# Petition — Securities Investor Protection Corp. v. Massachusetts Financial Services, Inc.

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition
- **Published:** January 1, 1977
- **Citation:** 431 U.S. 904

## Text

I L & D eke?
FEB 2< 1977
IN THE _ LMICHAEL RODAK, JR., CLERK
Supreme Court of the United States zy.

OcroBER TERM, 1976

N %671197

SECURITIES INVESTOR PROTECTION CORPORATION,
Petitioner

v.

MAssACHUSETTS FINANCIAL SERVICES, INC.,
Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS FOR THE
FIRST CIRCUIT

THEopoRE H. Focut
General Counsel
SECURITIES INVESTOR PROTECTION
CoRPORATION
900 Seventeenth Street, N.W.
Washington, D.C. 20006

Attorney for Petitioner
Of Counsel:

WiFrep R. Caron
Associate General Counsel

F Wru1aM H. Seckincer
Senior Attorney

Kevin H. BEL.

ee

Paumes oy Brzon S. Adams PRintina, Inc., WASHINGTON, D. C.

Page

I oe ees Pie ednnd dda eehdeesescenes 1
6 ee ee eases Whee eeeooeees 2
ete, 6. cee iwhe eens vise Ss hou ne 2
Statutory Provisions Involved ..................0: 3
i ae toon damenentesecedese 4
Nature of Case, Proceedings Below .............. 4
Sn EE Ne Tia tas need peGnbdneeseuedee su dees +
i hike Deas es ed a hadatseebebendos 4)
Summary of SIPA Funding Scheme ................ 6
Reasons for Granting the Writ ..................... 8

The Proper Construction of Section 3(a)(2) Is Im-
portant to the Administration of SIPA, and the
Protection of the Public. The Decision Below
Results in Non-Uniform Membership Standards
and Conflicts with the Intent of Congress ..... 8

A. The Decision of the Court of Appeals Results in
Non-Uniform, Criteria for SIPC Membership
Throughout the Nation, Impedes the Growth of
SIPC’s Funds and the Scope of SIPA Protec-
tion for the Public, and Increases Administra-

EE nS bda csc ccve ded i ddveesceSotuse 8
Conflict—Lack of Uniformity .............. 8
Administrative Burdens ................... 9
Effect on SIPC and Treasury Funds ........ 9
Effect on Customer Protection ............. 10

B. The Construction Adopted by the Court of Ap-
peals Produces Incongruities in Section 3(a) (2),
Conflicts with Other Relevant SIPA Provisions,
and Fails To Effectuate the Intent of Congress
as Revealed by SIPA and Its Legislative History 10

Applicable Principles of Construction ....... 11
The Statutory Language .................. 13
EET otc tacesgncgccuentinae 18

ii | Index Continued

Page
SEC and Industry Bills ................. 18
The Genesis of Section 3(a)(2) .......... 20
The Intent of Section 3(a)(2) ............ 21
PPP TTT Teer eter TT tc ttt 25
AGT © n.nnc dk cctncccnccdacecsccdacogutttecawtee 27
TABLE OF AUTHORITIES
CasEs:
Abbott Laboratories v. Portland Retail Druggists Ass’n,
— fit BY: Fe ere rrr rrr rr 12
Atlantic Cleaners & Dyers v. United States, 286 U.S.
REI re Ea ee ee errr 12
Boston Sand & Gravel Co. v. United States, 278 U.S. 41
SEED <ccbidedecdisunesctetieceubeenseneuseets 11
Boys Market, Inc. v. Retail Clerk’s Union, 398 U.S. 235
SEE S.cdb ceo sundccekwcidenybowiaguercsaneasss 13
Clark v. Uebersee Finanz-Korporation, A.G., 322 U.S.
RR er ee re re eee 13
Corning Glass Works v. Brennan, 417 U.S. 188 (1974)

12, 13

Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976). ..13, 18
Farmers Reservoir & Irrigation Co. v. McComb, 337

fe Free eS oe ee ee 11, 12
First Atlantic Investment Advisory Corp., [1973-1974
Transfer Binder] Fed. Sec. L. Rep. (CCH) { 79,476

(S.E.C. Div. Mkt. Reg., February 20, 1974) ...... 15

Harrison v. Northern Trust Co., 317 U.S. 476 (1943).. 11

Helvering v. New York Trust Co., 292 U.S. 455 (1934) 11
Henry C. Coppelt dba May Pac Management Co., [1973-
1974 Transfer Binder] Fed. Sec. L. Rep. (CCH)

§ 79,814 (S.E.C. Div. Mkt. Reg., May 13, 1974) .. 17
Lawson v. Suwanee Fruit & Steamship Co., 336 U.S.

Ba Se ra Se ee 11
Markham v. Cabell, 326 U.S. 404 (1945) ............. 11
Mastro Plasties Corp. v. NLRB, 350 U.S. 270 (1956) .11, 13
NLRB v. Lion Oil Co., 352 U.S. 282 (1957) ......... 11,15
Peyton v. Rowe, 391 U.S. 54 (1968) ................ 12

A. H. Phillips, Ine. v. Walling, 324 U.S. 490 (1945) ... 12
Piedmont & Northern Ry. Co. v. ICC, 286 U.S. 299
EMD 46.644 4040060666n0qs0ne0Raebencaeie eness 12
SEC v. Ralston Purina Co., 346 U.S. 119 (1953) ..... 12
SEC v. Variable Annuity Ins. Co., 359 U.S. 65 (1959) 15

Table of Authorities Continued iii
Page
SIPC v. Barbour, 421 U.S. 412 (1975) .............. 6
aa & Co., Civ. No. 76-1061 (D.D.C.
DU ditiks Chh Leanne hahaa aed bbe0eee tense 8
Spokane & Inland Empire R. Co. v. United States, 241
I es ea Ae i ceseceeee 12
Tcherepnin v. Knight, 389 U.S. 332 (1967) .......... 12
United States v. American Trucking Ass’ns, 310 U.S.
ET cies ie eth bleedin chaeniene sp eeeee eee 11
United States v. Dickerson, 310 U.S. 554 gl ébewe 11
United States v. First City National Bank, 386 U.S.
ty DE oiieten themes ees detained Wansoeees se 12
United States v. Menasche, 348 U.S. 528 (1955) ...... 13
United States v. Public Utilities Commission, 345 U.S.
EE td inl ot eee bbe da dmaede tens 0c 12
United States v. Raynor, 302 U.S. 540 (1938) ........ 13
United States v. Universal C.I.T. Credit Corp., 344
ESET ep EP 13

Walling v. Jacksonville Paper Co., 317 U.S. 564 (1943) 12
Westfield Securities Company v. SIPC, Civ. No. C-2-

RO eee 8
wa v. Vinton Branch of Mountain Trust Bank, 300
i hile ea ie han a ea og ams 13
STATUTEs:
Securities Exchange Act of 1934
re en ie. ccobeees 14
§ 3(a)(4) [15 U.S.C. § 78e(a)(4)] ............. 13, 14
$ 3(a)(5) [15 U.S.C. § 78e(a)(5)] ............. 13, 14

Securities Investor Protection Act of 1970, Pub. L. No.
91-598, 84 Stat. 1636, 15 U.S.C. § 78aaa et seq. (1970)

asl 4 kk SD RE errereree 14
§ 3(a)(2) [15 U.S.C. § 78ece(a)(2)]....... 2, 3, 4, 5, 6,
7, 8, 9, 10, 13, 14, 15, 16, 17, 22, 23, 24, 25, 26

§ 3(a)(2)(B) [15 U.S.C. § 78ece(a)(2)(B)] ..... 15
§ 4(a)(2) [15 U.S.C. § 78ddd(a)(2)] ............ 6
§ 4(c)(2) [15 U.S.C. Jf reaaate) (9) kecneesies 6
§ 4(c)(3)(C) [15 U.S.C. § 78ddd(e)(3)(C)]....3, 5,7,
16, 22, 25

§ 4(d) (1) (A) (i) ie S.C. § 78ddd(d)(1)(A)(i)] 6
4(d)(1)(A) (ii) [15 U.S.C. § 78ddd(d)(1)(A)(ii)] 7

iv ) Table of Authorities Continued

Page

§ 4(g) [15 U.S.C. § T8ddd(g)] .....-..-.--eeeee 7

§ 4(h) [15 U.S.C. § 78ddd(h)] .............2-0-s 7

§ 4(i)(1) [15 U.S.C. § 78ddd(i)(1)]....... 2, 3, 4, 5, 6,

7, 9, 16, 17, 22, 23, 25, 26

§ 5(a)(2) [15 U.S.C. § 78eee(a) (2)] Sudésnboudas 10

§ 7(b) [15 U.S.C. i PGND sc ccinecacéetaciwe 8

§$ 7(c)(2) [15 U.S.C. § Bepe(c)(2)1 + <tetipintawces 9

§ 7(d) [15 U.S.C. § “T8gee(d)] ‘cannineddeswoiin 14

8S [15 UAE. © FEE co ccddcccccvacdessecends 7

6 Ofna) (RS DAO. § TRONS oc vcccdccvovsctscds 7

8 10(a) [35 UBC. § TERRORS occwcccdvcscceccs 8

3S UGG, BGS os cic cccecsuinenscoomessaceneuanee 4

93 UBC. 6 TERRIER) .cccccosccececeuecsscseneul 2
OtrHer AUTHORITIES:

116 Cong. Ree. 39364 (1970) .......cecvcccceccececs 23

136 Comm, Wee. GEER CORCG co cccvseccesceugesesaaet 23

136 Comp. Blan. GRRGO CHBGGD oc ccccccscsucbccveueuse 24

116 Cong. Ree. 40872, 40873 and 40877 (1970) ........ 24

116 Cong. Rec. 43075, 43234 (1970) ................. 24

Hearings on H.R. 13308, H.R. 17585, H.R. 18081, H.R.
18109, H.R. 18158 Before the Subecomm, on Com-
merce and Finance of the House Comm. on Inter-
state and Foreign Commerce, 91st Cong., 2d Sess.

