Petitioner accounting firm was retained by a securities
brokerage firm (Weis) registered with the Securities and Exchange
Commission (SEC) and a member of the New York Stock Exchange
(Exchange), and, in this capacity, audited Weis' books and records
and prepared for filing with the SEC the annual reports of
financial condition required by § 17(a) of the Securities Exchange
Act of 1934 (1934 Act) and implementing regulations. Subsequently,
because of Weis' precarious financial condition, respondent
Redington was appointed as trustee in the liquidation of Weis'
business pursuant to the Securities Investor Protection Act (SIPA).
During the liquidation, Weis' cash and securities on hand, as well
as a sum of money advanced by respondent Securities Investor
Protection Corporation (SIPC) to the trustee under the SIPA, proved
to be insufficient to make whole those customers who had left
assets or deposits with Weis. The SIPC and the trustee then filed
an action for damages against petitioner in District Court, seeking
to impose liability upon petitioner by reason of its allegedly
improper audit of Weis' financial statements, and alleging that,
because of such improper conduct, petitioner breached duties owed
to the SIPC, the trustee, and others under the common law, § 17(a),
and the regulations, and that this misconduct prevented Weis' true
financial condition from becoming known until it was too late to
forestall liquidation or to lessen the adverse financial
consequences to Weis' customers. The District Court dismissed the
complaint, holding that no claim for relief was stated because no
private cause of action could be implied from § 17(a). The Court of
Appeals reversed, holding that § 17(a) imposes a duty on
accountants, that a breach of this duty gives rise to an implied
private right of action for damages in favor of a broker-dealer's
customers, and that the SIPC and the trustee could assert this
implied cause of action on behalf of Weis' customers.
Held: There is no implied private cause of action for
damages under § 17(a). Pp.
442 U. S. 568-579.
(a) In terms, § 17(a) simply requires broker-dealers to keep
such records and file such reports as the SEC may prescribe, and
does not purport to create a private cause of action in favor of
anyone. The
Page 442 U. S. 561
section's intent, evident from its face, is to provide the SEC,
the Exchange, and other authorities with a sufficiently early
warning to enable them to take appropriate action to protect
investors before a broker-dealer's financial collapse, and not by
any stretch of its language does the section purport to confer
private damages rights or any remedy in the event the regulatory
authorities are unsuccessful in achieving their objectives and the
broker-dealer becomes insolvent before corrective steps can be
taken. Pp.
442 U. S.
568-571.
(b) The conclusion that no private right of action is implicit
in § 17(a) is reinforced by the fact that the 1934 Act's
legislative history is entirely silent on whether or not such a
right of action should be available. This conclusion is also
supported by the statutory scheme under which other sections of the
Act explicitly grant private causes of action. More particularly, a
cause of action in § 17(a) should not be implied that is
significantly broader than the one granted in § 18(a), which
provides the principal express civil remedy for misstatements in
reports, but limits it to purchasers and sellers of securities. Pp.
442 U. S.
571-574.
(c) The inquiry in a case such as this ends when it is
determined on the basis of the statutory language and the
legislative history that Congress did not intend to create, either
expressly or by implication, a private cause of action. Further
inquiries as to the "necessity" of implying a private remedy and
the proper forum for enforcement of the asserted rights have little
relevance to the decision of the case. Pp.
442 U. S.
575-576.
(d) Section 27 and the remedial purposes of the 1934 Act do not
furnish a sufficient ground for holding that the federal courts
should provide a damages remedy for petitioner's alleged breach of
its duties under § 17(a). Section 27 merely grants jurisdiction to
federal district courts over violations of the Act and suits to
enforce any liability or duty thereunder, and provides for venue
and service of process. It creates no cause of action of its own
force and effect, and imposes no liabilities. And generalized
references to the "remedial purposes" of the Act do not justify
reading a provision "more broadly than its language and the
statutory scheme reasonably permit."
SEC v. Sloan,
436 U. S. 103,
436 U. S. 116.
Pp.
442 U. S.
576-578.
592 F.2d 617, reversed and remanded.
REHNQUIST, J., delivered the opinion of the Court, in which
BURGER, C.J., and BRENNAN, STEWART, WHITE, BLACKMUN, and STEVENS,
JJ., joined. BRENNAN, J., filed a concurring opinion,
post, p.
442 U. S. 579.
MARSHALL, J., filed a dissenting opinion,
post, p.
442 U. S. 580.
POWELL, J., took no part in the consideration or decision of the
case.
