Opinion ID: 786487
Heading Depth: 2
Heading Rank: 3

Heading: the sec's interpretation is persuasive and merits skidmore deference

Text: 38
39 The first question we must ask in the deference analysis is whether Congress has directly spoken to the precise question at issue. Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). Of course, if congressional intent could be discerned from the face of SIPA, our deference inquiry would be over because the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress. Id. at 842-43, 104 S.Ct. 2778; see also United States v. Gayle, 342 F.3d 89, 92 (2d Cir.2003) (Statutory construction begins with the plain text and, if that text is unambiguous, it usually ends there as well.). SIPA does not address the precise issue presented in this case. The statute fails to provide any definition of a claim for cash. See 15 U.S.C. § 78 lll. None of the provisions outlines how the Claimants — who were fraudulently misled to invest their money in Goren's bogus securities — should be treated. This is precisely the type of interstitial question anticipated by Chevron and its progeny. See, e.g., Barnhart v. Walton, 535 U.S. 212, 222, 122 S.Ct. 1265, 152 L.Ed.2d 330 (2002). 40 In light of the statute's silence, and because we have an agency interpretation of section 9(a)(1) of SIPA, 15 U.S.C. § 78fff-3(a)(1), the second Chevron step requires that, as opposed to proceeding to construe the statute ourselves (as we usually would), we must determine whether the SEC's interpretation is based on a permissible construction of the statute. Chevron, 467 U.S. at 843, 104 S.Ct. 2778. If the administrator's reading fills a gap or defines a term in a way that is reasonable in light of the legislature's revealed design, we give the administrator's judgment `controlling weight.' NationsBank of North Carolina, N.A. v. Variable Annuity Life Ins. Co., 513 U.S. 251, 257, 115 S.Ct. 810, 130 L.Ed.2d 740 (1995) (quoting Chevron, 467 U.S. at 844, 104 S.Ct. 2778); see also SEC v. Zandford, 535 U.S. 813, 819-20, 122 S.Ct. 1899, 153 L.Ed.2d 1 (2002) (explaining that SEC's interpretation of the ambiguous text of § 10(b) ... is entitled to deference if it is reasonable). 41 There are several reasons that the mandatory deference envisioned by Chevron would be inappropriate here. First, although the SEC has clearly had the power to draft rules to address this ambiguity in SIPA, the interpretation proffered in its brief has never been articulated in any rule or regulation. 16 As the SEC admits, [o]ther than the Series 500 Rules, which the Commission does not interpret to cover fictitious securities, the Commission has not defined by regulation the terms in Section 9(a). Prezioso Letter at 6. In United States v. Mead Corp., 533 U.S. 218, 121 S.Ct. 2164, 150 L.Ed.2d 292 (2001), the Supreme Court explained that it ha[s] recognized a very good indicator of delegation meriting Chevron treatment in express congressional authorizations to engage in the process of rulemaking or adjudication that produces regulations or rulings for which deference is claimed.  Id. at 229, 121 S.Ct. 2164 (emphasis added). While the fact that the SEC interpretation has not been expressed in the form of a rule or regulation crafted after notice and comment does not alone determine the applicability of Chevron, see id. at 230-31, 121 S.Ct. 2164; Walton, 535 U.S. at 222, 122 S.Ct. 1265, taken together with the factors discussed infra, it counsels against affording Chevron deference to the SEC's interpretation. 42 Second, it appears that the position taken by the SEC in its brief is one that it has not previously articulated in any form. Cf. Local 705, Int'l Bhd. of Teamsters v. Daniel, 439 U.S. 551, 566 & n. 20, 99 S.Ct. 790, 58 L.Ed.2d 808 (1979) (noting that considerable weight is given to an administrative agency's consistent, longstanding interpretation of the statute under which it operates) (emphasis added). To be clear, while the SEC's articulation of this position is new, the issue certainly is not. The SEC acknowledges that SIPC has long held its position regarding the treatment of non-existent securities. SIPC first articulated this argument — that a claim for fictitious securities is properly treated as a claim for cash — in cases that arose over a decade ago. See Plumbers and Steamfitters Local 490 Severance and Ret. Fund v. Appleton (In re First Ohio