(DRUG ac vcvccencceecestennvenranenl 18, 19, 20, 21
H.R. 18081, 91st Cong., 2d Sess. (1970) .......... 14, 18, 19
H.R. 18109, 91st Cong., 2d Sess. (1970) .......... 14, 18, i9
H.R. 18458, 91st Cong., 2d Sess. (1970) ............. 14, 19
H.R. 19333, 91st Cong., 2d Sess. (1970) .............. 21

H.R. Rep. No. 91-1613, 91st Cong., 2d Sess. (1970) .21, 22, 23
H.R. Rep. No. 91-1788, 91st Cong., 2d Sess. (1970). . .24, 25

Hearings on 8S. 2348, S. 3988, S. 3989 Before the Sub-
comm, on Securities of the Senate Comm. on Bank-
ing and Currency, 91st Cong., 2d Sess. (1970) . .18, 19,

20, 21
S. 2348, 91st Cong., 2d Sess. (1970) .............-.. 23
IT L. Loss, Securtrres Recunation (2d ed. 1961) ..... 15

5 Garo Auu. Bar. (2006) .....0sceseseneeseeeee 9

IN THE

Supreme Court of the United States

OctToBer TERM, 1976

No.

SECURITIES INVESTOR PROTECTION CORPORATION,
Petitioner

Vv.

MASSACHUSETTS FINANCIAL SERvIcEs, INC.,
Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS FOR THE
FIRST CIRCUIT

Petitioner Securities Investor Protection Corpora-
tion (‘‘SIPC’’) respectfully prays that a writ of cer-
tiorari issue to review the judgment of the Court of
Appeals for the First Circuit entered December 1,
1976.

OPINIONS BELOW

The opinion of the Court of Appeals, revorted at
545 F.2d 754 (1st Cir. 1976), and its judgment are re-
spectively printed as Appendix A and B hereto. The
opinion of the District Court, reported at 411 F. Supp.
411 (D. Mass. 1976), is printed as Appendix C hereto.

2

By agreement of the parties, no action will be taken
pursuant to the mandate of the Court of Appeals until
this petition is determined. The jurisdiction of this
Court is invoked under 28 U.S.C. § 1254(1).

QUESTION PRESENTED

Section 3(a)(2) of the Securities Investor Protec-
tion Act of 1970 (‘‘SIPA’’)’ requires all registered
broker-dealers and members of national securities ex-
changes to be members of SIPC, except those whose
‘*business as a broker or dealer consists exclusively”
of one or more specified lines of business. Members
must pay assessments on their revenues from the se-
curities business as defined in section 4(i)(1), not-
withstanding that the conduct of some of that business
does not require registration as a broker-dealer under
the Securities Exchange Act of 1934 (‘‘1934 Act’’).’

The question presented is:

Whether section 3(a) (2) of SIPA exempts a reg-
istered broker-dealer from paying assessments
on revenues defined as assessable under section
4(i)(1) of SIPA, merely because the segment of
its business which requires registration as a broker-
dealer would exempt it from SIPC membership
under section 3(a)(2) if its business as a broker-
dealer consisted exclusively of that segment.

Pub. L. No. 91-598, § 3(a) (2), 84 Stat. 1637 (1970). Herein-
after all citations to SIPA will be to Statutes at Large.

715 U.S.C. § 78a et seq.

3

STATUTORY PROVISIONS INVOLVED

Section 3(a)(2) of SIPA provides, in pertinent
part:

(a) Creation.—There is hereby established a body
corporate to be known as ‘‘Securities Investor
Protection Corporation’’ (hereafter in this chap-
ter referred to as ‘‘SIPC’’). SIPC shall be a non-
profit corporation and shall have succession until
dissolved by act of the Congress. SIPC shall—

(2) be a membership corporation the members
of which shall be—

(A) all persons registered as brokers or deal-
ers under section 15(b) of the 1934 Act, and

(B) all persons who are members of a na-
tional securities exchange,

other than persons whose business as a broker or
dealer consists exclusively of (i) the distribution
of shares of registered open end investment com-
panies or unit investment trusts, (ii) the sale of
variable annuities, (iii) the business of insurance,
or (iv) the business of rendering investment ad-
visory services to one or more registered invest-
ment companies or insurance company separate
accounts; ....

Also directly involved are sections 4(¢)(3)(C) and
4(i)(1), reproduced in Appendix D hereto. Following
are descriptions of the material aspects of each.

Assessable Non-Broker-Dealer Activities—Sec-
tion 4(i)(1) assesses some business not exempt
under section 3(a)(2) and which does not require
registration as a broker-dealer under the 1934 Act.

Exclusions From Assessments—Section 4(c) (3)
(C) prohibits assessments on activities which are

4

exempt under section 3(a) (2), and seetion 4(i) (1)
excludes revenues from such activities from the
definition of assessable gross revenues.

STATEMENT OF THE CASE _
Nature of Case, Proceedings Below

Respondent Massachusetts Financial Services, Inc.
(““MFS”’) had paid SIPC approximately $5,000 in
assessments for 1972 and 1973. In accordance with sec-
tion 10(a) of SIPA, MFS sued SIPC to recover the
assessments and sought judgment declaring that it had
not been a member of SIPC. Both MF'S and SIPC
moved for summary judgment based on stipulated
facts. The District Court granted judgment for MFS,
and the Court of Appeals affirmed.

The Facts

SIPA became effective on December 30, 1970. At
that time MF'S was registered as an investment adviser
under the Investment Advisers Act of 1940, 15 U.S.C.
§ 80b-1 et seq. It did not register as a broker-dealer
under the 1934 Act until December 24, 1972.

Since passage of SIPA the securities business of
MFS has included investment management services
and investment advice to (i) registered open-end in-
vestment companies (‘‘Mutual Funds”), as well as
(ii) private clients such as employee benefit funds,
individuals and institutions.

Prior to its broker-dealer registration MFS ar-
ranged for the distribution of Mutual Fund shares
through other broker-dealers. MFS registered as a
broker-dealer so that it could distribute such shares

5

itself. MEFS’ revenues since then may be classified as
follows for SIPA assessment purposes:

Exempt—Mutual Fund activities not assessable
under sections 4(¢c)(3)(C) and 4(i)(1).

Non-Exempt—Investment advice to clients other
than Mutual Funds, defined as assessable under
section 4(i) (1) and not exempt under sections 3(a)

(2) or 4(¢)(3)(C).

MFS reported revenues of $12,850,325 from its 1973
securities business, of which $1,056,048 was assessable.
It paid an assessment of $5,280 at the statutory rate of
.005 percent. Thus, MEFS’ contribution to the SIPA
program was .0004 percent of its 1973 revenues. It
reported assessable revenue for 1972 of only $16,378
on which it paid an $88 assessment. All payments were
made under protest.

Opinions Below

The opinion of the Court of Appeals is ow
appealing but lacks meaningful analysis of the rele-
vant provisions of SIPA, including section 3(a) (2), or
its legislative history. Many points in SIPC’s brief
were unanswered save by the cryptic statement that
‘*SIPC has not met its burden . . . of showing why the
crucial statutory language (‘whose business as a broker
or dealer’) should not'be given its ordinary meaning.”’
(App. 5a n.3). The Court did not explain ‘‘ordinary
meaning’’ beyond a reference to 1934 Act definitions of
‘*broker’’ and ‘‘dealer” (App. 5a).

As will be demonstrated, the construction adopted
below lacks the preliminary advantage of resting on
language which is unambiguous in context. Further,

6

it (i) produces incongruities in section 3(a) (2) itself,
and inconsistencies between it and section 4; and (ii)
eviscerates the intent and purpose of Congress to
assess all registered broker-dealers and exchange
members as a class on their ‘‘gross revenues from the
securities business’’, as defined in section 4(i) (1).

The District Court’s rationale reflects an additional
element. Because SIPA was meant to protect custo-
mers whose brokers carry their cash or securities, the
District Court held: ‘‘It seems logical, therefore, that
membership in 8.1.P.C. was limited to that phase of
the industry where the risk was felt most directly.”’
(App. 17a). As will be demonstrated, membership was
not limited to such broker-dealers.

SUMMARY OF SIPA FUNDING SCHEME

This Court is familiar with the history and purposes
of SIPA. SIPC v. Barbour, 421 U.S. 412 (1975).

SIPC must build its fund to at least $150 million.
Sections 4(a)(2) and 4(d)(1)(A)(i). Until it does,
all members of SIPC must be assessed not less than 4
of one percent of gross revenues from the securities
business, as defined in section 4(i)(1) [hereinafter
‘“‘Gross Revenues’’]. Section 4(d)(1)(A)(i). SIPC
may eventually classify members at varied rates of as-
sessment. Section 4(c)(2). It may then take into
account such factors as ‘‘the nature of their activi-
ties ... and the consequent risks.’’ Jd. Thus, SIPA
looks to the risk to customers solely to determine ap-
propriate assessments, not membership.

Assessable Gross Revenues are defined in section
4(i)(1) to inelude all securities-related revenues, in-
cluding those from activities which may be conducted

7

by persons other than registered broker-dealers. Con-
gress excluded only revenues from (i) the distribution
of shares of Mutual Funds and unit investment trusts,
(ii) the sale of variable annuities, (iii) the business
of insurance and (iv) investment advice to Mutual
Funds and insurance company separate accounts. Sec-
tions 3(a) (2), 4(¢)(3)(C) and 4(i) (1).

The responsibility for collecting assessments falls
primarily on the stock exchanges and the National
Association of Securities Dealers, Inc. (‘‘NASD’’)
with whom their member firms (who are SIPC mem-
bers) must file assessment-related repqrts and informa-
tion. Sections 8 and 9(a).

In ease of a crisis which SIPC’s funds cannot meet,
SIPC may borrow up to $1 billion dollars from the
United States. Sections 4(g) and (h). SIPA assures
repayment by controlling assessments [section 4(d)
(1)(A)(i)], and by authorizing the SEC to impose
a transaction fee upon purchasers of equity securities.
Section 4(g). Thus, even the investing public may be
required to support the SIPA program.

8

REASONS FOR GRANTING THE WRIT

THE PROPER CONSTRUCTION OF SECTION Xa)(2) IS IM-
PORTANT TO THE ADMINISTRATION OF SIPA, AND THE
PROTECTION OF THE PUBLIC. THE DECISION BELOW
RESULTS IN NON-UNIFORM MEMBERSHIP STANDARDS
AND CONFLICTS WITH THE INTENT OF CONGRESS.

A. The Decision of the Court of Appeals Results in Non-Uni-
form Criteria for SIPC Membership Throughout the Na-
tion, Impedes the Growth of SIPC’s Funds and the Scope
of SEPA Protection for the Public, and Burdens SIPA’s
Administration.

In 1975, this Court reversed an erroneous construc-
tion of section 7(b) which threatened disruption of
SIPA’s mechanism for the surveillance and orderly
liquidation of SIPC members. Now, an erroneous
construction of seetion 3(a)(2) endangers the fund-
ing of the SEPA program and the protection of public
investors, and results in uncertainty and conflict in the
application of section 3(a) (2).

Conflict—Lack of Uniformity.