Page 442 U. S. 562
MR. JUSTICE REHNQUIST delivered the opinion of the Court.
Once again, we are called upon to decide whether a private
remedy is implicit in a statute not expressly providing one. During
this Term alone, we have been asked to undertake this task no fewer
than five times in cases in which we have granted certiorari.
[
Footnote 1] Here we decide
whether customers of securities brokerage firms that are required
to file certain financial reports with regulatory authorities by §
17(a) of the Securities Exchange Act of 1934 (1934 Act), 48 Stat.
897, as amended, 15 U.S.C. § 78q(a), have an implied cause of
action for damages under § 17(a) against accountants who audit such
reports, based on misstatements contained in the reports. [
Footnote 2]
Page 442 U. S. 563
I
Petitioner Touche Ross & Co. is a firm of certified public
accountants. Weis Securities, Inc. (Weis), a securities brokerage
firm registered as a broker-dealer with the Securities and Exchange
Commission (Commission) and a member of the New York Stock Exchange
(Exchange), retained Touche Ross to serve as Weis' independent
certified public accountant from 1969 to 1973. In this capacity,
Touche Ross conducted audits of Weis' books and records and
prepared for filing with the Commission the annual reports of
financial condition required by § 17(a) of the 1934 Act, 15 U.S.C.
§ 78q(a), and the rules and regulations adopted thereunder. 17 CFR
§ 240.17a-5 (1972). [
Footnote
3] Touche Ross also prepared for Weis
Page 442 U. S. 564
responses to financial questionnaires required by the Exchange
of its member firms.
This case arises out of the insolvency and liquidation of Weis.
In 1973, the Commission and the Exchange learned of Weis'
precarious financial condition and of possible violations of the
1934 Act by Weis and its officers. In May, 1973, the Commission
sought and was granted an injunction barring Weis and five of its
officers from conducting business in violation of the 1934 Act.
[
Footnote 4] At the same time,
the Securities Investor Protection Corporation (SIPC), pursuant to
statutory authority, applied in the United States District Court
for the Southern District of New York for a decree adjudging that
Weis' customers were in need of the protection afforded by the
Securities Investor Protection Act of 1970 (SIPA), 84 Stat. 1636,
15 U.S.C. § 78aaa
et seq. [
Footnote 5] The District Court
Page 442 U. S. 565
granted the requested decree and appointed respondent Redington
(Trustee) to act as trustee in the liquidation of the Weis business
under SIPA.
During the liquidation, Weis' cash and securities on hand
appeared to be insufficient to make whole those customers who had
left assets or deposits with Weis. Accordingly, pursuant to SIPA,
SIPC advanced the Trustee $14 million to satisfy, up to specified
statutory limits, the claims of the approximately 34,000 Weis
customers and certain other creditors of Weis. Despite the advance
of $14 million by SIPC, there apparently remain several million
dollars of unsatisfied customer claims. [
Footnote 6]
In 1976, SIPC and the Trustee filed this action for damages
against Touche Ross in the District Court for the Southern District
of New York. The "common allegations" of the complaint, which at
this stage of the case we must accept as true, aver that certain of
Weis' officers conspired to conceal substantial operating losses
during its 1972 fiscal year by falsifying financial reports
required to be filed with regulatory authorities pursuant to §
17(a) of the 1934 Act. App. 8. SIPC and the Trustee seek to impose
liability upon Touche Ross by reason of its allegedly improper
audit and certification
Page 442 U. S. 566
of the 1972 Weis financial statements and preparation of answers
to the Exchange financial questionnaire.
Id. at 15-19. The
complaint alleges that, because of its improper conduct, Touche
Ross breached duties that it owed SIPC, the Trustee, and others
under the common law, § 17(a) and the regulations thereunder, and
that Touche Ross' alleged dereliction prevented Weis' true
financial condition from becoming known until it was too late to
take remedial action to forestall liquidation or to lessen the
adverse financial consequences of such a liquidation to the Weis
customers. App. 8-9. The Trustee seeks to recover $51 million on
behalf of Weis in its own right and on behalf of the customers of
Weis whose property the Trustee was unable to return. SIPC claims
$14 million, either as subrogee of Weis' customers whose claims it
has paid under SIPA or in its own right. The federal claims are
based on § 17(a) of the 1934 Act; the complaint also alleges
several state common law causes of action based on accountants'
negligence, breach of contract, and breach of warranty. [
Footnote 7]
The District Court dismissed the complaint, holding that no
claim for relief was stated because no private cause of action
could be implied from § 17(a).
