Appendix — Securities Investor Protection Corp. v. Barbour

APPENDIX A

[Court of Appeals Opinion]

No, 73-1451

UNITED STATES COURT OF APPEALS

For Tue Sixty Circuit

ee

SECURITIES AND EXCHANGE CoMMISSION,

Appellee,

vs.

Guaranty Bonp Anp Securities Corp., ET AL.,

Defendants,

JAMES C. BARBOUR, Receiver, .

Appellant.

AppraL from the United States District Court for the

Middle District of Tennessee, Nashville Division.

a

Decided and Filed April 23, 1974.

Before: Puriuirs, Gpief Judge CELEBREzzE and MILLER,

Circuit judges.

Muter, Circuit Judge. Guaranty Bond and Securities

Corporation was registered with the S.E.C. as a broker and

dealer in securities as required by Section 15(b) of the

Securities Exchange Act of 1934. As part of its business,

it promoted the sale of church bonds. On December 22,

1970, the S.E.C. filed in the court below a complaint against —

Guaranty alleging net capital violations contrary to the |

federal securities laws, including Section 15(c)(3) of the

Securities Exchange Act, 15 U.S.C. 780(c)(3). Injunctive

relief was sought against the alleged violations.

The district court, finding that Guaranty had violated the —

S.E.C.’s net capital rule and that such violation had existed §

abhipt ch jint re elle RT cr as eat Rg 68 se denise

tw

PAE AZ ONER GMNOER IE SIE GON AN. ORI BIRGER E DAO On BN ERT REY AS ON DE

A-2

for a substantial period of time prior to the filing of the

complaint by the S.E.C., granted a preliminary injunction.

The court further found that between the filing of the com-

plaint on December 22, 1970 and the granting of the injunc-

tion on January 6, 1971, Guaranty had continued to engage

in substantial business, handling 101 transactions after the

effective date of the Act creating the Security Investor

Protection Corporation. On application of S.E.C., a re-

ceiver was appointed for Guaranty to take charge of all of

its assets subject to the further orders of the court.

On March 31, 1972, the receiver filed a petition for an

order directed to the S.E.C. and the Security Investor Pro-

tection Corporation requiring each of them to show cause

why S.LP.C. should not be required to intervene in the

action and afford to the customers of Guaranty the benefits

of the Act. The show cause order was issued accordingly

and both 8.E.C. and S.I.P.C. responded. The court, without

an evidentiary hearing, filed its memorandum opinion in

which it found the Act (S.I.P.A.) was inapplicable to eus-

tomers of Guaranty for the reason that Guaranty was

insolvent and in financial difficulties before the effective

date of S.I.P.A. To hold otherwise, it was said, would be

to give the Act a forbidden retroactive effect. The court

accordingly ordered that S.I.P.A. should be dismissed from

the action. This order was certified as a final judgment for

purposes of appeal.

The Security Investor Protection Act was enacted in

response to the need to protect the customers of securities

brokers and dealers which might fail, thereby jeopardizing

the cash and securities that customers had left on deposit

with the firm.! S.I.P.A. accordingly created the Security

1. The legislative history shows the purpose of the S.I.P.A.

The serious and persistent financial problems besetting the

securities industry in recent months have led to the voluntary

i

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Investor Protection Corporation as a “non-profit corpora-

tion,” not designed to “be an agency or establishment of the

United States Government,” but rather to be “a member-

ship corporation,’? consistent with the self-regulatory

nature of the securities industry. 15 U.S.C. 78 eee (a). The

S.I.P.C.’s role is primarily one of consultation and coopera-

tion with the self-regulatory organizations which remain

subject to the federal securities laws and the rules of the

S.E.C. By mandating membership in the S.I.P.C. for cer-

tain members of the securities industry and by granting the

S.I.P.C. general assessment authority over the members in

order to establish an S.I.P.C. fund, Congress accomplished

its intention that the cost of providing protection to cus-

liquidations, mergers, receiverships or, less frequently, bank-

ruptcies of a substantial nuntber of brokerage houses. Such

failures may lead to loss of customers’ funds and securities

with an inevitable weakening of confidence in the U. S. secu-

rities markets. Such lessened confidence has an effect on the

entire economy. Whatever other steps must be taken to

improve these conditions, one objective of the bill, as reported,

is to provide investors protection against losses caused by the

insolvency of their broker-dealer. The need is similar, in

many respects to that which prompted the establishment of

the Federal Deposit Insurance Corporation and the Federal

Savings and Loan Insurance Corporation.

4 U. S. Code Congressional and Administrative News 5255 (1970).

2. The members of S.I.P.C., as defined by 15 U.S.C. Sec. 78 ccc

(a) (2), are:

(A) all persons registered as brokers or dealers under sec-

tion 780(b) of this title, and

(B) all persons who are members of a national 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 companies or unit investment trusts, (ii) the sale of

variable annuities, (iii) the business of insurance, or (iv) the busi-

ness of rendering investment advisory services to one or more regis-

tered investment companies or insurance company separate accounts;

Bisein ats

A-4

tomers under S.I.P.C. was to be borne by the securities

industry itself.’

Under 15 U.S.C. See. 78 eee (a) (1), if the S.E.C. or any

self-regulatory organization believes that a broker or dealer

subject to its regulations in, or approaching, financial diffi-

culty, it must notify immediately the S.I.P.C. If the S.I.P.C.

determines that a member broker or dealer has failed or is

in danger of failing to meet its obligations to customers, it

is authorized to seek a decree in an appropriate court

adjudicating that the customers of a member of S.I.P.C. are

in need of the protection of the Act. 15 U.S.C. See. 78 eee

(a)(2). Upon so finding, the district court shall grant the

decree and appoint a trustee for the liquidation of the busi-

ness and an attorney for the trustee. The objectives of the

proceeding, in addition to operating the business for a

limited: purpose, completing the open contractual commit-

ments of the dealer, enforcing rights of subrogation and

liquidating the business of the dealer, are “as promptly as

possible” (1) to return specifically identifiable property to

the customers of a firm, (2) to distribute the “single and

separate fund,” and (3) to pay to customers monies

advanced by S.I.P.C. 15 U.S.C. 78 fff(a). To provide for

prompt satisfaction of the net equities of the dealer’s cus-

tomers, S.I.P.C. must advance to the trustee such monies as

may be required to satisfy the full claims of each customer

not to exceed $50,000. 15 U.S.C. 78 fff(f).

3. S.I.P.C.’s first responsibility under the Act was to establish a

fund which would consist of all amounts received by S.I.P.C. and from

which all expenditures would be paid. 15 U.S.C. Sec. 78 ddd(c). If

the fund should become insufficient for the purposes of the Act, the

S.E.C. is authorized, if necessary for the protection af the customers

of brokers and dealers and for the maintenance of confidence in the

United States securities markets, to issue notes under certain con-

ditions to the Secretary of the Treasury in an amount up to one

billion dollars, which then may be lent to S.I.P.C. 15 U.S.C. 78

ddd (g).

NORA 8 Ri A ALOE RE ELLE DESDE ETEELENBE LE SI VE A OE

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If S.LPLC. refuses to act, the S.C. is authorized by 15

U.S.C. 78 gege(b),4 to apply to the court for an order requir-

ing the S.LP.C. to discharge its obligations under the Act.

The present appeal involves a unique situation. The

appellant, as mentioned earlier, urges, contrary to the dis-

trict court’s decision, that the Act is applicable to Guaranty

Bond. The S.E.C. agrees with the appellant’s contention

that the Act is applicable, but challenges the court’s decision

that the receiver has standing to petition the court to apply

the Act. The S.LP.C. agrees with the district court as to

the inapplicability of the Act but challenges, along with the

S.E.C., the receiver-appellant’s standing to obtain compli-

ance with the Act.

The S.1.P.A. was effective on December 30, 1970. In two

eases, Lohf v. Casey, 330 F.Supp. 356 (D. Colo. 1971), aff’d.