With respect, SIPC has declined to follow the de-
cision below in any other Cireuit. Thus far, pursuant
to section 10(a) SIPC has enforced its view against
firms based in New York and Ohio. Litigation has
resulted in both cases, each firm relying on the deci-
sions below.’ It is impossible to project the industry-
wide dimension of the problem.

The conflict is exacerbated where firms conduct busi-
ness in more than one Circuit. Thus, one Philadelphia
firm with a Boston branch could possibly benefit from
the decision below, whereas another with no First Cir-

* SIPC v. Georgeson & Co., Civ. No. 76-1061 (D.D.C. 1976) ;

Westfield Securities Company v. SIPC, Civ. No. C-2-77-103 (S.D.
Ohio 1977).

9

cuit nexus would be bound by SIPC’s view unless re-
jected by the Third Circuit. There will be conflict, con-
fusion and inequality in the interpretation and appli-
eation of section 3(a)(2) until this Court resolves the
issue.

Administrative Burdens.

The exchanges and the NASD (as well as SIPC)
must collect assessments in accordance with SIPA, as
construed. In the First Circuit, when firms claim out-
right exemption it will now be necessary to determine
[a] which of their assessable revenues under section
4(i)(1) are derived from business technically asso-
ciated with the ‘‘broker or dealer’’ function under the
1934 Act, and then [b] whether such activities fall en-
tirely within business specified in section 3(a)(2) of
SIPA. In other jurisdictions SIPC’s view (until
judicially rejected) will limit exemptions to those
firms which earn no revenues assessable under section
4(i)(1). There will be administrative difficulties in
the First Circuit, compounded by the problem of ap-
plying different standards elsewhere.

Effect on SIPC and Treasury Funds.

The effect of the decision below in terms of lost as-
sessments and litigation costs is presently indetermin-
able. The two litigated cases mentioned above involve
more than $100,000 aggregate assessments. Although
SIPC’s fund is substantial, after six years it still lags
behind the statutory minimum target of $150 million.
At year-end 1976 the balance was $116.2 million.‘ As

* At December 31, 1975 the SIPC Fund totalled $81.7 million.
5 SIPC Ann. Rep. 2 (1975). SIPC’s annual report for 1976 has
not yet been filed with the SEC pursuant to section 7(c)(2) of
SIPA.

10

of December 31, 1976 SIPC had advanced $52.7 mil-
lion net in the liquidation of 121 SIPC member firms.
Congress was greatly concerned that inadequate in-
dustry funding of the SIPA program would risk funds
of the United States (discussed infra at 20 n.30).
Clearly, constructions of section 3(a)(2) which under-
mine the broad industry assessment base contem-
plated by Congress can only draw federal exposure
closer.

Effect on Customer Protection.

The holding that a broker-dealer is not a member

of SIPC has implications beyond the financial effect
on the firm and SIPC. SIPC’s authority to protect
customers in SIPA proceedings is limited to custom-
ers of SIPC members. Section 5(a)(2). Just how
far the rationale of the Court of Appeals will adversely
affect the public is an imponderable, but it seems any
imwarranted erosion of SIPC’s membership conflicts
with the public interest and the intent of Congress.

B. The Construction Adopted by The Court Of Appeals Produces
Incongruities in Section 3(a)(2), Conflicts With Other Relevant
SIPA Provisions, And Fails To Effectuate The Intent of Con-
gress As Revealed By SIPA And Its Legislative History.

SIPC submits that the Court of Appeals reached
an erroneous result for two reasons. First, it found
the phrase ‘‘business as a broker or dealer’’ plain and
unambiguous, ascribing to it its ordinary meaning,
without perceiving that such a construction was in-
compatible with other portions of section 3(a)(2) and
the assessment scheme of section 4. If it was not per-
suaded of SIPC’s view based on the relevant statutory
provisions, it should have at least determined that an
ambiguity existed. Secondly, its appraisal of SIPA’s

11

legislative history as ‘‘polyvalent’’ fails to give due
weight to abundant legislative history which unequiv-
ocally sustains SIPC’s position in this case.

Applicable Principles Of Construction

‘fT |here is wisely no rule of law forbidding resort
to explanatory legislative history no matter how ‘clear
the words may appear on superficial examination.’ ”’
Harrison v. Northern Trust Co., 317 U.S. 476, 479
(1943).° ‘“‘The rule that, where the statute contains
no ambiguity, it must be taken literally and given ef-
fect according to its language .. .”’ has utility only
where it effectuates the intent of Congress. /Telvering
v. New York Trust Co., 292 U.S. 455, 464-465 (1934).
A literal interpretation of words read in isolation is
inappropriate, even where ‘‘such an interpretation is
possible.””’ NZRB v. Lion Oil Co., 352 U.S. 282, 288
(1957) ; Mastro Plastics Corp. v. NLRB, 350 U.S. 270,
285 (1956).° A construction at variance with the sta-
tutory purposes ‘‘is to be avoided unless the words
Congress has chosen clearly compel it.’’ Lion Oil Co.,
352 U.S. at 289.

Even 2 statutory definition will not be applied
to a provision of the same statute where it would
defeat the latter’s purpose. Lawson v. Suwanee
Fruit & Steamship Co., 336 U.S. 198, 201 (1949);
Farmers Reservoir & Irrigation Co. v. McComb,
337 U.S. 755, 764 (1949); see also, United States

5 See also, United States v. American Trucking Ass’ns, 310 U.S.
534, 543-544 (1940); United States v. Dickerson, 310 U.S. 554,
561-562 (1940); Boston Sand & Gravel Co. v. United States, 278
U.S. 41, 48 (1928).

* See also, United States v. American Trucking Ass’ns, 310 U.S.
at 542; Markham v. Cabell, 326 U.S. 404, 409 (1945).

12

v. Public Utilities Commission, 345 U.S. 295, 312
(1953). In the McComb case, this Court said: ‘‘And
we have, therefore, consistently refused to pervert the
process of interpretation by mechanically applying
definitions in unintended contexts.” 337 U.S. at 764.
Similarly, identical words (undefined) in different
sections of the same statute will be accorded different
meanings when necessary to achieve congressional
intent. Atlantic Cleaners & Dyers v. United States,
286 U.S. 427, 432-433 (1932).

Additional special principles are operative here.
First, there is ‘‘the familiar canon of statutory con-
struction that remedial legislation should be construed
broadly to effectuate its purposes.’’ Tcherepnin v.
Knight, 389 U.S. 332, 336 (1967).7 Second, there is
‘‘the elementary rule requiring that exceptions from a
general policy which a law embodies should be strictly
construed. ...’’ Spokane & Inland Empire R. Co. v.
United States, 241 U.S. 344, 350 (1916); Abbott Lab-
oratories, 425 U.S. at 12.° Exceptions must be limited
to the congressional purpose in creating them. Walling
v. Jacksonville Paper Co., 317 U.S. 564, 570-571 (1943).
The burden rests on the party claiming the exception.
Corning Glass Works v. Brennan, 417 U.S. 188, 196-
197 (1974).°

"See also, Abbott Laboratories v. Portland Retail Druggists
<sae) 425 U.S. 1, 12 (1976); Peyton v. Rowe, 391 U.S. 54, 65

5 See also, A. H. Phillips, Inc. v. Walling, 324 U.S. 490, 493
‘ a L — & Northern Ry. Co. v. ICC, 286 U.S. 299, 311-

* United States v. First City National Bank, 386 U.S. 361, 366
(1967) ; SEC v. Ralston Purina Co., 346 U.S. 119, 126 (1953).

13

‘“‘A construction that creates an inconsistency
should be avoided when a reasonable interpretation
can be adopted which will not do violence to the plain
words of the act, and will carry out the intention of
Congress.’’ United States v. Raynor, 302 U.S. 540, 547
(1938) .*°

Explanation of legislation ‘‘by a spokesman for its
drafters is significant.’’ Ernst & Ernst v. Hochfelder,
425 U.S. 185, 203 (1976). To the extent legislative his-
tory aids construction, all its varied parts should be
consulted. Wright v. Vinton Branch of Mountain
Trust Bank, 300 U.S. 440, 463 n.8 (1937) [committee
reports, explanations of sponsors, the evolution of bill
drafts and amendments, and debates expositive of the
statutory purpose]. In the final analysis, ‘‘a better
understanding of the phrase . . . can be obtained from
a consideration of the way in which Congress arrived
at the statutory language than from trying to reconcile
or establish preferences between the conflicting inter-
pretations of the Act by individual legislators or the
committee reports.’’ Corning Glass Works, 417 U.S.
at 198; see also, United States v. Universal C.I.T.
Credit Corp., 344 U.S. 218, 222 (1952).

The Statutory Language

SIPA does not define the phrase ‘‘business as a
broker or dealer’ employed in section 3(a) (2). In-
deed, the 1934 Act does not do so precisely. Sections
3(a)(4) and (5) of the 1934 Act merely define

% Boys Markets, Inc. v. Retail Clerk’s Union, 398 U.S. 235, 250
(1970) ; Lion Oil Co., 352 U.S. at 288; Mastro Plastics Corp., 350
U.S. at 285-286: United States v. Menasche, 348 U.S. 528, 538-539
(1955) ; Clark v. Uebersee Finanz-Korporation, A.G., 332 U.S. 480,

488-489 (1947).

14

‘‘broker”’ and ‘‘dealer’’ for purposes of that statute,
and as a result refer only to ‘‘transactions in securi-
ties.”’** They do not purport to describe all types of
securities business normally conducted by broker-
dealers. Indeed, as far as they go, those definitions
are not inflexible even for purposes of the 1934 Act.
Thus, the definitions under section 3(a) of the 1934
Act are qualified by the first sentence in that section,
namely, ‘‘When used in this chapter, unless the con-
text otherwise requires—’’.” Notwithstanding the ref-
erence to the 1934 Act in section 2 of SIPA”™ on which
the Court of Appeals relied, it is clear that section
3(a)(2) of SIPA should be construed as its own con-
text requires.

Even if section 3(a)(2) could properly be consid-
ered in isolation, it would show conclusively that
‘‘business as a broker or dealer’’ was not employed
in the technical 1934 Act sense. Congress specifically

1 Sections 3(a)(4) and (5) of the 1934 Act, 15 U.S.C. §§ 78e
(a) (4) and (5), provide:

(4) The term “‘broker’’ means any person engaged in
the business of effecting transactions in securities for the
account of others, but does not include a bank.

(5) The term ‘‘dealer’’ means any person engaged in
the business of buying and selling securities for his own
account, through a broker or otherwise, but does not in-
clude a bank, or any person insofar as he buys or sells
securities for his own account, either individually or in
some fiduciary capacity, but not as a part of a regular
business.