428 F.
Supp. 483 (SDNY 1977). [
Footnote 8] A divided panel of the Second Circuit
reversed. 592
Page 442 U. S. 567
F.2d 617 (1978). The court first found that § 17(a) imposes a
duty on accountants. 592 F.2d at 621. It next concluded, based on
the factors set forth in
Cort v. Ash, 422 U. S.
66,
422 U. S. 78
(1975), that an accountant's breach of his § 17(a) duty gives rise
to an implied private right of action for damages in favor of a
broker-dealer's customers, even though it acknowledged that the
"legislative history of the section is mute on the issue." 592 F.2d
at 622. The court held that SIPC and the Trustee could assert this
implied cause of action on behalf of the Weis customers. [
Footnote 9] We granted certiorari, 439
U.S. 979 (1978), and we now reverse.
Page 442 U. S. 568
II
The question of the existence of a statutory cause of action is,
of course, one of statutory construction.
Cannon v. University
of Chicago, 441 U. S. 677,
441 U. S. 688
(1979);
see National Railroad Passenger Corp. v. National
Association of Railroad Passengers, 414 U.
S. 453,
414 U. S. 458
(1974) (hereinafter
Amtrak). SIPC's argument in favor of
implication of a private right of action based on tort principles,
therefore, is entirely misplaced. Brief for Respondent SIPC 22-23.
As we recently have emphasized,
"the fact that a federal statute has been violated and some
person harmed does not automatically give rise to a private cause
of action in favor of that person."
Cannon v. University of Chicago, supra at
441 U. S. 688.
Instead, our task is limited solely to determining whether Congress
intended to create the private right of action asserted by SIPC and
the Trustee. And as with any case involving the interpretation of a
statute, our analysis must begin with the language of the statute
itself.
Cannon v. University of Chicago, supra at
441 U. S. 689;
Teamsters v. Daniel, 439 U. S. 551,
439 U. S. 558
(1979);
Santa Fe Industries, Inc. v. Green, 430 U.
S. 462,
430 U. S. 472
(1977);
Piper v. Chris-Craft Industries, Inc.,
430 U. S. 1,
430 U. S. 24
(1977);
Ernst & Ernst v. Hochfelder, 425 U.
S. 185,
425 U. S. 197
(1976).
At the time pertinent to the case before us, § 17(a) read, in
relevant part, as follows:
"Every national securities exchange, every member thereof, . . .
and every broker or dealer registered pursuant
Page 442 U. S. 569
to . . . this title, shall make, keep, and preserve for such
periods, such accounts, correspondence, . . . and other records,
and make such reports, as the Commission by its rules and
regulations may prescribe as necessary or appropriate in the public
interest or for the protection of investors."
15 U.S.C. § 78q(a) (1970 ed.). In terms, § 17(a) simply requires
broker-dealers and others to keep such records and file such
reports as the Commission may prescribe. It does not, by its terms,
purport to create a private cause of action in favor of anyone. It
is true that, in the past, our cases have held that, in certain
circumstances, a private right of action may be implied in a
statute not expressly providing one. But in those cases finding
such implied private remedies, the statute in question at least
prohibited certain conduct or created federal rights in favor of
private parties.
E.g., Cannon v. University of Chicago,
supra (20 U.S.C. § 1681);
Johnson v. Railway Express
Agency, Inc., 421 U. S. 454
(1975) (42 U.S.C. § 1981);
Superintendent of Insurance v.
Bankers Life & Cas. Co., 404 U. S. 6 (1971)
(15 U.S.C. § 7j(b));
Sullivan v. Little Hunting Park,
Inc., 396 U. S. 229
(1969) (42 U.S.C. § 1982);
Allen v. State Board of
Elections, 393 U. S. 544
(1969) (42 U.S.C. § 1973c);
Jones v. Alfred H. Mayer Co.,
392 U. S. 409
(1968) (42 U.S.C. § 1982);
J. I. Case Co. v. Borak,
377 U. S. 426
(1964) (15 U.S.C. § 78n(a)). By contrast, § 17(a) neither confers
rights on private parties nor proscribes any conduct as
unlawful.
The intent of § 17(a) is evident from its face. Section 17(a) is
like provisions in countless other statutes that simply require
certain regulated businesses to keep records and file periodic
reports to enable the relevant governmental authorities to perform
their regulatory functions. The reports and records provide the
regulatory authorities with the necessary information to oversee
compliance with and enforce the various statutes and regulations
with which they are concerned.
