale of securities),such transaction has been erroneously confirmed, but where no transaction, much less a securitiestransaction, has taken place at all. In such instances, the Rules classify the customer claim as if the


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transaction had occurred provided that a confirmation of the non-occurring "transaction" was sent bythe broker-dealer. Appellees' Brief at 12.

Should the Court agree that the Rules are clear on their face, it is submitted that theCourt need not reach the issue of the appropriate level of deference. Claimants do not dispute that if,on the other hand, the Court finds that Rule 500 is ambiguous as to the applicability of the Series 500Rules, Chevron deference is owed to the SEC's interpretation. Where a regulation is ambiguous as tothe precise issue in contest, an agency's interpretation of its own regulation is controlling unless it isclearly erroneous. Auer v. Robbins, 519 U.S. 452 (1997).

E. No Deference is Due to Either SIPC or the Trustee on Issues of StatutoryInterpretation. In contrast to the deference owed to the SEC Positions stated in the SEC Brief, for anumber of reasons, absolutely no judicial deference can be afforded to the position of either SIPC orthe Trustee with respect to the construction of SIPA. The very statutory provision creating SIPCpointedly states: "There is hereby established a body corporate to be known as the "Securities InvestorProtection Corporation" (hereat_er... referred to as "SIPC")... SIPC shall not be an agency orestablishment of the United States Government." SIPC 78ccc(a). Closely related to this firstobstacle to deference, is the absence of the underlying rationale for all degrees of judicial deference: theimplicit or explicit intent of Congress to delegate interpretive or legislative authority. See Chevron, 467U.S. at 844 ("[w]e have long recognized that considerable weight should be accorded to an executivedepartment's construction of a statutory scheme it is entrusted to administer"). 4 Although the Actcontemplates that the SIPC maypropose rules for adoption, the SEC has exclusive authority over thepromulgation of such rules. Such promulgation is to follow an SEC determination that any suchproposed rule "is in the public interest and is consistent with the purposes of SIPA."

Rather than being entrusted to administer or interpret SIPA, SIPC functions as acomponent within a statutory scheme whose administration and interpretation has been delegated to theSEC to whom is also given "plenary authority to supervise SIPC." Barbour, 421 U.S. at 417. While aSIPA trustee is given an active role in a SIPA liquidation, nothing in SIPA suggests that the Trustee hasany discretion in the performance of the duties at issue here: to "discharge .... all obligations of thedebtor to a customer relating to, or net equity claims based upon, securities or cash [.]" Notably, SIPAprovides that any person aggrieved by a claim determination by a SIPA trustee (who, as discussedbelow, are dominated by SIPC) is entitled to seek a final adjudication of such claim by the bankruptcycourt. The availability of such judicial review is "at odds" with any suggestion of deference. See Mead,533 U.S. at 232-33. Moreover, we are aware of no case law affording judicial deference to statutoryinterpretations by SIPC.

4 SIPA 78eee(5)(C)( "Recommendation of SIPC and awarding of allowances") has been interpreted torequire some judicial deference to SIPC on the limited issue of compensation for services rendered by a trustee andhis attorney in the liquidation of an estate. See. In re Lloyd Securities, Inc., 163 B.R. 242.


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It is anticipated that SIPC will call attention to its institutional experience wi_ the Actand its resulting "expertise." Mere expertise, however, is not a basis for judicial deference in theabsence of Congressional delegation. Moreover, such expertise and experience must be viewed incontext; SIPC has discrete functions within the statutory scheme and its interests and objectives as aninstitution are by no means identical to the public interests to be advanced by the Act. Rather thanaccording to SIPC any deference as to its positions on customer claims, SIPC positions should beviewed in light of the inherent conflict of interest in SIPA itself, between the role of SIPC as theguardian of the SIPC Fund (established pursuant to SIPA 78ddd(a)) and the role of SIPC in thedetermination and evaluation of customer claims. In this connection, it is important to understand thatwhile the trustee appointed in a SIPA liquidation is nominally "disinterested," SIPC may name thetrustee and may even name itself as trustee. SIPA 78eee(b)(3), (6). In addition, SIPC effectivelycontrols the trustee's compensation. SIPA 78eee(b)(5). See JA-746 (noting that SIPC has advanced$2 million for Trustee's attorneys' fees in this case.) Indeed, it has been observed that the provisions ofSIPA have the effect of"assuring [the Trustee's] domination and control by SIPC." In re First StateSecurities Corp., 39 B.R. 26, 27 (Bankr. S.D.FIa. 1984). In this proceeding, the Trustee and SIPChave acted at all times in unison with no discemable disparities as to position and the Trustee hasroutinely awaited SIPC's approval before taking any positionJ Thus, the nominal "disinterestedness"of the Trustee does nothing to meliorate the inherent conflict of interest in having SIPC play a role in thedetermination of claims to be paid from the SIPA Fund. This inherent conflict and its impact of theclaims resolution process was observed as early as 1978. The legislative history of the 1978amendments finds the observation that "[SIPC] has, during its brief existence, shown itself to be highlyconcerned with protecting the SIPC trust fund. There is a built-in conflict of interest with the trusteepressing strongly for recognition of customer claims and SIPC, except in the clearest of cases, resistingany claims based upon principles which would expand its liability." Hearings Before the Subcommitteeon Securities of the Committee on Banking, Housing and Urban Affairs, United States Senate, on H.R.8331 (April 25, 1978), 173. Furthermore, another witness before the Senate Committee testified that"SIPC has perverted the Act by dominating the trustee" and that "an irresolvable conflict of interestexists under the present SIPC Act." [d. at 134-135. While to the extent that the conflict of interest isbuilt into SIPA, this conflict must not be exacerbated by a misapplication of a doctrine or policy ofjudicial deference to the claim determinations made by the SIPC dominated trustees in claimdetermination proceedings.

In short, this Court should view with extreme skepticism the claim of either the Trusteeor SIPC that they are only concerned with acting within the strictures of the Act and that the SEC, its

5 It also should be noted that SIPC has been frequently criticized for taking the narrowest possibleconstruction of i ts abili ty to compensate victims of brokerage house theft and misappropriation, raising seriousquestions as to whether SIPC (with a billion dollar fund) is completely adrift from its mandate. See. e.g., Morgenson,Gretchin, "Many Holes Weaken Safety Net for Victims of Failed Brokerages," The New York Times, September 25,2000, at A-1.


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oversight agency, somehow has misunderstood SIPA's mandate and provisions oft.he Act. In view ofthe statutory scheme, we submit that the SIPC should have deferred here to the SEC Positions. SIPC,having for whatever reasons chosen to oppose the SEC, the Court nonetheless, under the applicableSupreme Court precedents should accord substantial deference to the SEC Positions, or alternatively,apply the plain language of the SEC's duly promulgated Series 500 Rules to the issue on appeal.

Respectfully submitted,

Sigtrfund S. Wissner-Gross

cc: All Counsel (via fax)

sec authority over sipc

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