7215 U.S.C. § 78e(a). (Emphasis added).

18 SIPA is not an amendment to the 1934 Act, as is evident
from a comparison of section 2 with section 7(d) which explicitly
amends the 1934 Act. Also compare earlier bills which would
have made SIPA an amendment to the 1934 Act. H.R. 18109, 91st
Cong., 2d Sess. §§ 2, 3, 4 (1970) ; H.R. 18081, 91st Cong., 2d Sess.
§ 2 (1970) ; H.R. 18458, 91st Cong., 2nd Sess. § 2 (1970).

NO

EEO ee oe

15

employed that phrase im the broadest manner by in-
cluding in its scope the business of insurance and
investment advice. These are not conducted by
firms in their narrow capacity as broker-dealers.“
Kither Congress used the critical phrase in a broad
sense, as it clearly did, or it misused a technical
phrase despite its own definition of ‘‘broker’’ and
‘*dealer’’ for 1934 Act purposes. Not only does the
construction adopted below lead to the latter unlikely
conelusion, but also the equally unacceptable view that
Congress employed superfluous verbiage. Had it meant
to use the critical language technically, it would have
sufficed to exclude only lines of business technically
conducted as a broker or dealer, 1.¢., those specified in
section 3(a)(2)(i) and (ii). A technical usage would
automatically have excluded those in subdivisions
(iii) and (iv).

Again confining analysis to section 3(a) (2) in isola-
tion, the critical phrase does not refer to a broker or
dealer registered under the 1934 Act. Congress neces-
sarily omitted such a requirement since the phrase was
meant also to apply to exchange members who were
not registered.” Clearly, the language in question was
not tied to 1934 Act registration.

The Court of Appeals appears to have considered
section 3(a)(2) as a membership provision unrelated

4 See, SEC v. Variable Annuity Ins. Co., 359 U.S. 65 (1959) ;
First Atlantic Investment Advisory Corp., [1973-1974 Transfer
Binder] Fen. Sec. L. Rep. (CCH) { 79,746 (S.E.C. Div. Mkt. Reg.,
February 20, 1974).

15 Section 3(a)(2)(B). When SIPA was enacted, exchange mem-
bers could, under certain circumstances, do business as a broker
or dealer without being registered under the 1934 Act. II L. Loss,
SEcurRITIES REGULATION 1289 (2d ed. 1961).

16

to its function as part of the funding mechanism
of SIPA. A correct and harmonious interpreta-
tion of section 3(a)(2) requires that the inquiry
begin with section 4(i)(1) which prescribes the as-
sessable revenue base. With the exclusions speci-
fied, Congress was laying open to assessment the
gamut of securities business commonly conducted by
registered broker-dealers and exchange members, irre-
spective of which technical hat they wear in earning
their revenues. Thus, section 4(i)(1) sweeps into the
assessment scheme a great variety of revenues, includ-
ing revenue derived from business not technically
classifiable as ‘‘business as a broker or dealer’’—for
example, investment advisory services [subd. (F)],
proxy solicitations [subd. (G)] and investment bank-
ing [subd. (K) ].

The section 3(a)(2) exempting language is but one
of three provisions inserted in response to pressures
from the insurance and mutual fund industries (dis-
cussed infra at 20). That the section 3(a)(2) ex-
emption was merely intended to remove certain reve-
nues from assessment, in tandem with sections 4(c)
(3)(C) and 4(i)(1), is reasonably clear from SIPA
itself, and is crystal clear in the legislative history
(discussed infra, especially at 22).

Section 4(¢) (2) authorizes SIPC to assess all ‘‘gross
revenues from the securities business’’, subject to sec-
tion 4(c)(3) which prohibits [subd. (C)] assessments
based on the activities exempted by section 3(a) (2).
Section 4(¢) (3) (C) is a carbon copy of the description
of exempt business in section 3(a)(2). The theme is
carried forward by section 4(i)(1) which excludes
revenues from exempt activities from the definition
of ‘‘gross revenues from the securities business’’. The
simultaneous insertion of those three sections for pre-

17

cisely the same reason mandates an attempt to harmon-
ize their terms and legal effect.

Section 3(a)(2) is not the only one in which Con-
gress did not technically employ a particular phrase.
Section 4(i)(1) excludes ‘‘the business of insurance’”’
from the definition of gross revenues ‘‘from the securi-
ties business’’. Given the funding objectives of SIPA,
Congress displayed a proper lack of concern with
whether assessable revenue was derived from business
technically cowducted as a broker or dealer.

The only reasonable view of the crucial section 3(a)
(2) phrase is that it was meant to refer to the gamut
of securities business conducted by the two classes
of persons whose SIPC membership was mandated,
not as a limitation which would carve out of the
assessment scheme revenues specifically assessable un-
der section 4(i)(1). That interpretation would avoid
the inconsistency in section 3(a)(2), and the conflict
with section 4(i)(1), which the construction adopted
below forces on the statute. More important, it would
accord with the intent of Congress.

It is noteworthy that the SEC’s staff has construed
section 3(a)(2) in the manner urged by SIPC.”

16 Henry C. Coppelt dba May Pac Management Co., [1973-1974
Transfer Binder] Fep. Sec. L. Rep. (CCH) § 79,814 (S8.E.C. Div.
Mkt. Reg., May 13, 1974). In that case, the SEC’s response to an
inquiry included the following statement :

Similarly, your membership in SIPC is required by the
Securities Investor Protection Act of 1970 which provides
that SIPC’s membership shall consist of all registered
brokers and dealers and all members of nationa] securities
exchanges except those who deal exclusively in mutual
funds, variable annuities, the business of insurance or the
rendering of investment advice to investment companies
or insurance separate accounts. If your activities as a
broker are not confined to the exceptions stated, you are
required to pay the applicable SIPC assessments.

Id. at 84,201-202 (emphasis added).

18

Legislative History

SIPA was the product of close cooperation between
the SEC, the securities industry’s task force and the
Department of the Treasury.’ They sponsored and
drafted SIPA; their views are of particular signifi-
eance. Ernst & Ernst v. Hochfelder, 425. U.S. at 204
n.24. Before they agreed on a jointly sponsored. bill,
the SEC and the industry drafted separate bills.

SEC and Industry Bills

Under the industry’s bill” all registered broker-
dealers would be members of SIPC, unless later
exempted by the SEC.” The definition of assess-
able gross revenues included all Mutual Fund ac-
tivities.°° The Chairman of the industry task force,
currently a director of SIPC, made clear that the cost
of the program was ‘‘intended to be borne by the se-
curities industry’’, by all registered broker-dealers not
exempt by the SEC. Senate Hearings at 225, 227;
House Hearings at 167. The SEC’s bill™ did not em-
ploy the membership concept; it simply authorized
SIPC to impose assessments on all registered broker-
dealers and members of national securities exchanges

* Hearings on S. 2348, 8. 3988, S. 3989 Before the Subcomm. on
Securities of the Senate Comm. on Banking and Currency, 91st
Cong., 2d Sess. 11-12, 178, 186, 209-10, 230-31, 234, 241-42, 296
(1970) [hereinafter Senate Hearings]; Hearings on H.R. 13308,
H.R. 17585, H.R. 18081, H.R. 18109, H.R. 18458 Before the Sub-
comm. on Commerce and Finance of the House Comm. on Inter-
state and Foreign Commerce, 91st Cong., 2d Sess. 153, 163-66, 185,
198, 204, 315-16, 352-53 (1970) [hereinafter House Hearings].

*® H.R. 18109, 91st Cong., 2d Sess. (1970) [hereinafter H.R.
18109].

* H.R. 18109, § 3, adding §§ 35(a)(1) and (7) to the 1934 Act.
20 H.R. 18109, § 3, adding § 35(c) (2) to the 1934 Act.

71 H.R. 18081, 91st Cong., 2d Sess. (1970) [hereinafter H.R.
18081}.

19

unless exempted by the SEC.” Thus the assessable
class was broader than under the industry’s bill. Un-
der both bills, risk to the public was merely a factor
in determining appropriate assessments.”

After their initial proposals, the SEC and the in-
dustry drafted a joint bill * ‘‘ (Joint Bill’) which made
SIPC a non-profit membership corporation. Member-
ship was mandated for all registered broker-dealers
and members of national securities exchanges, unless
exempted by the SEC.* Assessments could be based
on (a) ‘‘gross revenues from the securities business’’,
or (b) additional factors including the risk posed to
the public by the nature of a firm’s business.” The
definition of ‘‘gross revenues from the securities busi-
ness’’ conformed almost precisely to the broad defini-
tion in the industry’s bill.”

The focus of the SEC and the industry was on
assessing securities business revenues without distine-
tions based on the technical capacity in which they
are earned. In a written memorandum, the SEC
stated: ‘‘Under paragraph (f)(4) gross revenues are
defined as the sum (but without duplication) of eleven
specified activities which are integral parts of the
broker-dealer business.’’ Senate Hearings at 280 (em-
phasis added). The Joint Bill was intended ‘‘to the

22 H.R. 18081, § 2, adding § 35(g) to the 1934 Act.

23 Td. ; H.R. 18109, § 3, adding § 35(c) (3) te the 1934 Act; House
Hearings at 203-04.

*4H.R. 18458, 91st Cong., 2d Sess. (1970) [hereinafter H.R.
18458]; House Hearings at 315 et seg.; Senate Hearings at 257,
283 et seq.

25 H.R. 18458, § 2, adding §§ 35(a) and (h) to the 1934 Act.
26 H.R. 18458, § 2, adding § 35(f)(2) to the 1934 Act.

27 H.R. 18458, § 2, adding § 35(f)(4) to the 1934 Act. House
Hearings at 385.

20

maximum extent possible, [to] assess all the securities
revenues of a broker-dealer.’’ Jd. at 281.

The SEC and industry spokesmen were of the view
that firms which pose little or no risk to the investing
public should be included in the assessment scheme
because they would benefit from capital markets in-
vigorated by restored public confidence.” The risk-
factor was something to be considered only in estab-
lishing assessment rates. House Hearings at 335,
383-84, 389.

The Genesis of Section 3(a)(2)

The mutual fund segment of the industry urged its
exemption from bearing the cost of the program, on
the theory that the failure of a mutual fund firm would
pose no risk to the public,” notwithstanding ‘‘that the
mutual funds industry ... has a vital stake in the
health and welfare of the stock exchange community.”’
House Hearings at 313. The subcommittee chairman
expressed deep concern that such exemptions might
seriously impair the funding of the SIPA program.”