Page 442 U. S. 570
In this case, the § 17(a) reports, along with inspections and
other information, enable the Commission and the Exchange to ensure
compliance with the "net capital rule," the principal regulatory
tool by which the Commission and the Exchange monitor the financial
health of brokerage firms and protect customers from the risks
involved in leaving their cash and securities with broker-dealers.
[
Footnote 10] The
information contained in the § 17(a) reports is intended to provide
the Commission, the Exchange, and other authorities with a
sufficiently early warning to enable them to take appropriate
action to protect investors before the financial collapse of the
particular broker-dealer involved. But § 17(a) does not, by any
stretch of its language, purport to confer private damages rights
or, indeed, any remedy in the event the regulatory authorities are
unsuccessful in achieving their objectives and the broker becomes
insolvent before corrective steps can be taken. By its terms, §
17(a) is forward-looking, not retrospective; it seeks to forestall
insolvency, not to provide
Page 442 U. S. 571
recompense after it has occurred. In short, there is no basis in
the language of § 17(a) for inferring that a civil cause of action
for damages lay in favor of anyone.
Cort v Ash, 422 U.S.
at
422 U. S.
79.
As the Court of Appeals recognized, the legislative history of
the 1934 Act is entirely silent on the question whether a private
right of action for damages should or should not be available under
§ 17(a) in the circumstances of this case. 592 F.2d at 622. SIPC
and the Trustee nevertheless argue that, because Congress did not
express an intent to deny a private cause of action under § 17(a),
this Court should infer one. But implying a private right of action
on the basis of congressional silence is a hazardous enterprise, at
best.
See Santa Clara Pueblo v. Martinez, 436 U. S.
49,
436 U. S. 64
(1978). And where, as here, the plain language of the provision
weighs against implication of a private remedy, the fact that there
is no suggestion whatsoever in the legislative history that § 17(a)
may give rise to suits for damages reinforces our decision not to
find such a right of action implicit within the section.
See
Cort v. Ash, supra, at
422 U. S. 82-84;
cf. Securities Investor Protection Corp. v. Barbour,
421 U. S. 412
(1975);
Amtrak, 414 U. S. 453
(1974);
T.I.M.E. Inc. v. United States, 359 U.
S. 464 (1959). [
Footnote 11]
Further justification for our decision not to imply the private
remedy that SIPC and the Trustee seek to establish may be found in
the statutory scheme of which § 17(a) is a part. First, § 17(a) is
flanked by provisions of the 1934
Page 442 U. S. 572
Act that explicitly grant private causes of action. § 16(b), 15
U.S.C. § 78p(b); § 18(a), 15 U.S.C. § 78r(a). Section 9(e) of the
1934 Act also expressly provides a private right of action. 15
U.S.C. § 78i(e).
See also § 20, 15 U.S.C. § 78t.
Obviously, then, when Congress wished to provide a private damages
remedy, it knew how to do so, and did so expressly.
Blue Chip
Stamps v. Manor Drug Stores, 421 U. S. 723,
421 U. S. 734
(1975);
see Amtrak, supra at
414 U. S. 458;
T.I.M.E. Inc. v. United States, supra at
359 U. S.
471.
Second, § 18(a) creates a private cause of action against
persons, such as accountants, who "make or cause to be made"
materially misleading statements in any reports or other documents
filed with the Commission, although the cause of action is limited
to persons who, in reliance on the statements, purchased or sold a
security whose price was affected by the statements. [
Footnote 12] 15 U.S.C. § 78r(a);
see Ernst & Ernst v. Hochfelder, 425 U.S. at
425 U. S. 211
n. 31;
Blue Chip Stamps v. Manor Drug Stores, supra at
421 U. S. 736.
Since SIPC and the Trustee do not allege that the Weis customers
purchased
Page 442 U. S. 573
or sold securities in reliance on the § 17(a) reports at issue,
they cannot sue Touche Ross under § 18(a). [
Footnote 13] Instead, their claim is that the
Weis customers did not get the enforcement action they would have
received if the § 17(a) reports had been accurate. [
Footnote 14] SIPC and the Trustee argue
that § 18(a) cannot provide the exclusive remedy for misstatements
made in § 17(a) reports because the cause of action created by §
18(a) is expressly limited to purchasers and sellers. They assert
that Congress could not have intended in § 18(a) to deprive
customers, such as those whom they seek to represent, of a cause of
action for misstatements contained in § 17(a) reports.
