# Appendix — Securities Investor Protection Corp. v. Barbour

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1975
- **Citation:** 421 U.S. 412

## Text

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 §

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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

A-9

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

A-6

‘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

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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.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386414_0415%3A03. Public record. Not legal advice.