466 F.2d 618 (10th Cir. 1972) and Bohart-McCaslin Ven-

tures, Inc. vy. Midwestern Securities Corp., 352 F.Supp. 937

(N.D. Texas 1973), courts have held that S.I-P.A. was not

intended to apply to a broker-dealer who had failed prior

to that date. The district court in Lohf, supra at 358 stated:

“.. it is equally clear that Congress expressed an

intention of refusing to make the Act retroactive.

The record is replete with comments to that effect,

the most cogent example being the report of the Com-

mittee on Interstate and Foreign Commerce:

4. 15 U.S.C. 78 ggg (b) provides that:

In the event of the refusal of SIPC to commit its funds

or otherwise to act for the protection of customers of any

member of SIPC, the Commission may apply to the district

court of the United States in which the principal office of

SIPC is located for an order requiring SIPC to discharge its

obligations under this chapter and for such other relief as the

court may deem appropriate to carry out the purposes of this

chapter.

As mentioned above, this section is hardly couched in terms of

exclusivity—a feat easily accomplished had it been the intent of

Congress.

Paitswiaincs Rei etal

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‘It is the clear intention of your committee that

SIPC assume no liability for firms either in net

capital violation, in liquidation, or in bankruptey

at the time of creation of SIPC. H.R. Rep. No.

1613, 91st Cong., 2nd Sess. 14 (Oct. 21, 1970), re-

printed in 3 U.S. Code Cong. & Admin. News ’70

at 5268.’

This language is frequently echoed in the debates on

this bill, and it seems clear that Congress did not

intend the bill to operate retroactively.”

Congress seemed to be concerned that S.I.P.C. not be

used to compensate customers of members firms of the

New York Stock Exchange which “have closed their doors

and begun liquidation,” when the Exchange had not ad-

vanced money from its existing trust fund to protect the

customers of those firms. As mentioned earlier in the Lohf

quote, the Committee Report did use very broad language

when it stated that coverage be withheld from firms “either

in net capital violation, in liquidation, or in bankruptcy at

the time of the creation of 8.I.P.C.” H.R. Rep. No. 91-1613,

91st Cong., 2d Sess. p. 14 (1970). The meaning of this

broad language was subsequently clarified by Representa-

tive Moss, sponsor of the Bill, on the floor of the House,

when he stated:

. “Finally, we have been concerned all along with the

problem of providing protection to the customers of

firms that might fail before enactment of the bill into

law. We early anticipated this possibility but we

have specifically declined to make the bill retroactive

in its application. The bill is prospective from the

date of its enactment.” [emphasis supplied] 116

Cong. Ree. 39350-39351, 12-1-70).

Congress, lacking precise information on the condition of

the industry, was concerned with the impact that S.I.P.C.

coverage might have on the Treasury. The losses that had

already been experienced by the industry were regarded by

Congress as the industry’s responsibility. S. Rep. No. 1218,

eb pe ei ARG ROL! 8 EI

A-7

9ist Cong. 2d Sess. 6 (1970); H.R. Rep. No. 91-1613, 91st

Cong., 2d Sess. 14 (1970).

Clearly to apply S.I.P.C. to’ a firm that was bankrupt

prior to the Act would be to give the Act a retroactive ap-

plication that runs counter to the Act’s clear purpose as

reflected by its legislative history. However, application of

the Act to Guaranty would not be in our view a retroactive

application. “A statute is not rendered retroactive merely

because the facts or requisites upon which its subsequent

action depends are drawn from a time antecedent to its

enactment.” Cox v. Hart, 260 U.S. 427 (1922). The time

period of the financial difficulties of the broker-dealer bears

more on the status of the broker within the meaning of the

Act than upon the issue of retroactivity.

The court in Lohf found the absence of business activity

subsequent to the effective date of the Act as determinative

of the non-coverage issue when it stated:

However, it is apparent that plaintiff was not con-

ducting its business as a broker or dealer at the

effective date of the Act. The business was in the

jurisdiction of the bankruptcy court, and the day to

day decisions were being made by the trustee. We

cannot consider plaintiff then to be a “broker or

dealer,” whether registered or not, as contemplated

by the Act. It makes no difference for these pur-

poses that plaintiff’s registration had not been of-

fically terminated, and thus the automatic member-

ship in the Securities Investor Protection Corpora-

tion may have continued in form. It could not be

expected that the Act could be applied to firms which

had already gone out of business. Plaintiff thus did

not have the status of a broker or dealer for the pur-

poses of the Act. 466 F.2d at 620.

The district court in Behart-McCaslin Ventures, Inc.,

supra at 940 made a similar determination when it stated:

For purposes of determining coverage under the

. Act, this Court discerns no legal difference between

a firm in bankruptcy and a firm in the financial and

Wo i rr ae mee LE DMO LIL IO OLE WA SANT BIEN I

. ut

legal condition which Midwestern suffered prior to

the effective date of the Act. Midwestern, prior to the

effective date of the Act, had ceased to be a broker-

dealer in any real sense of that terms and has not

resumed the normal activities of a broker-dealer even

at the present time.

These determinations are not applicable to Guaranty

since it actually conducted a substantial business after the

effective date of the Act. In light of the purposes of the

Act, the 101 transactions conducted by Guaranty after

the effective date are sufficient, we believe, to qualify

Guaranty’s customers for the protection provided by the

Act. As the Tenth Circuit stated in Lohf concerning the

coverage of the Act:

We must take this to mean firms or persons which

were actually in business in the usual sense at the

critical date were the “brokers er dealers” referred

to. Congress was willing to extend coverage to then

financially weak institutions and those of unknown

strength, but the line was drawn to exclude those

which had failed and were thus in fact not brokers

or dealers. Supra at 621.

We hold that Guaranty, though financially weak, was, in

fact, a broker or dealer at the effective date of the Act.

The court below focused on the filing date of the action

against Guaranty by the S.F.C. which was prior to the

effective date of the Act. However, the S.E.C. did not

seek to foree Guaranty into receivership until after the

effective date- Therefore, the filing of the original S.E.C.

action did not prevent Guaranty from conducting normal

business after the effective date of the Act and thus quali-

fying as a broker-dealer.

The S.I.P.C. and the S.E.C. challenge the reeciver’s

standing to bring an action to compel either of them to act

under the $.1.P.A. The court below held that the provi-

A-9

sions of the Act “do not limit this court’s power to adjudi-

cate an enforcement action brought by a receiver, of an

insolvent member of S.LP.C.”) We agree. The appellees

point to an absence of express language providing for an

enforcement action by the customers of a securities com-

pany or their representatives as prohibiting such an action,

We are persuaded, however, that the lack of express lan-

guage of éxclusivity in providing for an enforcement action

by the S.E.C., coupled with a general provision allowing

for suits against the S8.I.P.C.,° evidences an intent by Con-

gress that the statute should not be as narrowly construed

as the appellees urge.

The customers of Guaranty have a definite interest in

the application of the S.I.P.A. to the present litigation. The

receiver, the representative of the customers of Guaranty,

seeks to have the 8.1.P.C. meet its obligations to the cus-

tomers under the broad purposes of the 8.I.P.A. Appar-

ently, the S.1.P.C. has not attempted to obtain an adjudieca-

tion of the necessity for providing the protections of the

S.1.P.A. to the customers of Guaranty. Nor has the S.E.C.

moved to compel the S.1.P.C. to meet its obligations. We

do not believe that Congress intended under such cireum-

stances to leave the customers of securities firms without

remedy under the S.I.P.A. Furthermore, despite the

appellees urgings, we find no constitutional® or statutory

5. 15 U.S.C. 78 ccc (b) (1) provides that the S.I.P.C. has the

power “to sue and be sued, complain and defend, in its corporate

name, through its own counsel, in any court, State or Federal.”

6. To meet the “case or controversy” requirement of the Constitu-

tion, the Supreme Court has formulated a standard for ascertaining

those persons with “standing” for maintaining an action in a federal

court. The standard as defined by the Supreme Court in Sierra

Club vy. Morton, 405 U.S. 727 (1971), is that one must have suffered

“injury in fact” and the injury must be an “interest arguably within

the zone of interests to be protected.” - The customers of Guaranty

and their representative clearly meet this broad standard. See also

Data Processing Service v. Camp, 397 U.S. 150.

