In their amicus brief filed with the DC Circuit, the former SEC officials contended that the SEC’s efforts to so dramatically expand the scope of persons covered through SIPC should be rejected for at least three distinct reasons. First, the SEC’s proposal to deem purchasers of CDs issued by a foreign bank to be customers of a domestic broker-dealer contravenes the plain language of the statute, conflicts with the relevant statutory history, and is at odds with more than forty years of judicial precedent. Second, the SEC’s unwarranted expansion of the definition of the term “customer” would substantially increase the financial exposure of the SIPC Fund. Third, the SEC’s proposed redefinition of the term “customer” does not warrant Chevron deference.
Where a statute is administered by more than one entity, noted the former SEC Commissioners, no single entity can claim Chevron deference. Here, the relevant statute is also administered by SIPC, a body governed by a seven-member board composed of presidential and executive branch appointees. SIPC’s views are diametrically opposed to the SEC’s, said the former officials, and should be accorded more deference.
According to amici, the SEC has presented no economic analysis considering the financial implications of this expanded coverage for the industry that must pay fees in order to support the SIPC Fund and the U.S. Treasury, which is statutorily required to provide a line of credit to help support the SIPC Fund, which line of credit is more likely to be drawn down if the scope of coverage is expanded as the SEC requests. The SEC’s proposed expansion of SIPC protection, absent even the most rudimentary consideration of any financial consequences, would radically transform SIPA and threaten SIPC’s ability to function as Congress intended. Under the SEC’s interpretation, noted the brief, SIPC would become another version of the FDIC, with SIPC obligated to provide blanket protection against investment fraud.
The critical aspect of the “customer” definition under SIPA is the entrustment of cash or securities to the broker-dealer for the purposes of trading securities. The investors in the CDs had no cash or securities on deposit with the broker-dealer at the time it failed. Thus, said amici, the SEC does not seek the return of any cash on deposit with the broker-dealer for the purpose purchasing CDs because there is none. It is undisputed that the investors had purchased and received those CDs at the time the broker failed. Instead, said the brief, the SEC is essentially seeking to force SIPC to generate rescission damages for CDs already purchased and received. But SIPC has no such authority, emphasized the former Commissioners.