Sec. Co.), No. 93-3313, 39 F.3d 1181 (table), 1994 WL 599433, at  (6th Cir. Nov.1, 1994) (unpublished decision) (finding that the only legal conclusion possible where claimants sought SIPC advances for securities that never even existed was that the claims were for cash and not for securities), cert. denied, 514 U.S. 1018, 115 S.Ct. 1362, 131 L.Ed.2d 219 (1995); Appleton v. Hardy (In re First Ohio Sec. Co.), No. 590-0072 (Bankr.N.D.Ohio Dec. 1, 1992) (unpublished order affirming trustee's determination that a claim for non-existent securities is a claim for cash). SIPC also apprised the SEC of its position on this issue in its 1993 and 1994 Annual Reports. Harbeck Letter at 9. 43 Third, the SEC concedes that its new interpretation of SIPA has been expressed for the first time ... in an amicus brief filed at the request of this Court and that, under those circumstances, its interpretation may not be entitled to Chevron deference. Prezioso Letter at 6. As we observed in Callaway v. Commissioner, 231 F.3d 106 (2d Cir.2000), the Supreme Court has accorded deference, even to agency interpretations appearing for the first time in an amicus brief, where there `is simply no reason to suspect that the interpretation does not reflect the agency's fair and considered judgment on the matter in question.' A new, and therefore inconsistent position, may yet be `fair and considered.'  Id. at 132 (citations omitted); see also Cedar Rapids Cmty. Sch. Dist. v. Garret F. ex rel. Charlene F., 526 U.S. 66, 74-75 n. 6, 119 S.Ct. 992, 143 L.Ed.2d 154 (1999); Auer v. Robbins, 519 U.S. 452, 462, 117 S.Ct. 905, 137 L.Ed.2d 79 (1997). But cf. Christensen v. Harris County, 529 U.S. 576, 587, 120 S.Ct. 1655, 146 L.Ed.2d 621 (2000) (Interpretations such as those in opinion letters — like interpretations contained in policy statements, agency manuals, and enforcement guidelines, all of which lack the force of law — do not warrant Chevron-style deference.). The SEC's opinion is certainly not the sort of `post hoc rationalization'... to defend past agency action against attack about which the Supreme Court has registered concern. Auer, 519 U.S. at 461-62, 117 S.Ct. 905 (citation omitted). We have no reason to doubt that the SEC's interpretation was the product of careful consideration. And the SEC's familiarity with this case from its inception lends credence to its view. Nevertheless, the SEC submitted its brief only after being invited to do so (and only once this dispute reached appeal). 17 Indeed, in some cases, we have declined to consider arguments raised for the first time in an appellate amicus brief. See, e.g., Concourse Rehab. & Nursing Ctr., Inc. v. DeBuono, 179 F.3d 38, 47 (2d Cir.1999). This, then, is another consideration that weighs against Chevron deference. 44 Finally, the SEC's historical relationship with SIPC and SIPC's arguably greater familiarity with the provisions of SIPA are yet additional reasons to decline to apply Chevron deference to the SEC's interpretation of SIPA. Chevron deference is predicated, in part, on the perceived superior expertise of the agency in question. See Pension Benefit Guar. Corp. v. LTV Corp., 496 U.S. 633, 651-52, 110 S.Ct. 2668, 110 L.Ed.2d 579 (1990) ([P]ractical agency expertise is one of the principal justifications behind Chevron deference.). With respect to SIPA and the determinations made by the Trustee and SIPC during liquidation proceedings, the SEC's role involves more removed oversight. Indeed, if the conduct of this litigation is any indication, it appears that the SEC generally adopts a hands-off approach with respect to SIPC liquidations (and litigation). As a result, the SEC's expertise in this context is arguably less compelling than it would be with respect to those portions of the Securities Exchange Act as to which it takes a more proactive day-to-day role. Cf. Bowen v. Am. Hosp. Ass'n, 476 U.S. 610, 643 n. 30, 106 S.Ct. 2101, 90 L.Ed.2d 584 (1986) (noting that where the Department of Health and Human Services was one of twenty-seven agencies responsible for promulgating regulations forbidding discrimination, there is ... not the same basis for deference predicated on expertise as we found [in Chevron ]). 45 For these reasons, we find that the informal opinion proffered by the SEC in its amicus brief lacks the force of law and thus does not warrant Chevron deference. Chao, 291 F.3d at 227.