There is evidence to support the view that § 18(a) was intended
to provide the exclusive remedy for misstatements contained in any
reports filed with the Commission, including
Page 442 U. S. 574
those filed pursuant to § 17(a). [
Footnote 15] Certainly, SIPC and the Trustee have pointed
to no evidence of a legislative intent to except § 17(a) reports
from § 18(a)'s purview.
Cf. Securities Investor Protection
Corp., 421 U.S. at
421 U. S.
419-420;
Amtrak, 414 U.S. at
414 U. S. 458.
But we need not decide whether Congress expressly intended § 18(a)
to provide the exclusive remedy for misstatements contained in §
17(a) reports. For where the principal express civil remedy for
misstatements in reports created by Congress contemporaneously with
the passage of § 17(a) is, by its terms, limited to purchasers and
sellers of securities, we are extremely reluctant to imply a cause
of action in § 17(a) that is significantly broader than the remedy
that Congress chose to provide.
Blue Chip Stamps v. Manor Drug
Stores, supra at
421 U. S.
735-736;
see Ernst & Ernst v. Hochfelder,
supra at
425 U. S. 210;
Securities Investor Protection Corp. v. Barbour, supra at
421 U. S.
421-423;
Amtrak, supra at
414 U. S. 458;
cf. T.I.M.E. Inc. v. United States, 359 U.S. at
359 U. S. 471.
[
Footnote 16]
Page 442 U. S. 575
SIPC and the Trustee urge, and the Court of Appeals agreed, that
the analysis should not stop here. Relying on the factors set forth
in
Cort v. Ash, 422 U.S. at
422 U. S. 7, they
assert that we also must consider whether an implied private remedy
is necessary to "effectuate the purpose of the section," and
whether the cause of action is one traditionally relegated to state
law. SIPC and the Trustee contend that implication of a private
remedy is essential to the goals of § 17(a) and that enforcement of
§ 17(a) is properly a matter of federal, not state, concern. Brief
for Respondent Redington 30-35; Brief for Respondent SIPC 42-52. We
need not reach the merits of the arguments concerning the
"necessity" of implying a private remedy and the proper forum for
enforcement of the rights asserted by SIPC and the Trustee, for we
believe such inquiries have little relevance to the decision of
this case. It is true that, in
Cort v. Ash, the Court set
forth four factors that it considered "relevant" in determining
whether a private remedy is implicit in a statute not expressly
providing one. But the Court did not decide that each of these
factors is entitled to equal weight. The central inquiry remains
whether Congress intended to create, either expressly or by
implication, a private cause of action. Indeed, the first three
factors discussed in
Cort -- the language and focus of the
statute, its
Page 442 U. S. 576
legislative history, and its purpose,
see 422 U.S. at
422 U. S. 78 --
are ones traditionally relied upon in determining legislative
intent. Here, the statute, by its terms, grants no private rights
to any identifiable class, and proscribes no conduct as unlawful.
And the parties, as well as the Court of Appeals, agree that the
legislative history of the 1934 Act simply does not speak to the
issue of private remedies under § 17(a). At least in such a case as
this, the inquiry ends there: the question whether Congress, either
expressly or by implication, intended to create a private right of
action has been definitely answered in the negative.
Finally, SIPA and the Trustee argue that our decision in
J.
I. Case Co. v. Borak, 377 U. S. 426
(1964), requires implication of a private cause of action under §
17(a). In
Borak, the Court found in § 14(a) of the 1934
Act, 15 U.S.C. § 78n(a), an implied cause of action for damages in
favor of shareholders for losses resulting from deceptive proxy
solicitations in violation of § 14(a). SIPC and the Trustee
emphasize language in
Borak that discusses the remedial
purposes of the 1934 Act and § 27 of the Act, which,
inter
alia, grants to federal district courts the exclusive
jurisdiction of violations of the Act and suits to enforce any
liability or duty created by the Act or the rules and regulations
thereunder. [
Footnote 17]
They argue that
Page 442 U. S. 577
Touche Ross has breached its duties under § 17(a) and the rules
adopted thereunder, and that, in view of § 27 and of the remedial
purposes of the 1934 Act, federal courts should provide a damages
remedy for the breach. [
Footnote
18]
The reliance of SIPC and the Trustee on § 27 is misplaced.
Section 27 grants jurisdiction to the federal courts and provides
for venue and service of process. It creates no cause of action of
its own force and effect; it imposes no liabilities. The source of
plaintiffs' rights must be found, if at all, in the substantive
provisions of the 1934 Act which they seek to enforce, not in the
jurisdictional provision.