28 Senate Hearings at 281; House Hearings at 335, 383, 387, 390.
They specifically alluded to specialists, mutual fund firms, non-
carrying broker-dealers, underwriters, and the like.

2° House Hearings at 308 et seq.; Senate Hearings at 315 et seq.

%° Mr. Moss. One of the great problems that we are going to
be confronted with is a level of assessment adequate to
create reserves for a sound insurance program and, in the
event of demand upon the Treasury, to reimburse the
Treasury for whatever is the extent of the draw on the
Tre ,

Our problem has been not one of exclusion but one of

hopefully finding areas of inclusion in order to raise the
revenues to make any such program a totally self-support-
ing operation.

House Hearings at 312.

21

The SEC Chairman resisted the proposed exemption
for so-called riskless mutual fund dealers.** The in-
surance industry adopted the mutual fund approach.
House Hearings at 399-400; Senate Hearings at
307-08.

As subsequent events show, the mutual fund and
insurance industries were accomm dated only to the
extent of making certain of their revenues non-assess-
able.

The Intent Of Section 3(a)(2)

The bill reported out by the House Committee
conformed substantially to the Joint Bill. With
minor differences,” it provided precisely what SIPA
provides with respect to membership and assessable
Gross Revenues. The Committee report pointed out
that the program ‘‘will be funded by monies raised
by and from the industry .. .’’,* and that after SIPC’s
funds reached $150 million ‘‘risk’’ would be a factor
in determining appropriate assessment rates. House
REport at 5, 6.

31 Mr. Budge. That would be even more true of specialists on
the exchange who are included in this bill, and I might
comment that this bill provides for a transaction tax if
and when borrowings are made from the Treasury; and if
the public is going to be asked to foot part of the bill, it
would seem to us there should not be any blanket exemp-
tion initially at any rate of segments of the securities in-
dustry since or because there may be a minimal, or some-
thing higher, degree or exposure or risk to the public.

House Hearings at 341-2.

32, H.R. 19333, 91st Cong., 2d Sess. (1970), reprinted at 116
Conga. Rec. 39354 et seq. (1970).

33 H.R. 19333, §§ 4(c) (3) (C) (iv), 4(i)(1)(A) and (F).

34 H.R. Rep. No. 91-1613, 91st Cong., 2d Sess. 11 (1970) [herein-
after House Report].

22

Of paramount significance is that portion of the re-
port which specifically stated the purpose and effect of
the exclusion of the lines of business referred to in
the membership provision [section 3(a)(2)], the as-
sessment provision [section 4(¢c)(3)(C)], and the
definition of Gross Revenues [section 4(i)(1)]. After
stating ‘‘[y]our committee determined to remove
from the assessment provisions revenues derived from
certain sources,’’ the report explained the mechanics:

These revenues were removed from the assessment
scheme by providing (1) that persons who would
otherwise be members of SIPC but who engage ex-
clusively in certain of these four activities would
be exempt from membership in SIPC, and that,
as to those who engage in these activities but not
exclusively, (2) revenues from these activities not
be included in gross revenues from the securities
business, and (3) SIPC not use the other factors
permitted to be considered in setting assessments
in such a way as to include any of these activities.

House Report at 7 (emphasis added). It was spe-
cificially noted: ‘‘ [Y]our committee reached those de-
terminations not because it made a judgment that such
activities are or are not properly considered to be
broker-dealer activities, but rather beeause it seemed
appropriate—for other reasons—not to include them
in the assessment schedule.’”? Jd. (emphasis added).

Equally significant is this statement:

Under the provisions of the bill SIPC will be a
membership corporation. Its members will be all
persons registered as brokers or dealers pursuant
to the Securities Exchange Act of 1934, and all
persons who are members of a national securities
exchange (that is, an exchange registered under

23

section 6 of the 1934 act), except that any such
persons whose business consists exclusively of (1)
the distribution of mutual fund shares or variable
annuities, or (2) the business of insurance, or (3)
the business of rendering investment advice to
mutual funds or insurance company separate ac-
counts, shall be exempt from membership in SIPC.

Id. at 15 (emphasis added). This statement supplies,
in quite appropriate words, the construction of section
3(a)(2) which most accords with section 4(i)(1) and
the intent of Congress.

These portions of the House Committee’s report
were included in its ‘‘Section By Section Summary”’.
Yet they were not alluded to by the Court of Appeals
which quoted (App. 7an.5) a segment from the pre-
liminary aspect of the report where the focus was not
as sharp. Indeed, that segment failed to mention in-
vestment advice and insurance, both of which are re-
ferred to in section 3(a) (2).

The House Committee report is unequivocal. Ex-
emption from membership was merely one of the de-
vices for removing certain revenues ‘‘from the assess-
ment scheme’’. Exemption was meant to be a function
of non-liability for assessments, not a function of risk
or the technical capacity in which a firm does its securi-
ties business. Except for one amendment not per-
tinent here,® the bill was passed by the House as re-
ported out by the Committee.

On the Senate side, the bill as reported out by its
Committee was different in many respects from the
House bill.** Section 35(h) would have exempted all

35116 Cone. Rec. 39364 (1970).

36 S$. 2348, 91st Cong., 2d Sess. (1970), reprinted at 116 Cone.
Rec, 40861 (1970).

24

registered broker-dealers and exchange members who
carried little or no cash or securities for customers.
This ‘‘risk’’ approach to membership drew sharp dis-
sent from the Secretary of the Treasury,” and was
quickly superseded by a floor amendment. That
amendment followed the House’s membership provi-
sion and, indeed, was worded precisely the same as
section 3(a)(2) of SIPA.

SIPA was enacted in the form reported by the con-
ferees.” The Conference Report (at 24) notes that

*7 In a letter to the Committee Chairman (Senator Sparkman)
the Acting Secretary stated, in part:

If retained, these exemptions would reduce potential rev-
enues by at least 20 percent. Such a reduction would
seriously hinder the required accumulation of cash in the
balance of the fund within the time anticipated, thus in-
creasing the potential need for the Corporation to borrow
from the U.S. Treasury.

Quite apart from the loss of revenues, we continue to
feel that all registered brokers or dealers and members of
national securities exchanges should be required to be
members, with authority in SEC to exempt any such
broker/dealers or members of national exchanges as it
deems necessary or appropriate in the public interest or
for the protection of investors. While certain portions of
the Industry do not directly hold customer securities or
free credit balances, their operations are so closely related
to the overall securities business that they benefit from the
preservation of investor confidence in the securities mar-
kets and the strengthening of those markets by the general
— of all present and potential customers in such
marke

116 Cona. Rec. 40870 (1970).

88116 Conc. Rec. 40872 (particularly statement of Sen. Me-
Intyre), 40873 and 40877 (1970).

*° H.R. Rep. No. 91-1788, 91st Cong., 2d Sess. (1970) -{herein-
after CONFERENCE Report] ; 116 Cong. Rec. 43075, 43243 (1970).

—s a

25

the bill agreed upon substantially conformed to the
bill passed by the House.”

Recapitulation

The phrase ‘‘business as a broker or dealer’’ in sec-
tion 3(a)(2) of SIPA was actually used by Congress
to refer to certain securities business which is not tech-
nically the business of a ‘‘broker’’ or ‘“‘dealer.”’ To
ascribe a limited or technical 1934 Act meaning con-
flicts with the actual usage and produces incongruities
within section 3(a) (2).

The meaning of the critical section 3(a) (2) phrase
becomes apparent upon examination of other relevant
provisions of SIPA and its legislative history. Sec-
tions 3(a) (2), 4(a)(3)(C) and 4(i)(1) are a cohesive
statutory expression of a single congressional decision,
i.e., to remove from the assessment scheme revenues
from several specified sources. Section 3(a)(2) was
not intended as an isolated membership provision with
exclusions unrelated to the revenue base of SIPA, as
defined in section 4(i) (1).

40 In the respects material here, the report (at 25) noted:

3. Gross revenues from the securities business—The House
bill, in effect, exempted revenues from the sale of mutual
funds, variable annuities and investment advice to registered
open-end investment companies, as well as revenues from the
business insurance... .

The conference substitute continues the exemption for
commissions on the sale of mutual funds and variable annu-
ities; revenues for the business of insurance; and revenues
derived from the rendering of investment advice, but the
exemption would include advice to both open-end and closed-
end registration investment companies.

The Conference Report did not alter the explanations in the House
Report that the exempting provisions of section 3(a)(2) were
merely part of the mechanism for excluding specified revenues
from assessment.

An harmonious reading of these related sections
leads ineluctably to the conclusion that ‘‘business as
a broker or dealer’’ refers merely to the securities busi-
ness of the two membership classes, viz., registered
broker-dealers and exchange members. That construc-
tion avoids the incongruities within section 3(a) (2)
which are forced on the statute by the Court of Ap-
peals. It is entirely consisternt-with all other relevant
parts of SIPA. Most important, it effectuates the in-
tent of Congress without doing violence to the phrase
in question. As sponsor and codrafter of SIPA, the
SEC viewed all the various section 4(i)(1) securities
business as ‘‘integral parts of the broker-dealer busi-
ness.’’ It is not surprising that ‘“broker-dealer” termi-
nology appears in section 3(a) (2) not as a term of art,
but as a term of convenient reference to securities
business.

The entire purpose of section 3(a)(2) membership
is to generate assessments on gross revenues as defined
in section 4(i)(1). To read its exempting language in
a way that exempts a firm from paying assessments on
its specifically assessable section 4(i)(1) revenues is
to lose sight of the fundamental role of section 3(a) (2)
as a funding device, and to create relief from assess-
ments not intended by Congress.

~ = Yee ~ ee

27

CONCLUSION

For the reasons set forth above, it is respectfully
submitted that this petition for certiorari should be
granted to review the opinion and judgment of the
Court of Appeals.

Respectfully submitted,

THEODORE H. Focut
General Counsel
SECURITIES INVESTOR PROTECTION
CoRPORATION
900 Seventeenth Street, N.W.
Suite 800
Washington, D.C. 20006

Attorney for Petitioner

Of Counsel:

Wirrep R. Caron
Associate General Counsel

WituraM H. SEcCKINGER
Senior Attorney

Kevin H. Bei

APPENDIX

la

APPENDIX A
[Court of Appeals Opinion]

UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT

No. 76-1256
Massacuusetts Frnanciau Services, Inc.,
Plaintiff, Appellee,
v.
Securities Investor Protection Corporation,
Defendant, Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS

{411 F.Supp. 411]

[Hon. Joseru L. Tauro, U.S. District Judge]

Before Corrin, Chief Judge,

Ciark,* Associate Justice, U.S. Supreme Court (Ret.)
McEn ter, Circuit Judge.

