Supplemental Brief — Research Equity Fund, Inc. v. Insurance Co. of North America

No. 79-584

IN THE

Supreme Court of the United States

OcToBER TERM, 1979

RESEARCH Equity Funp, INc., _

Petitioner

v.

THE INSURANCE COMPANY OF NORTH AMERICA,

Respondent

On Petition for a Writ of Certiorari to the United States

Court of Appeals for the Ninth Circuit

SUPPLEMENTAL BRIEF FOR PETITIONER

A. RayMonpd RANDOLPH, JR.

SHARP, RANDOLPH & GREEN

Suite 501

1800 Massachusetts Avenue, N.W.

Washington, D.C. 20036

(202) 659-2400

Attorney for Petitioner

TDS CE I TT EET TE TROT TT MLE PELE RIONOES PRE SELB SI

Pazss or Byron 8S. ADAMS PRINTING, JNC., WASHINGTON, D. C.

IN THE

Supreme Court of the United States

OcToBER TERM, 1979

No. 79-584

RESEARCH Equity Funp, INc.,

Petitioner

Vv.

THE INSURANCE CoMPANY OF NorTH AMERICA,

Respondent

On Petition for a Writ of Certiorari to the United States

Court of Appeals for the Ninth Circuit

SUPPLEMENTAL BRIEF FOR PETITIONER

Pursuant to Rule 24(5) of the Rules of this Court,

this supplemental brief addresses the brief amicus

curiae of the United States, filed on February 29, 1980,

in response to the Court’s order of January 7, 1980,

inviting the Solicitor General to file a brief express-

ing the views of the United States in this case.

1. While agreeing that the decision of the court of

appeals is in error and that the case is important, the

government in its amicus brief suggests that review

2

may not be ‘‘essential’’ because the Securities and

Exchange Commission is considering whether to pro-

mulgate new regulations interpreting Section 17(g)

of the Act and, in effect, overruling the decision in

this case.

The government’s position assumes that the decision

interprets the existing Commission regulations under

Section 17(g), rather than the statute itself. That is

a view we do not share. The opinion of the court of

appeals rests quite clearly on statutory interpretation:

it discusses what Congress intended in Section 17(g)

and it holds that Congress did not intend to have bond-

ing coverage extended to mutual fund portfolio man-

agers supplied by investment advisers because they

are not Section 17(g) ‘‘employees.’’* At one point at

least, the Commission itself thus viewed the opinion.

In its amicus submission on petition for rehearing, it

told the court of appeals that the court’s result was

‘“‘anomalous’’ and one that ‘‘Congress could hardly

have intended’’—a statement the government quotes

in its amicus brief in this Court.’

While the government suggests that the Commis-

sion has rulemaking authority under Section 38 of

the Act. (15 U.S.C. 80a-37(a)) to define the term ‘‘em-

ployee,” any court considering such regulation would

refer back to Section 17(g) to determine the scope of

"See, e.g., Pet. App. 10a (‘‘Congress obviously contemplated

the bonding requirement would be applicable only to those per-

sons who are in part officers or employees of the mutual fund’’) ;

id. at 10a (‘‘Since the statute does not require coverage for the

losses suffered by WGF at the hands of someone such as Sanders

Sy

* Brief for the United States as Amicus Curiae, at p. 4.

3

the Commission’s powers, as the court did in SEC v.

Talley Industries, Inc., 399 F.2d 396, 404 (2d Cir.

1968), cert. denied, 393 U.S. 1015. If the opinion of

the court below prevails, the regulations would be

struck down. The Commission’s rulemaking authority

may be considerable, as the government says, but it

cannot overrule a federal appellate court’s interpre-

tation of a statute.’ That is the function of this Court

when an important case has been wrongly decided.’

2. Furthermore, even if the Commission does en-

gage in rulemaking (and there is no assurance by the

government whether or when it will) and even if other

courts eventually uphold the new rules,’ this would

hardly cure the problem created by the court of ap-

peals decision in this case. Regulations are not retro-

active. Unless that decision is reversed, investors in

mutual funds that have bonds like petitioner’s will

have been stripped of bonding protection for losses

suffered in the past through the dishonesty of portfolio

managers. (Fidelity bonds are ‘‘discovery’’ bonds,

* See, e.g., Ernst & Ernst v. Hochfelder, 425 U.S. 185, 213 (1976)

(‘‘The rulemaking power granted to a federal ageney charged with

the administration of a federal statute is not the power to make

law.’’).

* If this Court upheld petitioner’s and the Commission’s inter-

pretation of Section 17(g), the Commission would of course be

free to implement that interpretation through further regulations

if it thought these necessary or desirable.

° We have noted before that ‘‘This is peculiarly an area in which

a definite and uniform rule should prevail. Only then ean the cost

of protecting investors against dishonesty by fund managers be

spread equitably throughout the mutual fund industry and only

then can insurers and mutual funds be certain of the coverage that,

at a minimum, must be maintained for the protection of investors.’

Pet. 13-14.

4

which provide protection from the point the fraud is

discovered.) This is why the Investment Company

Institute, as amicus curiae, has informed the Court

that the decision here adversely affeets the 7 million

shareholders of the mutual funds it represents.°

CONCLUSION

Review by this Court is essential and the petition |

for a writ of certiorari should be granted.

Respectfully submitted,

A. RayMonp RANDbDOLPH, JR.

SHARP, RANDOLPH & GREEN

Suite 501

1800 Massachusetts Avenue, N.W.

Washington, D.C. 20036

(202) 659-2400

Attorney for Petitioner

March 1980.

* Brief of the Investment Company Institute, Amicus Curiae,

at pp. 2, 5.