Commercial Litigation and Arbitration

SEC May Proceed Summarily in Federal Court to Compel SIPC to Act to Protect Investors — Full Gamut of Federal Rules Inapplicable — SEC Determination Is Subject to Judicial Review

Securities and Exchange Commission v. Securities Investor Protection Corp., 2012 U.S. Dist. LEXIS 16357 (D.D.C. Feb. 9, 2012):

This case was commenced by an Application of the Securities and Exchange Commission ("SEC"). (Dkt. No. 1). The SEC seeks an order from this Court mandating that the Securities Investor Protection Corporation ("SIPC") file an application for a protective decree with the United States District Court for the Northern District of Texas (the "Texas federal court"). If filed, the SIPC application would seek to commence a liquidation proceeding in the Texas federal court pursuant to Section 5(a)(3) of the Securities Investor Protection Act ("SIPA"), 15 U.S.C. § 78eee(a)(3).

In support of its Application, the SEC has filed an Ex Parte Motion for an Order to Show Cause why SIPC should not be ordered to file an application in the Texas federal court with respect to the Stanford Group Company. (Dkt. No. 2). SIPC, in turn, has filed a Motion to Strike the Ex Parte Motion for an Order to Show Cause. (Dkt. No. 3). SIPC also requests that this Court convene a case management conference pursuant to Fed. R. Civ. P. 16. Id. This matter is before the Court for resolution of the SEC Motion for an Order to Show Cause and the SIPC Motion to Strike. ***

The SIPA gives the SEC authority to seek to compel SIPC to file an application for a protective decree when the SEC believes that SIPC is failing to discharge its obligations under the statute. As set forth in the statute:

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.

15 U.S.C. § 78ggg(b). By its application to this Court, the SEC seeks to exert this statutory authority over SIPC. Both the SEC and SIPC advise the Court that this is the first instance in the 42 years since SIPA was enacted that the SEC has filed such an application. Thus, this is a matter of first impression.

The analysis must begin with an examination of the Federal Rules of Civil Procedure. Rule 1 provides:

These rules govern the procedure in all civil actions and proceedings in the United States district courts, except as stated in Rule 81. They should be construed and administered to secure the just, speedy, and inexpensive determination of every action and proceeding.

Fed. R. Civ. P. 1. Rule 2 adds, quite simply and directly, that "[t]here is one form of action--the civil action." Fed. R. Civ. P. 2. Unless an exception listed in Rule 81 applies, civil actions are required to commence by the filing of a complaint, followed by the issuance and service of a summons. See Fed. R. Civ. P. 3, 4.

As noted by the Supreme Court, however, Congress can expressly provide by statute "to allow proceedings more summary than the full court trial at common law." N. H. Fire Ins. Co. v. Scanlon, 362 U.S. 404, 407 (1960). In one of the examples cited in Scanlon, see id. at 407 n.6, the Supreme Court observed that Congress had clearly expressed an intent for summary proceedings in two provisions of Section 67 of the then-governing Bankruptcy Act. Those provisions stated that "the court shall have summary jurisdiction of any proceeding . . . ." See 11 U.S.C. §§107(a)(4), 107(f)(4) (1958 edition of the United States Code, available at Thus, the intent to allow summary proceedings was explicitly conveyed in the language of the example statute.

In this matter, the statutory language is not nearly as explicit as the above-described example cited favorably by the Supreme Court in Scanlon. ***

In this case, the Court finds that the plain meaning of the statute is clear. The plain meaning of "apply" is "[t]o make a formal request or a motion . . . ." Black's Law Dictionary 116 (9th ed. 2009). Likewise, the plain meaning of "application" is "a request or petition" or a "motion." Id. at 115. In S.E.C. v. McCarthy, 322 F.3d 650, 656-57 (9th Cir. 2003), the court relied upon this plain meaning to hold that Congress' use of the word "application" in Section 21(e) of the Securities Exchange Act permitted the use of summary proceedings to enforce an order of the Commission. Relying upon Scanlon, the Ninth Circuit ruled that because "'applications' are distinct from 'actions,'" Congress' use of the term expressed its intent to allow a summary proceeding, rather than a fullblown civil action. Id. at 656-57. In accord with McCarthy, this Court finds that the use of the term "apply" in Section 11(b) of SIPA [15 U.S.C. § 78ggg(b)] expressed Congress' intent to permit the SEC to commence a summary proceeding. By use of the term "apply," Congress did not intend the instant matter be treated as a "suit of a civil nature."

Footnote 4. The question is whether the current matter falls within the meaning of "suits of a civil nature," as Rule 1 was worded when Congress enacted SIPA. See Fed. R. Civ. P. 1, advisory committee's notes to the 2007 Amendments ("The former reference to 'suits of a civil nature' is changed to the more modern 'civil actions and proceedings.' This change does not affect such questions as whether the Civil Rules apply to summary proceedings created by statute. See SEC v. McCarthy, 322 F.3d 650 (9th Cir. 2003); see also New Hampshire Fire Ins. Co. v Scanlon, 362 U.S. 404 (1960).")

The Court also concludes that the plain meaning comports with the structure and purpose of SIPA. Congress clearly intended that an application by SIPC for a protective decree should be a summary proceeding, specifying that if the debtor fails to consent to the issuance of the decree, the application shall be heard within three business days "or at such other time as the court shall determine, taking into consideration the urgency which the circumstances require." 15 U.S.C. § 78eee(b)(1)(D). As the SEC notes, the purpose of SIPA is to allow a prompt, summary proceeding when a protective decree is sought in order to protect the customers of the troubled SIPC member. This salient purpose would be frustrated if this Court were to hold that the statute mandated a lengthy, full-blown plenary proceeding to resolve a dispute between the SEC and SIPC over whether an application for a protective decree should be filed in the first instance. ***

[T]here is one aspect of procedure that is ripe for decision now. As stated above, the SEC contends that its "preliminary determination that SGC has failed or in danger of failing to meet its obligations to customers is not subject to judicial review by this Court." *** This contention is untenable. The statute provides that "[i]n 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 . . . for an order requiring SIPC to discharge its obligations under this chapter . . . ." 15 U.S.C. § 78ggg(b). The plain meaning of this language makes the relief available to the SEC contingent upon an affirmative determination that SIPC has refused to commit funds or otherwise protect customers. This determination must be made by the Court, not unilaterally by the SEC. In other parts of SIPA, Congress provided that the SEC could "require" SIPC to take certain action without court intervention. See 15 U.S.C. § 78ccc(e)(3) ("[t]he Commission may . . . require SIPC to adopt, amend, or repeal any SIPC bylaw or rule, whenever adopted.") (emphasis added); 15 U.S.C. § 78ggg(c)(1) ("[t]he Commission may . . . require SIPC to furnish it with such reports and records or copies thereof as the Commission may consider necessary or appropriate in the public interest . . . .") (emphasis added). It is significant that court intervention is specified in this provision, whereby the SEC must "apply" for an order to compel action rather than simply "require" the action. The use, plain meaning and context of "apply" in Section 78ggg(b), in contrast to the use of "require" elsewhere in SIPA, strongly suggests that Congress intended that the SEC must ask this Court for relief and demonstrate that it is entitled to such relief.

Share this article:


Recent Posts