ED own ACER PEW cs baa

Dileiiteiarsitescisiinssosa. carr

A-10

prohibition’ to the maintenance of an enforcement action

by the receiver in this case.*

The judgment of the district court holding the 8.LP.A.

inapplicable and dismissing the action as to S.LP.C. must

therefore be reversed for the reasons stated herein. Since

we reject the premise on which the S.L-P.C. was dismissed

as a party to the action—inapplicability of the S.I.P.A. to

a company of Guaranty’s status—the action is remanded to

the district court for processing consistent with this opin-

ion and specifically to determine’and enforce any rights of

Guaranty’s customers under the §8.1.P.A.

‘7. As mentioned earlier, there are no terms of exclusivity of

enforcement in the statute.

8. The S.L.P.C. also attacks the jurisdiction—both subject mat-

ter and in personam—-of the district court to entertain this action.

We find that ‘the district court sufficiently disposed of these conten-

tions in its memorandum opinion.

FILED

”~\ Apri 23, 1974

James A. Hiccens, Clerk

APPENDIX B

[Court of Appeals Judgment]

UNITED STATES COURT OF APPEALS

For THE Sixtu Circuit

No. 73-1451

>=

———

Securities any ExcHancr Commission,

Plaintiff,

vs.

GuaRANTY Bonp anv Securities Corporation, Ev. Ax.,

Defendants,

James C. Barsour, Receiver,

Appellant.

or — ae

‘Before: Puituips, Chief Judge, CeLesrezze and MILLER,

Cireuit Judges.

JUDGMENT

AppreaL from the United States District Court for the

Middle District of Tennessee.

Tus Cause came on to be heard on the record from the

United States District Court for the Middle District of

Tennessee and was argued by counsel.

On ConsipeRaTION Wuereor, It is now here ordered and

adjudged by this Court that the judgment of the said Dis-

trict Court in this cause be and the same is hereby reversed

and the case is remanded for further proceedings.

It is further ordered that Appellant recover from Appel-

lee, the costs on appeal, as itemized below, and that execu-

tion therefor issue out of said Distriet Court.

Enterep By OrpeR oF THE CouRT

Joun P. HEHMAN

Clerk

A True Copy.

Attest:

John P. Hehman, Clerk

Issued as Mandate:

Costs To be recovered by

Appellant

Filing fee 0.000.200... $25.00

Printing ................0+ $ —

Total $25.00

eR Couper

mt Re Wh ne NN PRR Aa SI

APPENDIX C

[District Court Opinion]

IN THE

UNITED STATES DISTRICT COURT

For tHE Mippte District or TENNESSEE

NASHVILLE Drviston.

Civil Action No. 5989

$$

SECURITIES AND ExCHANGE CoMMISSION

;

' vs.

Guaranty Bonp anp SEcuRITIES CoRPORATION, et al.

——$<$_$<$<$—<——t a ____—_

MrmoranpuM—No. 54

On December 22, 1970, the Securities and Exchange Com-

mission (hereinafter the “Commission”) filed a complaint

and moved for a preliminary injunction against Guaranty

Bond and Securities Corporation (hereinafter “Guaranty”)

on the basis of alleged violations of the Securities Exchange

Act of 1934 and of the Securities Exchange Act of 1933. On

January 6, 1971, the injunction was granted, and this court

found, among other things, that Guaranty had violated the

Commission’s net capital rule by doing business (1) while

its net capital was less than $5,000, and (2) while its aggre-

gate indebtedness exceeded 2,000 per centum of it net capi-

tal, see § 15(e)(3) of the Exehange Act, 15 U.S.C. § 780(e)

(3) and Rule 15¢3-1, 17 C.F.R. 240.15¢3-1, and that the net -

capital violation had existed for a substantial period of time

prior to the filing of the complaint by the Commission. In

the period from December 22, 1970, to January 6, 1971,

Guaranty continued to do business, and prior to January 6,

handled 101 transactions during 1971. Then, pursuant to

valentines

C.2

the Commission’s motion, a receiver was appointed by

agreed order entered on January 29, 1971.

On May 27, 1971, the receiver made demand upon the

Securities Investor Protection Corporation (hereinafter

“SIPC”) for protection of Guaranty’s customers under the

Securities Investor Protection Act of 1970, 15 U.S.C.

§ 7Saaa, et seq. (hereinafter the “Act”), but SIPC ‘refused.

The Commission had not given SIPC a formal notice as

provided by §5(a)(1) of the Act that Guaranty was

approaching financial difficulty, and had taken no other

action to see that SIPC intervened. On April 6, 1972, pur-

suant to the receiver’s petition, an order was entered requir-

ing the Commission and SIPC to show cause why the

remedies afforded by the Act should not be made available

in this situation. Guaranty has been registered with the

Commission as a broker-dealer under § 15 of the Securities

Exehange Act, 15 U.S.C. § 780, since June 20, 1962, and was

therefore a member of SIPC on December 30, 1970, the date

the Act became effective. See §3(a) of the Act, 15 U.S.C.

§ 7S8eee(a). The ease is now before the court upon SIPC’s

response, which asserts three principal reasons why the

relief requested should be denied: (1) lack of personal juris-

diction over SIPC; (2) lack of subject matter jurisdiction ;

and (3) exclusion of Guaranty by the terms of the Act.

PERSONAL JURISDICTION

SIPC alleges that it is a non-resident foreign corporation

created by Congress and that effective service of process

ean only be achieved in accordance with Rule 4(d) (7), 4(e)

and 4(f) of the Federal Rules of Civil Procedure, which in

turn would require application of Tennessee law governing

service of process on foreign corporations. SIPC asserts

that since it is not doing business in Tennessee, it is not

subject to service of process issued in Tennessee.

SRE INR iy Sal a NEO A MTR RH, eA aR AC ER ak A, Le ~

C-3

This contention must be rejected. The Act plainly pro-

vides that SIPC will impose assessments on its members,

collect these assessments through its collection agent, and

extend protection to customers of its members. Since many

members of SIPC are located within the state of Tennessee, it

necessarily follows that the execution of these statutory ac-

tivities anticipates a continuing relationship between SIPC

and its members and customers, and the doing of these acts

within the state of Tennessee necessary to achieve the pur-

poses for which the Act was conceived. The nature of this

relationship and the protection which SIPC affords Ten-

nessee investors is sufficient in this court’s opinion to war-

rant the exercise of in personam jurisdiction consistent with

due process, and to be “... such that maintenance of the

suit does not offend traditional notions of fair play and

substantial justice.” International Shoe vy. State of Wash-

‘ington, 326 U.S. 310, 316 (1945). See also, McGhee v. Inter-

national Life Insurance Co., 355 U.S. 220 (1957).

The court finds this holding to be consistent with the

Tennessee long-arm statute, T.C.A. § 20-235, et seq., which

has been construed by the Tennessee courts as conferring

“ |. . jurisdiction over non-resident defendants to the

extent permitted by the due process clause,” Darby v.

Superior Supply Co., 224 Tenn. 540, 458 S.W.2d 423, 426

(1970), and in accord ‘with this cireuit’s interpretation of

that statute’s permissible breadth under the due process

clause of the Fourteenth Amendment. See King v. Hailey

Chevrolet, 462 F.2d 63 (6th Cir. 1972); Southern Machine

Company v. Mohasco Industries, Inc., 401 F.2d 374 (6th

Cir. 1968). Certainly it can be said that “. . . Tennessee

has an interest in resolving the conflict at issue... .”

Southern Machine Company v. Mohasco Industries, Inc.,

supra, at 384.

C-4

Suspsect MATTER JURISDICTION

SIPC asserts that although by $3 of the Act it is made

subject to and granted all the powers conferred upon a non-

publie corporation by the District of Columbia Non-Profit

Corporation Act, and is granted additional powers under

subsection (b) to sue and be sued in any court, state or fed-

eral, there is a clear congressional mandate that enforce-

ment actions against SIPC must be brought where its

principal office is located. This assertion is based upon

the fact that § 7(b) provides that in the event of the refusal

of SIPC to commit its funds or otherwise to act for the

protection of customers of any member, the Commission

may apply to the district court of the United States in which

the principal oftice of SIPC is located for an order requir-

ing SIPC to discharge its obligation under the Act, and

that had the Commission elected to seek enforcement in this

case, the action would have to have been brought in Wash-

ington, D. C., the location of the principal and only office of

SIPC.

