Opinion ID: 786487
Heading Depth: 4
Heading Rank: 2

Heading: The Legislative History of Section 9(a)(1) of SIPA Supports the SEC's Interpretation

Text: 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