Theodore H. Focht, with whom Wilfred R. Caron and
William H. Seckinger were on brief, for appellant.

Daniel B. Bickford, with whom Gerard A. Corsini and
Gaston Snow ¢& Ely Bartleti were on brief, for appellee.

December 1, 1976

McEnter, Circuit Judge. The single discrete question
with which this appeal deals is whether appellee, Massa-
chusetts Financial Services, Inc. (‘‘MFS’’), is a member
of the federally created Securities Investor Protection

* Sitting by designation.

2a

Corp. (‘‘SIPC’’).* The district court answered this ques-
tion in the negative and held that MF'S was not liable for
the $5,368 which it had paid to SIPC as a mandatory as-
sessment for the calendar years 1972 and 1973. 411 F. Supp.
411 (1976). We affirm.

The crucial statute in this case is J 3(a)(2) of the Se-
curities Investor Protection Act of 1970 (‘‘SIPA’’), 15
U.S.C. § 78eee(a)(2), which provides that SIPC shall:

‘*be a membership corporation the members of which
shall be—

(A) all persons registered as brokers or dealers
under section 780(b) of this title [the Securities
Exchange Act of 1934], and

(B) all persons who are members of a national se-
curities exchange,

other than persons whose business as a broker or
dealer consists exclusively of (i) the distribution of
shares of registered open end investment companies
or unit investment trusts, (ii) the sale of variable an-
nuities, (iii) the business of insurance, or (iv) the busi-
ness of rendering investment advisory services to one
or more registered investment companies or insurance
company separate accounts. ...’’ (Emphasis added.)?

? The district court carefully recounted the historical background
to the establishment of SIPC as an independent corporation by
Congress’s enactment of the Securities Investor Protection Act of
1970, 15 U.S.C. §§ 78aaa et seq. It also described the mechanism
whereby SIPC accumulates reserve funds (to protect investors
should a brokerage firm collapse) by assessing the ‘‘member’’
firms of SIPC. Massachusetts Financial Services, Inc. v. Securities
Investor Protection Corp., 411 F.Supp. 411, 412-14 (D. Mass. 1976).
See also Securities Investor Protection Corp. v. Barbour, 421 U.S.
412, 415-16 (1975) ; 1970 U.S. Code Cong. & Admin. News 5284-85.

* Of the four exceptions provided for in the statute, only the first
is directly relevant to this case.

3a

MFS contends that § 78eee(a)(2) specifically exempts it
from membership in SIPC because the only business which
it conducts as a broker or dealer is the marketing (distribu-
tion) of the shares of its mutual fund customers. The Sales
Division of MF'S markets the shares of the firm’s mutual
fund customers, while other MF divisions perform other
functions. See 411 F.Supp. at 414-15 & n.5. Some of these
other functions are beyond the pale of the four exceptions
specified in § 78cee(a)(2). It is critical to note, however,
that none of the other functions performed by MFS require
broker-dealer registration. In essence MF'S contends that
its only activity as a broker or dealer is one which is spe-
cifically exempted by § 78ceee(a)(2) and that the other ac-
tivities conducted by the firm in a non-broker-dealer ca-
pacity are irrelevant to the question of its membership vel
non in SIPC.

SIPC for its part does not deny that the exclusive activ-
ity of the Sales Division is the distribution of the shares
of the firm’s mutual fund customers. It argues, however,
that once MF'S registered as a broker-dealer (as it was
required to do by the 1934 Act so that the Sales Division
could conduct its business), it beeame a member of SIPC
by virtue of its other activities which are not included
among the specific statutory exceptions and therefore can
be assessed, pro tanto, for those non-excepted activities.
To use the term employed by SIPC in its brief, MFS’s
registration as a broker-dealer conferred upon it the status
of ‘‘member’’ in SIPC, see § 78ece(a)(2)(A), and it can
divest itself of that status only to the extent that it is
involved in one or more of the four exempted activities
(which SIPC characterizes as categories of exempt reve-
nue).

For SIPC to prevail, however, it must overcome the sig-
nificant hurdle that the plain language of the statute spe-
cifically exempts ‘‘persons whose business as a broker or
dealer consists exclusively of . . . the distribution of [mutual

4a

fund] shares.’’ SIPC vigorously argues that the quoted
phrase should not be given a technical meaning, but should
be understood as exempting only those parties whose secu-
rities business (in the broad sense) consists exclusively of
one or more of the exempted activities. MF'S argues that
the expression ‘‘as a broker or dealer’’ means precisely
what it says and that since the only activity which it con-
ducts pursuant to its broker-dealer registration is unques-
tionably exempted, it therefore is not a member of SIPC.

A basic principle which must guide our approach to the
instant case is that a statute’s plain language is the pri-
mary indicator of its meaning:

“*It is elementary that the meaning of a statute must,
in the first instance, be sought in the language in which
the act is framed, and if that is plain, and if the law is
within the constitutional authority of the law-making
body which passed it, the sole function of the courts is
to enforce it according to its terms. Caminetti v.
United States, 242 U.S. 471, 485 (1917).

See also Flora v. United States, 357 U.S. 63, 65 (1968) ;
United States v. Second National Bank, 502 F.2d 535, 539-
40 (Sth Cir. 1974), cert. denied, 421 U.S. 912 (1975); Busse
v. Commissioner, 479 F.2d 1147, 1150-51 (7th Cir. 1973) ;
United States v. New England Coal & Coke Co., 318 F.2d
138, 142-43 (1st Cir. 1963). Of course, deference to the plain
meaning rule should not be unthinking or blind. We would
go beyond the plain meaning of statutory language when
adherence to it would produce an absurd result or ‘‘an
unreasonable one ‘plainly at variance with the policy of the
legislation as a whole.’ ’’ [nited States v. American Truck-
ing Ass’ns, Inc., 310 U.S. 534, 543 (1940), quoting Ozawa v.
United States, 260 U.S. 178, 194 (1922). See also Commis-
stoner v. Brown, 380 U.S. 563, 571 (1965); Organized Mi-
grants im Community Action, Inc. v. Brennan, 520 F.2d
1161, 1166-67 (D.C. Cir. 1975) ; Chappell & Co. v. Frankel,

-
a es

5a

367 F.2d 197, 202 (2d Cir. 1966) (en bane). See generally
United States v. Second National Bank, supra at 540-41;
H. Hart & A. Sacks, The Legal Process 1144-1417 (tenta-
tive ed. 1958).

In the present case, we believe not only that the language
of § 78ece(a)(2) is clear but also that it produces a result
which is neither absurd, unreasonable, nor at variance with
the policy of SIPA. While Congress could have chosen to
be less generous with its exemptions in establishing SIPC’s
assessment powers, the statute as enacted does contain the
exemptions referred to above. And we cannot say that these
exemptions as drafted are absurd or unreasonable on their
face or as applied, nor that their presence in the act is
necessarily incompatible with the overall scheme of SIPA.
Accordingly, we agree with the district court that the words
‘‘whose business as a broker or dealer’’ are to be given
their ordinary meaning. See Banks v. Chicago Grain Trim-
mers, 390 U.S. 459, 465 (1968); United States v. Stewart,
311 U.S. 60, 63 (1940) ; Independent Meat Packers Ass’n v.
Butz, 526 F.2d 228, 237 (8th Cir. 1975), cert. denied, 424
U.S. 966 (1976) ; Andreozzi v. D’Antuono, 113 R.I. 155, 158,
319 A.2d 16, 18 (1974).* As a result of this reading of the

® SIPC has not met its burden, Commissioner v. Barclay Jewelry,
Inc., 367 F.2d 193, 196 (1st Cir. 1966), of showing why the crucial
statutory language (‘‘whose business as a broker or dealer’’)
should not be given its ordinary meaning. The words ‘‘broker”’
and ‘‘dealer’’ have highly technical meaning in securities law;
if Congress had not intended these words to have their usual tech-
nical sense, it could very easily have found appropriate language
to so indicate. Local 1424, Int'l Ass’n of Machinists v. NLRB, 362
U.S. 411, 417 n.7 (1960).
We note in this regard that SIPA makes explicit reference to
the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq.:
‘‘Except as otherwise provided in this chapter, the provi-
sions of the Securities Exchange Act of 1934... apply as
if this chapter constituted an amendment to, and was in-
eluded as a section of, such Act.’’ 15 U.S.C. § 78bbb.

This fact reinforces our belief that when Congress used the
word ‘‘broker’’ and ‘‘dealer’’ in SIPA, it used them in the tech-

a

6a

statute, it is clear that MFS is exempted from membership
in SIPC since it is conceded that all of MF'S’s activity as a
broker-dealer is statutorily exempted.

SIPC vigorously urges us to interpret § 78ecec(a) (2) in
the light of the legislative history of SIPA, which history
SIPC views as supportive of its thesis that the ‘‘business
as a broker or dealer’’ language in the statute does not
have its ordinary meaning but rather means ‘‘securities
business’’ in a general sense. Such use of the legislative
history would, however, be contrary to the well-established
rule that a court ‘‘will resort to the legislative history and
other aids of statutory construction only when the literal
words of the statute creat ambiguity or lead to an unrea-
sonable interpretation.’’ Araya v. McLelland, 525 F.2d
1194, 1195-96 (5th Cir. 1976). See also United States v.
Oregon, 366 U.S. 643, 648 (1961) ; 1.7.7. v. G.T.E., 518 F.2d
913, 917-21 (9th Cir 1975) ; Portland Cement Ass’n v. Ruck-
elshaus, 486 F.2d 375, 379-80 & n.13 (D.C. Cir. 1973), cert.
denied, 417 U.S. 921 (1974). Since we are satisfied that
§ 78eee(a)(2), whether read in isolation or in context, is
neither ambiguous nor productive of an unreasonable re-
sult, we do not feel required to look to the legislative his-
tory for illumination.

We have, nevertheless, read through the legislative his-
tory of SIPA with care,* and we concede that some portions
of the history are at least arguably favorable to SIPC’s
argument that Congress did not wish to grant broad ex-
emptions because it wanted SIPC to be able to raise a great
deal of revenue early in its existence. We stress, however,
that the legislative history is by no means unequivocal in

nical sense in which they are used in the 1934 Act and in securities
law generally. See United States v. Cuomo, 525 F.2d 1285, 1291
& n.17 (5th Cir. 1976) ; United Shoe Workers v. Bedell, 506 F.2d
174, 183 (D.C. Cir. 1974).