For this reason, SIPC asserts that the court lacks sub-

ject matter jurisdiction to adjudicate the relief sought. The

court finds this contention without merit, for the effect of

such a proposition would not only be to substantially frus-

trate a principal goal of the Act—protection of public

investors, but would also render meaningless the language

of §3(b)(1) which confers upon SIPC the right to sue and

be sued in any court, state or federal. Had the instant

proceeding been instituted in this court by the Commission

rather than the receiver, then under §7(b) of the Act dis-

missal of the action for improper venue if not lack of sub-

ject matter jurisdiction might logically be required. How-

ever, the fact that the receiver’s enforcement action here is

of the same type which, under §7(b), the Commission may

institute in the district court coterminous with the locale of

SIPC’s principal office does not compel the conclusion that

the receiver must do likewise, nor that district courts other

SRA ALLELE EDEL PDL ALLELE ALS A

C-5

than those of the District of Columbia lack subject matter

jurisdiction over claims arising under the Act. If substance

and meaning are to be given to the Act and to the legisla-

tive goal of investor protection, then the default or neglect

of the Commission to institute enforcement proceedings

under §7(b) should give rise to a similar cause of action

by a receiver in behalf of a member’s customers. When

such an occasion arises, § 7(b) must be read in pari materia

with § 3(b)(1) so as to provide a forum of practical utility ;

to the parties involved and which can give meaningful effect :

to the Act as a whole in the protection-of SIPC’s members

and their customers located throughout the country.

Since the jurisdictional interpretation sought by SIPC

would, in severely limiting access to the courts, run counter

to these considerations, the court finds that the provisions

of §7(b) do not limit this court’s power to adjudicate an

enforcement action brought by a receiver of an insolvent ;

member of SIPC. :

ExcLusion OF GUARANTY UNDER THE ACT 2

SIPC contends that the application of the Act to this

case would be to give it an unlawful retroactive effect.

There is no dispute that the Act was intended to operate

prospectively only. As stated by the court in Lohf v. Casey,

330 F. Supp. 356, 358 (D. Colo. 1971), aff’d. 446 F.2d 618

(10th Cir. 1972):

“...1t is equally clear that Congress expressed an

intention of refusing to make the Act retroactive.

The record is replete with comments to that effect,

the most cogent example being the report of the

Committee on Interstate and Foreign Commerce:

“*Tt is the clear intention of your committee that

SIPC assume no liability for firms either in net

capital violation, in liquidation, or in bankruptcy

at the time of creation of SIPC. H. R. Rep. No.

1613, 91st Cong., 2nd Sess. 4 (Oct. 21, 1970), re-

printed in 3 U.S. Code Cong. & Admin. News ’70

at 5268.’

on NE eae

eae OR RAIN Mee oe

Betis Raman he har) s

C-6

“This language is frequently echoed in the debates

on this bill, and it seems clear that Congress did

not intend the bill to operate retroactively.”

As further evidence of the scope of coverage envisioned

by Congress, Representative Moss, one of the proponents of

the Act and a member of the Conference Committee stated:

“This is not anticipated as bailing out those firms

or their customers. ‘his would be outside the scope

of this bill. This bill does not cover retroactively.”

116 Cong. Ree. 39,362 (1970).

Notwithstanding the prospective provisions of the Act,

there remains the problem of whether the relief sought

here would constitute a retroactive application. The Act

provides that the rights of claimants are fixed as of the

“filing date”. In explanation of this term, §5(b)(4)(B)

provides:

“(B) Filing date—The term ‘filing date’ means

the date on which an application with respect to any

debtor is filed under subsection (a) (2); except that

if—

(i) a petition was filed before such date by or

against the debtor under the Bankruptcy Act, or

(ii) the debtor is the subject of a proceeding.

pending in any court or before any agency of the

United States or any State in which a receiver, »

trustee, or liquidator for such debtor was

appointed which proceeding was commenced

before the date on which such application was filed,

‘ies the term ‘filing date’ means the date on

which such petition was filed or such proceeding

commenced.”

In terms of the instant proceeding, a receiver was not

appointed until January 29, 1971. SIPC contends, however,

that this receivership was merely an ancillary action taken

pursuant to the injunction proceeding which was com-

menced on December 22, 1970, eight days prior to the Act’s

effective date. Although § 5(b) (4) (B) (ii) is rather equivo-

C-7

eal, the court is inclined to agree with SIPC that the

injunction proceeding commenced on December 22, 1970,

determined the filing date by reason of the receiver subse-

quently appointed. Furthermore, there is another per-

suasive factor present which compels the same conclusion.

The injunction sought by the Commission was based in part

upon the failure of Guaranty to meet the net capital

requirements of Rule 15¢3-1, 17 C.F.R. 240.15¢3-1. As pre-

viously reflected by the legislative history, the Act was not

intended to cover firms in such violation prior to December

30, 1970. This fact, coupled with the inescapable conclu-

sion, drawn from evidence precipitated by the injunction

proceeding, that Guaranty was hopelessly insolvent prior

to December 30, 1970, persuades the court that to grant the

requested relief would be a retroactive application of the.

Act and a clear frustration of legislative intent. Therefore,

the court holds that customers of Guaranty are not entitled

to protection under the Act, and it is hereby ORDERED

that SIPC be dismissed as a party to this cause.

L. CLureE Morton

L. Clure Morton

United States District Judge

FILS PIO:

SPS A a eA Ty MO ED ee SNe

Fae BON OL, EE OIE

APPENDIX D

[Relevant Sections of the Securities

Investor Protection Act of 1970]

Section 3 _§78ccc. Securities Investor Protection Corporation

(a) Creation—There is hereby established a body cor-

porate to be known as “Securities Investor Protection

Corporation” (hereafter in this chapter referred to as

“SIPC”). SIPC shall be a nonprofit corporation and shall

have suecession until dissolved by act of the Congress

SIPC shall—

(1) not be an agency or establishment of the

United States Government;

(2) he a membership corporation the members of

which shall be—

(A) all persons registered as brokers or dealers

under section 780(b) of this title, and

(B) all persons who are members of a national

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 companies

or unit investment trusts, (ii) the sale of variable

annuities, (iii) the business of insurance; or (iv) the

business of rendering investment advisory services

to one or more registered iavestment companies or

insurance company separate accounts; and

(3) except as otherwise provided in this chapter,

be subject to, and have all the powers conferred upon

a nonprofit corporation by, the District of Columbia

Nonprofit Corporation Act (D.C. Code, see. 29-1001

and fol.).

(b) Powers.—In addition to the powers granted to SIPC

elsewhere in this chapter, SIPC shall have the power—

Oe tl MONEE ONY set nit

Section 4

PURER EL OR ens OH

(1) to sue and be sued, complain and defend, in its

corporate name and through its own counsel, in any

court, State, or Federal:

* * * *

§78ddd. SIPC Fund

(a) Zn general.— ;

(1) Establishment of fund —SIPC shall establish

a “SIPC Fund” (hereinafter in this chapter referred

to as the “fund”’). All amounts received by SIPC

(other than amounts paid directly to any lender pur-

suant to any pledge securing a borrowing by SIPC)

shall be deposited in the fund, and all expenditures

the beneficial owner of 5 per centum or more of

(2) Balance of the fund.—The balance of the fund

at any time shall consist of the aggregate at such

time of the following items:

(A) Cash on hand or on deposit.

(B) Amounts invested in United States Govern-

ment or agency securities.

(C) Confirmed lines of credit.

(3) Confirmed lines of credit——For purposes of

this section, the amount of confirmed lines of. creat

as of any time is the aggregate amount which SIPC

at such time has the right to borrow from banks and

other financial institutions under confirmed lines of

credit or other written agreements which provide

that moneys so borrowed are to be répayvable by SIPC

not less than one vear from the time of such borrow-

ings (ineluding, for purposes of determining when

such moneys are repayable, all rights of extension,

refunding, or renewal at the election of SIPC).