46 The fact that Chevron is inapplicable to this case does not mean that the SEC's interpretation will merit no deference whatsoever. Instead, it warrants the more limited standard of deference adopted by the Supreme Court in Skidmore v. Swift & Co., 323 U.S. 134, 65 S.Ct. 161, 89 L.Ed. 124 (1944). See United States v. Mead Corp., 533 U.S. 218, 234, 121 S.Ct. 2164, 150 L.Ed.2d 292 (2001) ( Chevron did nothing to eliminate Skidmore 's holding that an agency's interpretation may merit some deference whatever its form, given the `specialized experience and broader investigations and information' available to the agency.) (quoting Skidmore, 323 U.S. at 139, 65 S.Ct. 161); Esden v. Bank of Boston, 229 F.3d 154, 169 n. 19 (2d Cir.2000), cert. denied, 531 U.S. 1061, 121 S.Ct. 674, 148 L.Ed.2d 652 (2001). As the Skidmore Court explained, the level of deference owed to any particular interpretation depends upon the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade, if lacking power to control. 323 U.S. at 140, 65 S.Ct. 161; see also Mead, 533 U.S. at 239, 121 S.Ct. 2164. In Community Health Center v. Wilson-Coker, 311 F.3d 132 (2d Cir.2002), we outlined the factors that inform our Skidmore analysis, including the agency's expertise, the care it took in reaching its conclusions, the formality with which it promulgates its interpretations, the consistency of its views over time, and the ultimate persuasiveness of its arguments. Id. at 138, 65 S.Ct. 161. 47 Applying the Community Health Center factors in this case, we find that several factors — most notably the persuasiveness of the SEC's interpretation — weigh in favor of deference to the SEC's reading of section 9(a)(1) of SIPA, 15 U.S.C. § 78fff-3(a)(1). Under the federal securities laws, the SEC is responsible for regulating broker-dealers, administering the securities exchanges and protecting the public interest. The protections outlined in SIPA are merely one aspect of this much broader legislative scheme. Although the SEC has not always played a direct role in administering SIPA, its general oversight of the securities laws gives it expertise that merits some degree of deference. We decline to accord the SEC interpretation the considerable deference it requests, because the SEC has not had the kind of history of consistent interpretation of section 9(a)(1) that prompted our holding in Community Health Center. See 311 F.3d at 139. As we did in Community Health Center, we decline to determine the exact molecular weight of the deference to be accorded to the SEC's position without analyzing the persuasiveness of its interpretation (the final Skidmore factor). Id. at 137-38, 65 S.Ct. 161. 48
49 The SEC disagrees with SIPC's claims for cash analysis, asserting that the mere fact that the Claimants' net equity is determined by the amount of cash paid for the securities does not mean that the Claimants have claims for cash within the meaning of section 9(a)(1). Br. for Amicus Curiae SEC at 17. Although it notes that the SIPC's desire for cash-versus-securities consistency among the various provisions [of SIPA] is not an unreasonable approach, the SEC argues that the provisions relied upon by SIPC to supply this definition do not mention the terms claim for cash or claim for securities. Id. at 14. In fact, the net equity definition, see 15 U.S.C. § 78 lll (11), upon which SIPC heavily relies, does not even use the word cash. None of the provisions relied upon by SIPC illuminate the definition of a claim for cash. 50
51 Examination of SIPA's legislative history reveals that the SEC's interpretation is better tailored to the original aims of SIPA's drafters. Congress enacted SIPA in 1970, in response to a rash of failures among securities broker-dealers in the late 1960s that had resulted in significant losses to customers whose assets either were unrecoverable or became tied up in the broker-dealers' bankruptcy proceedings. Sec. Investor Prot. Corp. v. BDO Seidman, LLP, 222 F.3d 63, 66 (2d Cir.2000). The statute was designed to effect two aims. H.R. REP. No. 91-1613, at 2-4 (1970), reprinted in 1970 U.S.C.C.A.N. 5254, 5257. First, the legislation immediately established a substantial reserve fund ... [to] provide protection to customers of broker-dealers ... to reinforce the confidence that investors have in the U.S. securities markets. Id. Second, SIPA strengthen[ed] ... the financial responsibilities of broker-dealers. Id. Later amendments to the statute have reiterated this emphasis on investor protection. In 1978, the statute was amended to, inter alia, increase[] the amounts available to be distributed in liquidations to each customer from $50,000 to $100,000; no more than $40,000 (instead of the present $20,000) is available to satisfy claims for cash. 18 S. REP. No. 95-763, at 2 (1978), reprinted in 1978 U.S.C.C.A.N. 764, 765. These and other changes included in the 1978 amendments were intended to address the perceived limitations ... upon SIPC's ability to provide the type and degree of protection for securities customers for which SIPA was enacted. Specifically, these limitations in some cases impair the satisfaction of customers' claims as fully, promptly and efficiently as the Committee believes is desirable. Id. These statutory goals — promoting investor confidence and providing protection to investors — are better served by the SEC's broader reading of section 9(a)(1). 19 See Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967) (We are guided by the familiar canon of statutory construction that remedial legislation should be construed broadly to effectuate its purposes.) (interpreting the 1934 Securities Exchange Act). 52