* See Patagonia Corp. v. Board of Governors of the Federal Re-
serve System, 517 F.2d 803, 810 n.10 (9th Cir. 1975),

Ta

this sense,’ but rather is polyvalent and reflective of a mul-
titude of views.° When we compare this less than clear
legislative history" with the straight-forward language of
the statute, we are confirmed in our conviction that we
should adhere to the latter and interpret it in its usual
sense. See Greenwood v. United States, 350 U.S. 366, 374
(1956) ; Gemsco, Inc. v. Walling, 324 U.S. 244, 260 (1945).

It is not our province to decide whether Congress would
have been wiser to draft the SIPC legislation so as to in-

5 See, e.g., the following language from the House Report which,
in deseribing the criteria for membership in SIPC, uses the same
critical language (‘‘whose business as a broker or dealer’’) as does
§ 78ceee(a) (2): .

‘‘Membership in the corporation [SIPC] would consist
of all brokers and dealers registered under section 15(b)
of the Securities Exchange Act of 1934 and all persons
who are members of a national securities exchange, ex-
cept that persons whose business as a broker or dealer
consists exclusively of the distribution of shares of mutual
funds or variable annuities, would not be included in mem-
bership.’” H.R.Rep. No. 91-1613, 91st Cong., 2d Sess., 1970
U.S. Code Cong. & Admin, News 5254, 5258.

6 It does not strike us as at all surprising that the legislative his-
tory is not of one piece. It is quite natural that various and com-
peting interests would seek to have an influence on the shaping of
legislation like that which established SIPC. We recall also Justice
Jackson’s remark that ‘‘ [i]t is a poor cause that cannot find some
plausible support in legislative history, which often includes tenta-
tive rather than final views of legislators or leaves misinterpretation
unanswered lest more definite statements imperil the chance of
passage.’’ Problems of Statutory Interpretation, 8 R.F.D. 121, 125
(1949). See also United States v. Public Utilities Commission, 345
U.S. 295, 319-21 (1953) (opinions of Jackson and Frankfurter, JJ a %

™**TLJegislative history should be used to resolve ambiguities,
and not to ereate them.’’ National Ass’n of Regulatory Utility
Commissioners v. United States, 397 F.Supp. 591, 595 (D.D.C.
1975), aff’d, 423 U.S. 1041 (1976). See also Railroad Commission
v. Chicago, Burlington & Quincy R.R., 257 US. 563, 589 (1922) ;
Pennsylvania R.R. v. International Coal Mining Co., 230 U.S. 184,
189 (1913).

8a

clude firms like MF'S as members, Old Dearborn Distrib-
uting Co. v. Seagram-Distillers Corp., 299 U.S. 183, 195-96
(1986), and it is no part of our function to extend a stat-
ute’s reach beyond its clearly indicated scope. Guiseppi v.
Walling, 144 F.2d 608, 614-15 (2d Cir. 1944) (Frank, J.)
aff’d sub nom. Gemsco, Inc. v. Walling, 324 U.S. 244 (1945).
Rather, ‘‘[i]t is our judicial function te apply statutes on
the basis of what Congress has written, not what Congress
might have written.’’ United States v. Great Northern Ry.,
343 U.S. 562, 575 (1952). Congress remains free to amend
SIPA should it so choose, but as it now stands that act
clearly exempts MFS.

Affirmed.

9a

APPENDIX B
[Court of Appeals Judgment]

UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT

No. 76-1256.
Massacuusetts Financiau Services, Inc.,
Plaintiff, Appettee,

v.

Securities Investor Psorection Corporatiox,
Defendant, Appellant.

Judgment
Entered December 1, 1976

This cause came on to be heard on appeal from the
United States District Court for the District of Massachu-
setts, and was argued by counsel.

Upon consideration whereof, It is now here ordered,
adjudged and decreed as follows: The judgment of the Dis-
trict Court is affirmed.

By the Court:

/s/ Dawa H. Gatiup
Clerk.

fee: Messrs. Focht and Bickford.}

10a

APPENDIX C
(District Court Opinion]

UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS

CA 74-2008-T

Massacuvusetts Frnanciau Services, Inc., Plaintiff
v.
Securities Investor Protection Corporation, Defendant

Opinion

March 26, 1976
Tavro, D.J.

This is an action in which Massachusetts Financial Serv-
ices, Inc. (M.F.S.) is seeking a declaratory judgment on
the question of whether it is a member of the federally-
established Securities Investor Protection Corporation
(S.L.P.C.). It also seeks to recover $5,368 paid to S.L.P.C.
in response to 8.I.P.C.’s mandatory assessment of M.F:S.
for calendar years 1972 and 1973.

Subject matter jurisdiction over both the declaratory and
damage claims is Yased on section 27 of the Securities and
Exchange Act of 1934, 15 U.S.C. § 78aa, as incorporated
into the 1970 Investor Protection Act, 15 U.S.C. § 78bbb.
Venue is based on those same provisions. Alternatively,
subject matter jurisdiction over the plaintiff’s monetary
claim is based on § 10 of the 1970 Act, 15 U.S.C. § 78jjj(a).
Following the filing of cross-motions for summary judg-

* There is no dispute on the amount of M.F-.S.’s assessment should
it be found to be a member of S.I.P.C.

lla

ment, the parties stipulated to all material facts, allowing
this court to consider the case on the merits.

I.

S.I.P.C. is an independent corporation established by
Congress in 1970 to protect investors from the effects of
chronic instability in the securities industry.’ In late 1969
and early 1970, the price of publicly-traded securities rapid-
ly declined from the heights reached during the halcyon
days only a few years before. During the decline, large
numbers of institutional and individual investors left the
markets, dramatically reducing daily trading volume and
thereby drying up the commissions received by brokers and
dealers on individual transactions. Persistent financial prob-
lems soon beset the securities industry, leading to volun-
tary liquidations, mergers, receivorships and bankruptcies
of a significant number of brokerage houses. Such failures
seriously endangered customers’ funds which, in turn, led
to further, albeit temporary, erosion of confidence and weak-
ening of the industry.

Particularly vulnerable during this period, were the so-
ealled ‘‘free credit balances’’ left in brokerage accounts by
customers. This money, which can be withdrawn by the
customer at any time, usually represents the proceeds of
the sale of a customer’s securities or customer’s dividends
paid directly to his brokerage. Customers with particularly
active accounts leave these funds on deposit with the firm
largely as a convenience so that they are readily available

2 See Securities Investor Protection Corp. v. Barbour, 421 US.
412 (1975), Securities and Exchange Commission v. Baroff Co.,
Inc., 497 F.2d 280 (2d Cir. 1974) ; Securities and Exchange Com-
mission v. Aberdeen Securities Co., 480 F.2d 1121 (3rd Cir.), cert.
denied, 414 U.S. 1111 (1973) ; Securities & Exchange Commission
v. Alan F. Hughes, Inc., 461 F.2d 974 (2d Cir. 1972) ; Securities
and Exchange Commission v. Salmon & Co., 375 F. Supp. 867
(S.D. N.Y. 1974) ; Securities Investor Protection Corp. v. Charisma
Securities Corp., 352 F. Supp. 302 (S.D. N.Y. 1972).

12a

for the customer’s next transaction. In the interim, how-
ever, the funds are available to the broker to maintain
positions in securities, to finance margin purchases of other
customers and for general operating expenses. Rarely, if
ever, is interest paid on these funds.

Broker-dealers also hold substantial amounts of customer
securities in safekeeping. Although customers have a right
to receive these fully paid securities on demand, there is a
risk that they may be improperly transferred or reached
by creditors if the technical requirements of **segregation’’
are not complied with. Moreover, seeurities purchased by
customers on margin are held by the broker and may be
pledged as collateral on bank loans.

Prior to 1970, a variety of federal, state and industry
regulations had been introduced to safeguard customer
assets held by broker-dealers. Firms were required to regis-
ter with the Securities and Exchange Commission, to main-
tain certain minimum capital requirements and to limit their
aggregate indebtedness in relation to their net capital.
Member firms of registered exchanges were required to fur-
nish the customer credit balance statements, diselosing the
amount owed the customer, and the fact that his funds are
not segregated and may be used by the firm in its own
business. Certain exchanges and the National Association
of Securities Dealers required segregation and identification
of customer securities. After 1964, the New York Stock
Exchange and other exchanges established limited trust

funds to protect the free credit balances held by member
firms.

In 1970, however, as the market declined and brokerage
liquidations and bankruptcies became more than isolated
occurrences, it became apparent that existing legislation
and industry self-regulation provided insufficient protection
to customers. Between August and December, 1970, for ex-
ample, three former members of the New York Stock Ex-
change were forced to close. But that Exchange refused to

AN a Ane! A an ee +

13a

provide protection to customers of those firms, giving as
its reason the exhaustion of available funds. The industry
then turned to the federal government for assistance.’

Congress responded by enacting the Securities Investor
Protection Act of 1970. This legislation established 8.1.P.C.
as a non-profit, independent corporation whose prime re-
sponsibility was to establish immediately a substantial re-
serve fund which would provide protection to investors in.
the event a brokerage firm collapsed, thereby reinstilling
some confidence in the securities markets. The fund would
be created and maintained through assessments from the
members of S.I.P.C. Membership in the corporation, how-
ever, was made mandatory for brokers and dealers regis-
tered under $15 of the Securities and Exchange Act of
1934, 15 U.S.C. § 78a as well as certain categories of other
members of national securities exchanges. Membership,
therefore, is merely a device for determining who should
contribute to the fund.‘

The issue ‘in this ease is whether the plaintiff ‘‘qualified’’
for ‘‘membership’’ in the corporation and is thereby re-
quired to contribute to the S.I.P.C. reserve fund.

Il.

M.F-.S. is a Massachusetts corporation organized in 1969.
During its initial years, it performed no broker activities

*This discussion of the events giving rise to the enactment of
the 1970 Act is based on the detailed analysis appearing in the
Act’s legislative history. See 1970 U.S. Code Cong. & Admin. News
5254-85.

*The establishment of the S.I.P.C. fund is only one aspect of
the corporation’s responsibilities. In keeping with its responsi-
bilities for the protection of customers, S.I.P.C. is required to
maintain ‘‘an early warning system’’ to detect broker instability
and, if necessary, to oversee a brokerage’s liquidation, all in the
context of SEC supervision. See generally Securities Investor Pro-
tection Corp. v. Barbour, 421 U.S. 412 (1975).

l4a

requiring registration as a broker or dealer with the Secu-
rities and Exchange Commission. It has been registered
as an Investment Advisor, pursuant to the Investors Ad-
visors Act of 1940, 15 U.S.C. § 80b-3 since its incorporation.