(b) Initial required balance for fund.—Within one hun-

dred and twenty days from December 50, 1970, the balance

of the fund shall aggregate not less than $75,000,000, less

any amounts expended from the fund within that period.

D-3

(c) Assessments.—

(1) Luitial assessments—Each member of SIPC

shall pay to SIPC, or the collection agent for SIPC

specified in section 7Sili (a) of this title, on or before

the one hundred and twentieth day following Decem-

ber 30, 1970, an assessment equal to one-eighth of 1

per centum of the gross revenues from the securities

business of such member during the calendar year

1969, or if the Commission shall determine that, for

purposes of assessinent pursuant to this paragraph, :

a lesser percentage of gross revenues from the securi-

ties business is appropriate for any class or classes

‘of members (taking into account relevant factors, in-

cluding but not limited to types of business done

and nature of securities sold), such lesser percent-

ages as the Commission, by rule or regulation, shall

establish for such class or classes, but in no event

less than one-sixteenth of 1 per centum for any such

class. In no event shali any ‘assessment upon a

member pursuant to this paragraph be less than

$150. .

(2) General assessment authority —SIPC_ shall,

by bylaw or rule, impose upon its members such

assessments as, after consultation with self-regula-

tory organizations, SIPC may deem necessary and

-appropriate to establish and maintain the fund and

to repay any borrowings by SIPC. Any assessments

so made shall be in conformity with contractual obli-

gations made by SIPC in connection with any bor-

rowing incurred by SIPC. Subject to paragraph (3)

and subsection (d) (1) (A) of this section, any such.

assessment upon the members, or any one or more

classes thereof, may, in whole or in part,-be based.

upon or measured by (A) the amount of their gross

revenues from the securities business, or (B) all or

any of the following factors: the amount or composi-

tion of their gross revenues from the securities busi-

ness, the number or dollar volume of transactions:

effected by them, the number of customer accounts

maintained by them or the amounts of cash and

PA

4

securities in such accounts, their net capital, the

nature of their activities (whether in the securities

business or otherwise) and the consequent risks, or

other relevant factors.

(3) Limitations.—Notwithstanding any other pro-

vision of this chapter (other than section 78ece(f) of

this title)—

(A) no assessment shall be made upon a mem-

ber otherwise than pursuant to paragraph (1) or

(2) of this subsection,

(B) an assessment may be made under para-

graph (2) of this subsection at a rate in excess of

one-half of one per centum during any twelve-

month period if SIPC determines, in accordance

with a bylaw or rule, that such rate of assessment

during such period will not have a material

_—— adverse effect,on the financial condition of its

members or their customers, except that no assess-

ments shall be made pyrsuant to such paragraph

upon a member which require payments during any

such period which exceed in the aggregate one per

centum of such member’s gross revenues from the

securities business for such period, and

(C), ‘no assessment shall include any charge

based upon the member’s activities (i) in the dis-

tribution of shares of gistered open end invest-

ment companies or unitNnvestment trusts, (ii) in

the sale of variable annuities, (iii) in the business

of insurance, or (iv) in the business of rendering

‘investment advisory services to one or more reg-

istered investment companies or insurance com-

pany separate accounts.

(d) Requirements respecting ‘assessments and lines of

credit.—

(1) Assessments.—

(A) 1% of 1 percent assessment.—Subject to sub-

section (¢) (3) of this section, SIPC shall impose

upon each of its members an assessment at a rate

AS IEEE IAG 0 at) wrt

. mow a ge Salts lla aneet

eh onl Ac ENE PAA LE -

D-5

of not less than one-half of 1 per centum per

annum of the gross revenues from the securities

business of such member—

(i) until the balance of the fund aggregates

not less than $150,000,000 (or such other amount

* as the Commission may determine in the publie

interest),

(ii) during any period when there is out-

standing borrowing by SIPC pursuant to sub-

section (f) or subsection (g) of this section, and

(iii) whenever the balance of the fund (exelu-

sive of confirmed lines of credit) is below

$100,000,000 (or such other amount as the Com-

mission may determine in the public interest).

(B) 14 of 1 percent assessment.—During any

period during which—

(i) the balance of the fund (exclusive of con- ;

firmed lines of credit) aggregates less than

$150,000,000 (or such other amount as the Com-

mission has determined ‘under varagraph (2)

(B)), or |

(ii) SIPC is required under paragraph (2)

(B) to phase out of the fund all confirmed lines :

of credit,

SIPC shall endeavor to make assessments in such

a manner that the aggregate assessments payable

by its members during such period shall not be

less than one-fourth of 1 per centum per annum

of the aggregate gross revenues from the securi- q

ties business for such members during such period. :

(2) Lines of credit.— 4

(A) $50,000,000 limit after 1973. — After 3

December 31, 1973, confirmed lines of credit shall j

not constitute more than $50,000,000 of the balance :

of the fund.

(B) Phaseout requirement.—When the balance 1

of the fund aggregates $150,000,000 (or such other

. SECT eB SRL Agate at

| D-6

. amount as the Commission may determine in the

public interest) SIPC shall phase out of the fund

all confirmed lines of credit.

. * © * e

Section 5 §78eee. Protection of customers =

(a) Determination of need of protection.—

: - (1) Notice to SIPC.—If the Commission or any

i self-regulatory organization is aware of facts which

: lead it to believe that any broker or dealer subject

cf , to its regulation is in or is approaching financial

difficulty, it shall immediately notify SIPC, and, if,

such notification is by a self-regulatory organization,

the Commission.

: (2) Action by SIPC.—If SIPC determines that

any member has failed or is in danger of failing

to meet its obligations to customers and that there

exists one or more of the conditions specified in sub-

section (b) (1) (A) of this section, SIPC, upon

notice to such member, may apply to any court of

competent jurisdiction specified in section 78aa or

7TSu(e) of this title for a decree‘adjudicating that

customers of such member are in need of the pro-

tection provided by this chapter.

A RIE Siete AM wh Allee BM

: (3) Effect of other pending actions——An applica-

; tion under paragraph (2)—

(A) with the consent of the Commission, may

be combined with any action brought by the Com-

mission including an action by it for a temporary

receiver pending an appointment of a trustee under

subsection (b) (3) of this section, and

(B) may be filed notwithstanding the pendency

in the same or any other court of any bankruptcy,

mortgage foreclosure, or equity receivership pro-

ceeding or any proceeding to reorganize, conserve,

or liquidate such member or its property, or any

proceeding to enforce a lien against property of

such member.

Nab PANIES Se

A

BOA als TBD Nine ot” sate ee Biase,

Fab et RAINES i DO EL

D-7

(b) Court action.—

(1) Issuance of decree.—

(A) Findings by court.—A court to which appli-

cation is made pursuant to subsection (a) (2) of

this section shall grant the.application and issue

a decree adjudicating that customers of the mem-

ber named in the application are in need of pro-

tection under this chapter if it finds that such

member—

(i) is insolvent within the meaning of section

1(19) of Title 11, or is unable to meet its obliga-

tions as they mature, or

(ii) has committed ‘an act of bankruptcy

within the meaning of section 21 of Title 11, or

(iii) is the subject of a proceeding pending

in any court or before any agency of the United

States or any State in which a receiver, trustee,

or liquidator for such member has been appoint-

ed, or

(iv) is not in compliance with applicable

requirements under the 1934 Act or rules or

regulations of the Commission or any self-regu-

latory organization with respect to financial

responsibility or hy pothecation of customers’

securities, or ‘

(v) is unable to make such computations as

may be necessary to establish compliance with

such financial responsibility or hypothecation

rules or regulations.

(B) Uncontested, etc., applications.—If within

three business days after the filing of an applica-

tion pursuant to subsection (a) (2) of this section,

or such other period as the court may order, the

debtor shall consent to or fail to contest such appli-

cation or shall fail to show facts sufficient to con-

torvert (sic) any material allegation of such

application, the court shall forthwith grant the

LRT EAC NA NPA IE INES TIMED BU NNN i i i Abe

D-8

application and issue a decree adjudicating that

customers of the member named in the application

are in need of protection under this chapter.