53 The distinction between claims for cash and claims for securities in section 9(a)(1) was introduced into SIPA shortly before the legislation was passed. It appears to have been intended to address concerns raised during the drafting process by the Department of the Treasury and the Board of Governors of the Federal Reserve. In April 1970, the Acting General Counsel of the Department of the Treasury sent letters to the chairmen of the relevant committees of both the Senate and the House stating that Treasury opposed the bills, in part because the proposed limit on cash advances of $50,000 per account far exceeded the $20,000 limit per account on coverage provided by FDIC and FSLIC, and, thus, could be construed as an indication that the Federal Government attaches greater importance to the preservation of public confidence in broker-dealers than to the preservation of confidence in the banking system. 20 Federal Broker-Dealer Insurance Corporation: Hearings on S. 2348, 3988 and 3989 Before the Subcomm. on Sec. of the Senate Comm. on Banking and Currency, 91st Cong. 79-80 (1970) (letter from Englert to Sparkman); Securities Investor Protection: Hearings on H.R. 13308, 17585, 18081, 18109 and 18458 Before the Subcomm. on Commerce and Fin. of the House Comm. on Interstate and Foreign Commerce, 91st Cong. 148-49 (1970) [hereinafter House Subcommittee Hearings ] (letter from Englert to Staggers). The Vice Chairman of the Board of Governors of the Federal Reserve System made a similar observation — that the proposed SIPC insurance would be more generous than coverage afforded depositors under the FDIC and FSLIC — in a July 1970 letter to the House Committee. House Subcommittee Hearings, supra, at 145-47 (letter from Robertson to Staggers). He indicated, however, that the Federal Reserve Board recognized that coverage of customers of broker-dealers cannot be entirely parallel to that afforded depositors in banks, because the broker performs a custodial function — as an integral part of customer account services — in holding customers' fully paid securities in safekeeping. Id. He proceeded to explain that [t]he accounts of customers of broker-dealers thus reflect partly depository claims (credit balances) comparable to claims insured by the FDIC and partly custodial claims comparable not to deposits but to bank trust accounts. Id. 54 Notwithstanding this disparity, both bills emerged from their respective committees without modification of the $50,000 limit, see 116 CONG. REC. 39,358 (Dec. 1, 1970) (draft of H.R. 19333, 91st Cong. § 6(e)(1) (1970)); id. at 40,865-66 (Dec. 10, 1970) (draft of S. 2348, 91st Cong. § 35(m)(11) (1970)), and the House bill containing the $50,000 limit was passed on December 1, 1970, id. at 39,369-70. At a December 10 debate, however, the Senate adopted an amendment proposed by Senators McIntyre and Muskie to reduce the maximum insurance-type protection for all SIPA claims from $50,000 to $20,000 in order to bring investor protection in line with the protections which the Congress has already made available to depositors in banks and shareholders in savings and loan associations. Id. at 40,872 (statement of Sen. McIntyre). Another senator, after observing that it was reasonable to reduce the coverage for cash to $20,000 to bring[] it in line with the insurance coverage for cash deposits in other institutions, inquired whether it might be more acceptable and more efficient in restoring confidence if the figure in the original bill with respect to securities only were left at $50,000 and the $20,000 applied to the cash. Id. (statement of Sen. Bennett). After considerable debate, the Senate passed the amended version — reducing all claims to $20,000 — but with an understanding that the issue of a provision with separate limits for cash and securities would receive further examination in conference. Id. at 40,873-77. 55 Shortly thereafter, the Conference Committee reported that it had adopted the two-tiered system envisioned during the Senate debates, distinguishing the amount of protection available for securities claims from that available for cash claims. CONF. REP. NO. 91-1788, at 3 (1970), reprinted in 1970 U.S.C.C.A.N. 5281, 5283 (The Conference substitute continues the $50,000 limitation, but provides further that, insofar as all or any portion of a customer's claim is for cash (as distinct from securities), the amount advanced for such claim to cash shall not exceed $20,000.). The revised bill (H.R.19333) was passed by both chambers and signed into law on December 30, 1970. 