Until 1973, M.F.S. was organized into two divisions: an
Investment Counsel Division and a Mutual Fund Division.
The Investment Counsel Division has traditionally provided
investment management and advice to clients whose funds
and securities are held and transferred by third persons
such as bank trustees or custodians. The Mutual Fund
Division provides investment management services directly
to six registered open-ended mutual funds. The shares of
these funds were marketed by brokers and dealers having
no affiliation with the plaintiff. Neither one of these func-
tions are broker-dealer activities requiring registration.

See CCH 1973-74 Fed. Sec. L. Rep. 179, 746 (Feb
20, 1974). / anc

In November 1972 M.F.S. decided to expand its opera-
tions. It registered as a broker-dealer in December of that
year and in early 1973 established a Sales Division for the
purpose of marketing the shares of its mutual fund ecus-
tomers itself. No other Division of M.F-.S. distributes secu-
rities and the sole business of the Sales Division is the
distribution of the shares of these six mutual funds.

ITT.

. The prerequisites for S.I.P.C. membership are defined
in {| 3(a)(2) of the Securities Investor Protection Act of

— 15 U.S.C. § 78eee (a)(2). It provides for membership
or:

(A) all persons registered as brokers or dealers under
section 780(b) of this title [the registration pro-
visions of the 1934 Act], and

(B) all persons who are members of a national secu-
rities exchange,

—— a Te

15a

other than persons whose business as a broker or dealer
consists exclusively of (i) the distribution of shares of
registered open end investment companies or unit tn-
vestment trusts, (ii) the sale of variable annuities,
(iii) the business of insurance, or (iv) the business of
rendering advisory services to one or more registered
investment companies or insurance company separate
accounts; .... (emphasis added).

The plaintiff claims that its only business as a broker-dealer
is the activity of its Sales Division. Since that business
clearly falls within the exception of subparagraph (i),
M.F.S. contends it cannot be considered a member of
S.LP.C. The defendant argues, however, that the words
‘as a broker or dealer’’ in the quoted language should be
equated with the phrase ‘‘in the securities business.’’ Under
that view of the statute, the court should evaluate all
aspects of M.F.S.’s business. Because some of its activities
‘sin the securities business’’ go beyond the exceptions speci-
fied in the exceptions to S.I.P.C. membership, particularly
the work of its Investment Division, M.F.S. should be con-
sidered a member of S.LP.C.°

The question appears to be one of first impression. A
careful reading of the statute, however, as well as an evalu-

5’The nature of the Mutual Fund Division’s activities is not
clear. Specifically, in their stipulation, the parties have not indi-
eated whether the investment management activities for M.F.S.’s
mutual fund clients , the responsibilities plaintiff claims are those
of the Mutual Fund Division, include the providing of investment
advice. See Stipulation §4. Even if the Mutual Fund Division does
give investment advice to M.F.S.’s mutual fund clients, however,
thereby making M.F.S. eligible for the exception listed in sub-
paragraph (iv) as well as the exception listed in sub-paragraph
(i), the result in this case would be the same. S.I.P.C. permits a
firm to avoid membership by claiming multiple exceptions so long
as its ‘‘activities as a broker or dealer’’ do not fall outside the
exemptions specified in subparagraphs (i) through (iv). See
Stipulaiion Exhibit 3, page 1.

l6a

ation of its legislative history, support the plaintiff’s

position.

The terms ‘‘broker’’ and ‘‘dealer’’ are words of art,
with a specific meaning both in the industry and to those
members of Congress intimately involved in the drafting

of securities legislation. Section 3(a)(4) of the 1934 Act,
15 U.S.C. § 78e (a)(4) defines a broker as

any person engaged in the business of effecting trans-
actions in securities for the account of others, but does
not include a bank.

Section 3(a)(5) of the 1934 Act, 15 U.S.C. §78e (a)(5)
defines a dealer as

any person engaged in the business of buying and sell-
ing securities for his own account, through a broker or
otherwise, but does not include a bank, or any person
insofar as he buys or sells securities for his own ac-
count either individually or in some fiduciary capacity,
but not as a part of a regular business.

Both definitions connote a certain regularity of participa-
tion in securities transactions at key points in the chain
of distribution. Yet, neither definition is all-encompassing.
Each excludes, either explicitly or by implication, a variety
of functions—commodities trading, various banking trans-
actions—which under the defendant’s view might be con-
sidered part of the ‘‘securities business”’ in a general sense.
See Henry C. Coppel & Co. d/b/a May-Pak Management
Company, CCH 1974 See. L. Rep. 79, 814 (May 13, 1974).

By incorporating these unambiguous and familiar terms
into the 1970 Act, it seems manifest that Congress intended
to place some limitations on membership in S.I.P.C. The
members of the House Interstate and Foreign Commerce
Committee and the Senate Banking and Currency Commit-
tee, were certainly familiar with earlier securities legisla-

17a

tion eminating from those Committees as well as with the
general structure of the industry. If that committee, and
eventually the entire Congress, had intended to broaden
the membership of S.I.P.C. as the defendant claims, they
could have done so without torturing terms which tradi-
tionally have had settled meanings in earlier legislation and
the industry itself; and which have been incorporated by
reference into the 1970 Act. 15 U.S.C. § 78bbb.

The statute’s legislative history buttresses this interpre-
tation. As both the House and Conference Reports indicate,
the S.I.P.C. fund was established to deal with the specific
problem: the risk to members of the investing public who
found it necessary to leave assets on account with their
brokers. The problem was one which did not involve the
entire securities industry, but only brokerage houses which
actually marketed securities for the investing public. And
the matter came to Congressional attention only when seri-
ous declines in commission income raised the spectre of
substantial numbers of brokerage failures. It seems logical,
therefore, that membership in S.I.P.C. was limited to that
phase of the industry where the risk was felt most directly.
As noted in the House report accompanying the 1970 Act,
the primary aim of the legislation was to ‘‘establish im-
mediately a substantial reserve fund which will provide
protection to customers of broker-dealers similar to that
formerly provided by the exchange trust funds.’’ 1970 U.S.
Code Cong. & Admin. News 5257.

S.I.P.C.’s own dealings with the M.F.S. further support
this interpretation. It did not demand assessments until
M.F.S. had established dealer activities in late 1972. Yet,
prior to that time, M.F.S.’s Investment Division had en-
gaged ‘‘in the securities business’’ without any claim for
dues on the part of S.I.P.C. and without falling within
the exceptions listed in sub-paragraphs (i) through (iv).
Surely if mere participation ‘‘in the securities business”’
in a manner not specified in sub-paragraphs (i) through

18a

(iv) was sufficient to trigger S.I.P.C. membership, it would
seem logical that S.I.P.C. would have required M.F.S. to

participate in the fund prior to its registration as a broker-
dealer.®

The defendant argues, in response, that the primary ob-
jective of the Congress was to create a fund substantial
enough to provide meaningful protection to investors’
funds. The defendant has not shown, however, that a fund
whose contributors are limited to those clearly specified in
the legislation would not provide adequate insurance to
customers in the event of actual brokerage failure or pro-
vide a sufficient psychological boost to industry confidence.
Indeed, if the fund should become insufficient for the pur-
poses of the Act, the S.E.C. may, under certain conditions,
issue notes to the Secretary of the Treasury in an amount
to one billion dollars, the proceeds of which then may be
lent to S.LP.C. 15 U.S.C. § 78ddd(g). See Securities and
Exchange Commission v. Guaranty Bond & Securities
Corp., 496 F.2d 145, 147 n. 3 (6th Cir. 1974), rev’d on other
grounds sub. nom. Securities and Exchange Commission v.
Barbour, 421 U.S. 412 (1975). Certainly, protection of this
scope seems more than adequate for the forseeable future.

Accordingly, this court holds that M.F.S. is not a mem-
ber of S.LP.C. and that it is therefore not liable for assess-
ments covering calendar years 1972 and 1973.

/s/ Jos. L. Tauro
United States District Judge

* Of course, once a broker-dealer becomes a member of S.I.P.C..
the amount of its assessment may be based on factors other than
the amount of business it does as a broker-dealer. See 15 U.S.C.
§ 78ddd. This point seems to have been the source of some con-
fusion during Senate Hearings on the proposals which evolved
into the 1970 Act. See Defendant’s Memorandum at 14-18, ef.
SEC v. Aberdeen Securities Co., Inc., 480 F.2d 1121, 1123 (3rd
Cir.), cert. denied, 414 U.S. 1111 (1973).

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19a

APPENDIX D

[Relevant Sections of the Securities
Investor Protection Act of 1970]

Sec. 4. SIPC Fund

(c) Asscesments.—

(3) LIMITATIONS.—Not withstanding any other pro-
vision of this Act (other than section 3(f))—

(C) no assessment shall include any charge based
upon the member’s activities (i) in the distribution
of shares of registered open end investment com-
panies or unit investment trusts, (ii) in the sale of
variable annuities, (iii) in the business of insur-
ance, or (iv) in the business of rendering invest-
ment advisory services to one or more registered
investment companies or insurance company sep-
arate accounts.

(i) ‘‘Gross Revenves’”’ DeFinep.—

(1) In cenerat.—For purposes of this Act, the
term ‘‘gross revenues from the securities business’’
means the sum of (but without duplication) :

(A) commissions earned in connection with
transactions in securities effected for customers as
agent (net of commissions paid to other brokers
and dealers in connection with such transactions)
and markups in respect of purchases or sales of se-
curities as principal,

(B) charges for executing or clearing transac-
tions in securities for other brokers and dealers,

(C) the net realized gain, if any, from principal
transactions in securities in trading accounts,

20a

(D) the net profit, if any, from the management
of or participation in the underwriting or distribu-
tion of securities,

(E) interest earned on customers’ securities ac-
counts,

(F) fees for investment advisory services (ex-
cept when rendered to one or more registered in-
vestment companies or insurance company separate
accounts) or account supervision in respect of se-
curities,

(G) fees for the solicitation of proxies with re-
spect to, or tenders or exchanges of, securities,

(H) income from service charges or other sur-
charges in respect of securities,

(I) except as otherwise provided by rule or regu-
lation of the Commission, dividends and interest
received on securities in investment accounts of the
broker or dealer,

(J) fees in connection with put, call, and other
option transactions in securities, and

(K) fees and other income for all other invest-
ment banking services.

Such term does not include revenues received by a
broker or dealer in connection with the distribution
of shares of a registered open end investment com-
pany or unit investment trust or revenues derived ‘by
a broker or dealer from the sale of variable annuities
or from the conduct of the business of insurance.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385004_1353%3A1. Public record. Not legal advice.