(2) Exclusive jurisdiction over debtor—Upon

the filing of an application pursuant to subsection

(a) (2) of this section, the court to which application

is made shall have exclusive jurisdiction of the

debtor involved and its property wherever located

with the powers, to the extent consistent with the

purposes of this chapter, of a court of bankruptcy

and of a court in a proceeding under chapter X of the

Bankruptey Act. Pending an adjudication under

paragraph (1) such court shall stay, and upon

appointment by it of a trustee as provided in para-

graph (3) such court shall continue the stay of, any

pending bankruptcy, mortgage foreclosure, equity

receivership, or other proceeding to reorganize, con-

serve, or liquidate the debtor or its property and

_ any other suit against any receiver, conservator, or

trustee of the debtor or its property. Pending such

adjudication and ujjon the appointment by it of such

trustee, the court may stay any proceeding to enforce

a lien against property of the debtor or any other

suit against the debtor. Pending such adjudication,

such court may appoint a temporary receiver.

(3) Appointment of trustee—If the court grants

an application and makes an adjudication under

paragraph (1), the court shall forthwith appoint as

trustee for the liquidation of the business ef the

debtor in accordance with-section 6, and as attorney

for such trustee, such persons as SIPC shall specify.

No person shall be appointed as such trustee or

attorney if such person is not “disinterested” within

the meaning of section 558 of Title 11.

(4) Debtor and filing date defined—For purposes

of this chapter—

(A) Debtor.—The term “debtor” means a mem-

ber of SIPC in respect of whom an application has

es incall

Section 6

D-9

been filed pursuant to subsection (a) (2) of this

section.

(B) Filing date—The term “filing date” means

the date on which an application with respect to

any debtor is filed under subsection (a) (2) of this

section; except that if—

(i) a petition was filed before such date by or

against the debtor under the Bankruptcy Act, or

(ii) the debtor is the subject of a proceeding

pending in any court or before any agency of

the United States or any State in which a

receiver, trustee, or liquidator for such debtor

was appointed which proceeding was commenced

before the date on which such application was

filed,

then the term “filing date” means the date on which

such petition was “filed or such prneeomee com-

menced.

(ce) SEC participation in proceedings.—The Painboliacion

may, on its own motion, file notice of its appearance in any

proceeding under this chapter and may thereafter partici-

pate as a party.

§78fff. Liquidation proceedings \

(a) General purposes of liquidating proceeding—The

purposes of any proceeding in which a trustee has been

appointed under section 78eee(b) (3) of this title (here-

after in this section referred to as a “liquidation proceed-

ing”) shall be: |

(1) as promptly as possible after such appoint-

ment and in accordance with the Provinioay of this

section—

(A) to return specifically identifiable property

to the customers of the debtor entitled thereto;

a

CR EL ye I ee Nor

(b)

SOR LOR EID TALE SEMI A ote SEH

1-10

(B) to distribute the single and separate fund,

and (in advance thereof or concurrently therewith)

pay to customers moneys advanced by SIPC, as

provided in subsection (f) of this section;

(2) to operate the business of the debtor in order

to complete open contractual commitments of the

debtor pursuant to subsection (d) of this section;

(3) to enforce rights of subrogation as provided

in this chapter; and

(4) to liquidate the business of the debtor.

Powers and Duties of Trustee.—

(1) Trustee powers.—A trustee appointed under

section 7Seee(b) (3) of this title (hereinafter

referred to as “trustee”) shall be vested with the

same powers and title with respect to the debtor and

the property of the debtor, and the same rights te

avoid preferences, as a trustee in bankruptey and a

trustee under chapter X of the Bankruptey Act have

with respect to a bankrupt and a chapter X debtor.

In addition, a trustee shall have the right—

(A) with the approval of SIPC, to hire and fix

the compensation of all personnel (including offie-

ers and employees of the debtor and of its examin-

ing authority) and other persons (including but

not limited to accountants) that are deemed by

such trustee necessary for all or any purposes of

the liquidation proceeding, and

(B) to operate the business of the debtor in

order to complete open contractual commitments

pursuant to subsection (d) of this section,

and no approval of the court shall be required there-

for. =

(2) Trustee duties —Except as inconsistent with

the provisions of this chapter or otherwise ordered

by the court, a trustee shall be subject to the same

duties as a trustee appointed under section 72 of

(ce)

D-11

Title 11, except that a trustee may, but shall have

no duty to, reduce to money any securities in the

single and separate fund (provided under subsection

(c) (2) (B) of this section) or in the general estate

of the debtor.

Application of Bankruptcy Act.—

(1) General -provisions applicable—Except as

inconsistent with the provisions of this chapter and

except that in no event shall a plan of reorganization

be formulated, a liquidation proceeding shall be con-

ducted in accordance with, and as though it were

being conducted under, the provisions of chapter X

and such of the provisions (other than section 96(e)

of Title 11) of chapters I to VII, inclusive, of the

Bankruptcy Act as section 502 of Title 11 would

make applicable if an order of the court had been

entered directing that bankruptcy be proceeded with

pursuant to the provisions of such chapters I to

VII, inclusive; except that the court may, for such

period as may be appropriate, stay enforcement of,

but shall not abrogate, the rights provided in section

108 of Title 11 and the right to enforce a valid, non-

preferential lien or pledge against the property of the

debtor. For purposes of applying the Bankruptcy

Act in carrying out this section, any reference in the

Bankrupty Act to the date of commencement of pro-

ceedings under the Bankruptey Act shall be deemed

to be a reference to the filing date (as defined in sec-

tion 78eee(b) (4) (B) of this title).

(2) Special provisions—The following subpara-

graphs of this paragraph shall apply to a liquidation

proceeding in lieu of section 96(e) of Title 11:

(A) Definitions —Except as otherwise expressly

provided in this section, for purposes of this sec-

tion and the application of the Bankruptcy Act to

a liquidation proceeding—

(i) “property” includes cash and securities,

whether or not negotiable and all property of a

similar character ;

Mae are Steel pees AAT He Saab a

SIRE afte oy

WAR RARUR SE Geico

D-12 :

(ii) “customers” of a debtor means persons

(including persons with whom the debtor deals

as principal or agent) who have claims on ac-

count of securities received, acquired, or held by

the debtor from or for the account of such per-

sons (1) for safekeeping, or (II) with a view to

sale, or (III) to cover consummated sales, or

(IV) pursuant to purchases, or (V) as collateral

security, or (VI) by way of loans of securities

by such persons to the debtor, and shall include

persons who have claims against the debtor

arising out of sales or conversions of such

securities, and shall include any person who has

deposited cash with the debtor for the purpose

of purchasing securities, but shall not include

any person to the extent that such person has a

claim for property which by contract, agreement,

or understanding, or by operation of law, is part

of the capital of the debtor or is subordinated

to the claims of creditors of the debtor;

(iii) “cash customer” means, with respect to

any securities or cash, customers entitled to im-

mediate possession of such securities or cash

without the payment of any sum to the debtor,

and for purposes of this clause, the same person

may be a cash customer with reference to cer-

tain securities or cash and not a cash customer

with reference to other securities or cash;

(iv) “net equity” of a customer’s account or

accounts means the dollar amount thereof deter-

mined by giving effect to open contractual com-

mitments completed as provided in subsection

(d) of this section, by excluding any specifically

identifiable property reclaimable by the custo-

mer, and by subtracting the indebtedness, if any,

of the customer to the debtor from the sum which

would have been owing by the debtor to the cus-

tomer had the debtor liquidated, by sale or pur-

chase on the filing date, all other securities and

contractual commitments of the customer, and

= >

ba AR Te ZENE

D-13

for purposes of this definition, accounts held by

a customer in separate capacities shall be

deemed to be accounts of separate customers;

and

(v) “securities” has the same meaning as such

term has under section 96(e) of Title 11.