56 In light of this history, we are persuaded by the SEC's view that the dichotomy between claims for cash and claims for securities in section 9(a)(1) of SIPA, 15 U.S.C. § 78fff-3(a)(1), was introduced to distinguish the custodial functions of a broker-dealer with respect to securities from the broker-dealer's depository-like functions with respect to cash deposits. Br. for Amicus Curiae SEC at 12. The claims for cash carve-out in section 9(a)(1) was intended to ... limit the protection of a brokerage firm customer who uses his account as a depository for cash to the same protection for that cash that bank depositors receive under FDIC coverage. Id. Adopting this view of the statute, we find that because the Claimants directed that the money they placed with the Debtors be used to purchase securities — and, importantly, because they received confirmations and account statements reflecting such purchases — they are not the types of cash depositors envisioned by the drafters of the claims for cash provision. 57
58 As a final source of support for its position, the SEC cites the Series 500 Rules. Under the Series 500 Rules, whether a claim is treated as one for securities or cash depends not on what is actually in the customer's account but on what the customer has been told by the debtor in written confirmations. Thus, if the debtor sends a written confirmation to the customer that the securities in the customer's account have been sold, then the customer has a claim for cash, even if the sale never took place (unless there is a contract for the sale). 17 C.F.R. § 300.501(a). The customer is also viewed as having a claim for cash even if he or she placed an order for the purchase of securities unless (i) the debtor has sent a written confirmation of the purchase; or (ii) the securities have become the subject of a completed or executory contract for purchase. 17 C.F.R. § 300.501(b). Conversely, another rule makes clear that if the customer's account actually holds cash but the customer received from the debtor a written confirmation of a securities purchase, then the customer has a claim for securities in the liquidation. 17 C.F.R. § 300.502(a)(1). 59 The Claimants assert that the Series 500 rules, by their plain language, unambiguously apply to the classification issue presented here. Wissner-Gross Letter at 2. While the Claimants are correct that the Series 500 Rules address the circumstance of non-existent transactions, there is nothing in the rules suggesting their applicability to cases involving non-existent securities. The SEC and SIPC both indicate that the Rules were promulgated to resolve whether a claim is for securities or cash when a transaction in real securities straddled the filing date and do not govern transactions involving fictitious securities, and we defer to their shared interpretation because we do not find that it is plainly erroneous or inconsistent with the Series 500 Rules. Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414, 65 S.Ct. 1215, 89 L.Ed. 1700 (1945) (explaining that agency's interpretation of its own regulations is of controlling weight unless it is plainly erroneous or inconsistent with the regulation); see also Auer v. Robbins, 519 U.S. 452, 461, 117 S.Ct. 905, 137 L.Ed.2d 79 (1997) (same). 60 Nevertheless, we are persuaded by the SEC's argument that the premise underlying the Series 500 Rules — that a customer's legitimate expectations, based on written confirmations of transactions, ought to be protected — supports the SEC's interpretation of section 9(a)(1). See Rules of the Sec. Investor Prot. Corp., 53 Fed.Reg. 10368-69 & n. 3 (Mar. 31, 1988). In the SEC's view, the Claimants in this case should be treated as having claims for securities because the confirmations and account statements that they received from the Debtors stated that the Claimants held securities in their accounts. Br. for Amicus Curiae SEC at 8. 61 SIPC disputes that customers can have legitimate expectations as to non-existent securities. We note that SIPC's approach does perhaps promote an arguably laudable policy goal — encouraging investors to research and monitor their investments (and their brokers) with greater care. This goal of greater investor vigilance, however, is not emphasized in the legislative history of SIPA. Instead, as outlined supra at [26-27], the drafters' emphasis was on promoting investor confidence in the securities markets and protecting broker-dealer customers. We find the SEC's interpretation more in line with the goals of the statute and with the legislators' intent in introducing the securities/cash distinction in section 9(a)(1). 62