(B) Single and separate fund.—All property at

any time received, acquired, or held by or for the

account of a debtor from or for the account of

customers except cash customers who are able to

identify specifically their property in the manner

prescribed in subparagraph (C), and the proceeds

of all customers’ property transferred by the

debtor, including property unlawfully converted,

shall constitute a single and separate fund; and all

customers except such cash customers shall consti-

tute a single and separate class of creditors,

entitled to share ratably in such fund on the basis

of their respective net equities as of the filing date

and in priority to all other payments, except that.

(i) there shall be repaid to SIPC, in priority to all

other claims payable from such single and separate

fund, the amount of all advances made by SIPC

to the trustee to permit the completion of open

contractual commitments pursuant to subsection

(d) of this section, and (ii) to the extent that any

other assets of the debtor may be available there-

for as otherwise ordered by the court, all costs and

expenses specified in clauses (1) and (2) of section

104(a) of Title 11 shall be paid from such single

~and separate fund in priority to the claims of such

single and separate class of creditors, and any

moneys advanced by SIPC for such costs and

expenses shall be recouped as such. If such single

and separate fund shall not be sufficient to pay in

full the claims of such single and separate class of

creditors, the creditors of such class shall be en-

titled, to the extent only of their respective unpaid

balances, to share in the general estate with gen-

Sa ee i ge

D-14

eral eréditors. In, or for the purpose of, distri-

buting such fund, all property other than cash shall

be valued as of the close of business on the filing

date. To the greatest extent considered practi-

cable by the trustee, the trustee shall deliver in

payment of claims of customers for their net equi-

ties based upon securities held on the filing date in

their accounts (after giving effect to open contrac-

tual commitments completed as hereinafter pro-

vided), securities of the same class and series of

an issuer ratably up to the respective amounts

which were so held in such accounts. Any prop-

erty remaining after the liquidation of a lien or

pledge made by a debtor shall be apportioned be-

tween his general estate and the single and separ-

ate fund in the proportion in which the general

property of the debtor and the property of his cus-

tomers contributed to such lien or pledge.

(C) Specifically identifiable property. — The

trustee shall return specifically identifiable prop-

erty to the customers of the debtor, entitled

thereto. No cash or securities at any time

received, acquired, or held by or for the account

of a debtor from or for the accounts of customers

shall for the purposes of this paragraph be

deemed to be specifically identified, unless such

property remained in its identical form in the

debtor’s possession until the filing date, or unless

such property was allocated to or physically set

aside for such customers on the filing date. In

determining whether property was allocated to or

physically set aside for such customers, it shall be

sufficient that on the filing date:

(i) securities are segregated individually, or

in bulk for customers collectively ;

(ii) in the case of securities held for the

account of the debtor as part of any central cer-

tificeate service of any clearing corporation or

any similar depositary—

ital

*

ne ee a ee a

D-15

(I) the records of the debtor show or there

is otherwise established to the satisfaction of

the trustee that all or a specified part of the

securities held by such clearing corporation or

other similar depositary are held for specified

customers, or for customers collectively, and

(II) such records of the debtor also show

or there is otherwise established to the satis-

faction of the trustee the identities of the par-

ticular customers entitled to receive specified

numbers or units of such securities so held for

customers collectively; or

(iii) such property is held for the account of

customers of the debtor in such other manner as

the Commission, for the protection of customers

and other creditors on a fair and equitable basis,

by rule or regulation shall have determined to

be sufficiently identifiable as the property of such

customers.

If there is any shortage in securities of the same

class and series of an issuer so segregated in bulk

or otherwise held for customers pursuant to this

subparagraph, as compared to the aggregate rights

of particular customers to receive securities of

such class and series, the respective interests of

such customers in such securities of such class and

series shall be prorated, without prejudice, how-

ever, to the satisfaction of any claim for deficien-

cies as otherwise provided in this section.

(D) Where such single and separate fund is not

sufficient to pay in full the claims of such single

and separate class of creditors, a transfer by a

debtor of any property which, except for such

transfer, would have been a part of such fund may

be recovered by the trustee for the benefit of such

fund, if such transfer is voidable or void under the

provisions of the Bankruptcy Act. For the pur-

pose of such recovery, the property so transferred

shall be deemed to have been the property of the

D-16

debtor and, if such transfer was made to a cus-

tomer or for his benefit, such customer shall be

deemed to have been a creditor, the laws of any

State to the contrary notwithstanding. Subject to

the provisions of paragraph (D), ii any securities

received or acquired by a debtor from a cash cus-

tomer are transferred by the debtor, such customer

shall not have any specific interest in or specific

right to any securities of like kind on hand on the

filing date, but such securities of like kind or the

proceeds thereof shall become part of such single

and separate fund.

(d) Completion of open contractural (sic) commitments.

—The trustee shall complete those contractural commitments

of the debtor relating to transactions in securities which

were made in the ordinary course of debtor’s business and

which were outstanding on the filing date—

(1) in which a customer had an interest, except

those commitments the completion of which the Com-

mission shall have determined by rule or regulation

not to be in the public interest, or

(2) in which a customer did not have an interest,

to the extent that the Commission shall by rule or

regulation have determined the completion of such

commitments to be in the public interest.

For purposes of this subsection (but not for any other

purpose of this chapter) (i) the term “customer” means

any person other than a broker or dealer, and (ii) a cus-

tomer shall be deemed to have had an interest in a trans-

action if a broker participating in the transaction was

acting as agent for a customer, or if a dealer participating

in the transaction held a customer’s order which was to be

executed as a part of the transaction. All property at any

time received, acquired, or held by or for the account of

the debtor (except for cash or securities that are specifi-

cally identifiable as the property of particular customers

and are not the subject of an open contractual commit-

D7

ment), and all property in the single and separate funds

‘shall be available to complete open contractual commit-

ments pursuant to this subsection. Securities purchased or

eash received by the trustee upon completion of any such

commitment shall constitute specifically identifiable prop- |

erty of a customer to the extent that such commitment was

completed with property which constituted specifically

identifiable property of such customer on the filing date, or

was paid or delivered by or for the account of such eus-

tomer to the debtor or the trustee after the filing date.

(e) Notice —Promptly after-his appointment, the trustee

shall cause notice of the commencement of proceedings

under this section to be published in accordance with a

designation of the court, made in accordance with the

requirements of section 51 of Title 11, and at the same time

shall cause to be mailed a copy of such notice to each of

the customers of the debtor as their addresses shall appear

from the debtor’s books and records. Except as the trustee

may otherwise permit, claims for specifically identifiable

property (other than securities registered in the name of

the claimant or segregated for him in his individual name)

or claims payable from property in the single and separate

fund or payable with moneys advanced by STPC, shall not

be paid other tha: from the general estate of the debtor

unless filed within such period of time (not exceeding sixty

. days after such publication) as may he fixed by the court,

and no claim shall be allowed after the time specified in.

section 93 of Title 11. Subject to the foregoing, and without

limiting the powers and duties of the trustee to discharge

promptly obligations as specified in this section, the court

may make appropriate provision for proof and enforcement

» of all claims against the debtor including those of any

subrogee. |

}

{

D-18

(f) SIPC advances to trustee.—

(1) Advances for customers’ claims.—In order to

provide for prompt payment and satisfaction of the

net equities of customers of ‘debtor, SIPC. shall

advance to the trustee such moneys as may

be required to pay or otherwise satisfy claims in full

of each customer, but not to exéeed $50,000 for such

customer ; except, that—

(A) insofar as all or any portion of the net

equity of a customer is a claim for cash, as distinet

from securities, the amount advanced by reason

_of such claim to cash shall not exceed $20, 000;

_ (B) a customer who holds accounts with the

debtor in separate capacities shall be deemed to

be a different customer in each capacity;

(C) no such advance shall be made by SIPC to

the trustee to pay or otherwise satisfy, directly or

indirectly, any claims of any customer who is a

general partner, officer, or director of the debtor,

the beneficial owner of 5 per centum or more of

‘any class of equity security of the debtor (other

than a non-convertible stock havi ing fixed prefer-

ential dividend and liquidation rights) or limited

partner with a participation of 5 per centum or

’ more in the net assets or net profits of the debtor ;

and ;

(D) no such hacanes shall be made by SIPC to

the trustee to pay or otherwise satisfy claims of any

customer who is a broker or dealer or bank other

than to the extent that it shall he established to the

satisfaction of the trustee, from the books and

records of the debtor or from the books and ree-

ords of a broker or dealer or bank or otherwise,

that claims of such, broker or dealer or bank

against the debtor arise out of transactions for

customers of such broker or dealer or bank, in

which event, each such customer of such broker or

dealer or bank shall be deemed a separate cus-

tomer of the debtor.

eine en

D-19

To the extent that moneys are advanced by SIPC to

the trustee to pay the claims of customers, SIPC

shall be subrogated to the claims of such customers

with rights and priorities provided in this section.

(2) Other advances.~-SIPC may advance to the

trustee such moneys as may be required to effectuate

subsection (b) (1) (A) of this section. SIPC shall

advance to the trustee such moneys as (with those

available pursuant to subsection (d) of this section)

» may be required to effectuate subsection (d) of this

section.

(g) Payments to customers; no proof of claim required.—

It shall be the duty of the trustee to discharge promptly, in

accordance with the provisions of this section, all obligations

of the debtor to each of its customers relating to, or net

equities based upon, securities or cash by the delivery of

securitfes or the effecting of payments to such customer

(subject to subsection (f) (1) of this section, to the extent

that such payments are made out of advances from SIPC (

under such subsection) insofar as such obligations are :

ascertainable from the books and records of the debtor or 4

are otherwise established to the satisfaction of the trustee,

whether or not such customer shall*have filed formal proof

of such claim. For that purpose the court among other

things shall— “s

(1) in respect of claims relating to securities or

cash, authorize the trustee to make payment out of

moneys made available to the trustee by SIPC not-

withstanding the fact that there shall not haye been

any showing or determination that there are sufticient

funds of the debtor available to make such payment;

and coed

PE ee ee

(2) in respect of claims relating to, or net equities

based upon, securities of a class and series of an

issuer, which are ascertainable from the books and

records of the debtor or are otherwise established to

Se RE Se TE FON

AB oe ene Na ao NIN ti at

RENE EEE CRE ADE NIE RTE I ORO ad EMER.

Ss

i D-20

: the satisfaction of the trustee, authorize the trustee

to deliver securities of such class and series if and

to the extent available to satisfy such claims in whole

or in part, with partial deliveries to be made pro

rata to the greatest extent considered practicable by

the trustee. P

Any payment or delivery of property pursuant to this sub-.

; section may be conditioned upon the trustee requiring claim-

; ants to excute in a form to be determined by the trustee,

' ; appropriate receipts, supporting affidavits, and assign-

ments, but shall be without prejudice to the right of any

claimant to file formal proof of claim within the period

specified in subsection (e) of this section for any balance of

securities or cash to which he may deem himself entitled.

‘(h) Proof of claim by associates and others.—The pro-

visions of this section permitting discharge of obligations

of the debtor to pay cash or to deliver securities without

formal proof of claim shall not apply to any person “asso-

ciated” with the debtor as defined in section 78e(a) (18) of

this title, to any beneficial owner of 5 per centum or more

of the voting stock of the debtor, or to any metnber of the

immediate family of any of the foregoing.

(i) Reports by trustee to court.—All reports to the court

by a trustee (other than reports required to be filed pursu-

ant to section 567(3) of Title 11) shall be in such form and

detail as, having due regard to the requirements of section

78q of this title and the rules and regulations thereunder

and the magnitude of items and transactions involved in

connection with the operations of a broker or dealer, the

Commission shall determine by rules and regulations to

: present fairly the results of such proceeding as at the dates

or for the periods covered by such reports. |

td at sats ip elles Arua te tb Avid ay

‘

(j) Effect of chapter on claims.—Except as otherwise

provided in this section, nothing in this section shall limit

D-21

the right of any person to establish by formal proof such

clairis as such person may have to payment, or to delivery

of specific securities without resort to moneys advanced by

SIPC to the trustee.

Section 7(b)§78ggg. SEC functions

Section 9

(b) Enforcement of actions.—In the event of the refusal

of SIPC to commit its funds or otherwise to act for the

protection of customers of any member of SIPC, the Com-

mission may apply to the district court of the United States

in which the principal office of SIPC is located for an order

requiring SIPC to discharge its obligations under this chap-

ter and for such other relief as the court may deem appro-

priate to carry out the purposes of this chapter.

§78iii. Functions of self-regulatory organizations

(a) Collecting agent—Each self-regulatory organization

shall act as collection agent for SIPC to collect the assess-

ments payable by all members of SIPC for whom such self-

regulatory organization is the examining authority, and

members of SIPC who are not members of any self-regula-

tory organization shall make payment direct to SIPC. An

examining authority shall be obligated to remit to SIPC

assessments made under section 78ddd of this title only to

the extent that payments of such assessments are received

by such examining authority.

(c) Jnspections.—The self-regulatory organization of

which a member of SIPC is a member shall inspect or

examine such member for compliance with applicable finan-

cial responsibility rules, except that if a member of SIPC

is a member of more than one self-regulatory organization,

GN REIN BEL 2 RITES CRIES LOS Ren PI HO tS

D-22

SIPC shall designate one of such self-regulatory organiza-

tions to inspect or examine such member of SIPC for com-

pliance with applicable financial responsibility rules. Such

self-regulatory organization shall be selected by SIPC on

the basis of regulatory procedures employed, availability

of staff, convenience of location, and such other factors as

SIPC may consider appropriate for the protection of cus-

tomers of its members.

? * = e *

Section 12 §78//], Definitions

For purposes of this chapter:

(1) Self-regulatory organization.—The term “self-

* regulatory organization” means a national securities

exchange or a national securities association reg-

istered pursuant to subsection (b) of section 780-3

of this title.

(3) Examining authority—The term “examining

authority” means, with respect to any member of

SIPC, the self-regulatory organization which inspects

or examines such member of SIPC or the Commission

if such member of SIPC is not a member of any self-

regulatory organization.

ce SBE Si oN RLU a RAE LAR DEG PSTN Se ta sa ds 3 Sea ace sR

aes Donte te

APPENDIX E

[Other Statutory and Constitutional

Provisions Involved]

TENNESSEE LONG-ARM STATUTE

20-235. Jurisdiction of persons unavailable to personal

service in state—Classes of actions to which applicable. —

Persons who are nonresidents of Tennessee and residents

‘of Tennessee who are outside the state and cannot be per-

sonally served with process within the state are subject to

the jurisdiction of the courts of this state as to any action

or claim for relief arising from:

(a) The transaction of pny business within the

state;

(b) Any tortious act or omission within this state;

(c) The ownership or possession of any interest in

property located within this state;

(d) Entering into any contract of insurance,

indemnity, or guaranty covering any person, prop-

erty, or risk located within this state at the time of

contracting;

(e) Entering into a contract for services to be

rendered or for materials to be furnished in this

state. ’

(f) Any basis not inconsistent with the constitu-

tion of this state or of the United States.

“Person” as used herein shall include corporations and

all other entities which would be subject to service or proc-

ess if present in this state. Any such person shall be

deemed to have submitted to the jurisdiction of this state

who acts in the manner above described through an agent

or personal representative. ch. 67, §1; 1972 (Adj. S.),

ch. 689, § 1.

ey

AO Le EPO

AY Mig P Ahlen ah a My Cie be if

AAS EG IOL IAA MSY CLD:

" Dil ee —_—

ee ae

E-2

UNITED STATES CONSTITUTION

AMENDMENT V—CapiTaL Crimes; DousLe JEOPARDY; SELF-

IncriminaTion; Dur Process; Just COMPENSATION FOR

PROPERTY

No person shall be held to answer for a capital, or other-

wise infamous crime, unless on a presentment or indictment

of a Grand Jury, except in cases arising in the land or

naval forces, or in the Militia, when in actual service in

time of War or public danger; nor shall any person -be sub-

ject for the same offense to be twice put in jeopardy of life

or limb; nor shall be compelled in any criminal case to be

a witness againt himself, nor be deprived of life, liberty,

or property, without due process of law; nor shall private

property be taken-for public use, without just compensa-

tion.