See Securities Investor Protection
Corp. v. Barbour, 421 U.S. at
421 U. S. 44.
The Court in
Borak found a private cause of action
implicit in 14(a).
See Cannon v. University of Chicago,
441 U.S. at
441 U. S.
690-693, n. 13;
Piper v. Chris-Craft Industries,
Inc., 430 U.S. at
430 U. S. 25;
Allen v. State Board of Elections, 393 U.S. at
393 U. S. 557.
We do not now question the actual holding of that case, but we
decline to read the opinion so broadly that virtually every
provision of the securities Acts gives rise to an implied private
cause of action.
E.g., Piper v. Chris-Craft Industries, Inc.,
supra. [
Footnote
19]
Page 442 U. S. 578
The invocation of the "remedial purposes" of the 1934 Act is
similarly unavailing. Only last Term, we emphasized that
generalized references to the "remedial purposes" of the 1934 Act
will not justify reading a provision "more broadly than its
language and the statutory scheme reasonably permit."
SEC v.
Sloan, 436 U. S. 103,
436 U. S. 116
(1978);
see Ernst & Ernst v. Hochfelder, 425 U.S. at
425 U. S. 200.
Certainly, the mere fact that § 17(a) was designed to provide
protection for brokers' customers does not require the implication
of a private damages action in their behalf.
Cannon v.
University of Chicago, supra at
441 U. S. 688,
and n. 9;
Securities Investor Protection Corp. v. Barbour,
supra at
421 U. S. 421.
To the extent our analysis in today's decision differs from that of
the Court in
Borak, it suffices to say that, in a series
of cases since
Borak, we have adhered to a stricter
standard for the implication of private causes of action, and we
follow that stricter standard today.
Cannon v. University of
Chicago, supra at
441 U. S.
688-709. The ultimate question is one of congressional
intent, not one of whether this Court thinks that it can improve
upon the statutory scheme that Congress enacted into law.
Page 442 U. S. 579
III
SIPC and the Trustee contend that the result we reach sanctions
injustice. But even if that were the case, the argument is made in
the wrong forum, for we are not at liberty to legislate. If there
is to be a federal damages remedy under these circumstances,
Congress must provide it. "[I]t is not for us to fill any hiatus
Congress has left in this area."
Wheeldin v. Wheeler,
373 U. S. 647,
373 U. S. 652
(1963). Obviously, nothing we have said prevents Congress from
creating a private right of action on behalf of brokerage firm
customers for losses arising from misstatements contained in §
17(a) reports. But if Congress intends those customers to have such
a federal right of action, it is well aware of how it may
effectuate that intent.
The judgment of the Court of Appeals is reversed, and the case
is remanded for further proceedings consistent with this
opinion.
It is so ordered.
MR. JUSTICE POWELL took no part in the consideration or decision
of this case.
[
Footnote 1]
See, in addition to the instant case,
Chrysler
Corp. v. Brown, 441 U. S. 281
(1979);
Cannon v. University of Chicago, 441 U.
S. 677 (1979);
Southeastern Community College v.
Davis, ante, p.
442 U. S. 397;
Transamerica Mortgage Advisers, Inc. v. Lewis, No.
77-1645,
cert. granted, 439 U.S. 952 (1978).
[
Footnote 2]
In 1972, the date relevant to the instant case, § 17(a), as set
forth in 15 U.S.C. § 78q(a) (1970 ed.), read as follows:
"(a) Every national securities exchange, every member thereof,
every broker or dealer who transacts a business in securities
through the medium of any such member, every registered securities
association, and every broker or dealer registered pursuant to
section 780 of this title, shall make, keep, and preserve for such
periods, such accounts, correspondence, memoranda, papers, books,
and other records, and make such reports, as the Commission by its
rules and regulations may prescribe as necessary or appropriate in
the public interest or for the protection of investors. Such
accounts, correspondence, memoranda, papers, books, and other
records shall be subject at any time or from time to time to such
reasonable periodic, special, or other examinations by examiners or
other representatives of the Commission as the Commission may deem
necessary or appropriate in the public interest or for the
protection of investors."
Section 17 of the 1934 Act was substantially amended by the
Securities Acts Amendments of 1975. § 14, 89 Stat. 137. The present
§ 17(a)(1) contains essentially the same language as the first
sentence of the 1972 version of § 17(a).
Compare 15 U.S.C.
§ 78q(a) (1970 ed.)
with 15 U.S.C. § 78q(a)(1) (1976
ed.).
In
Ernst Ernst v. Hochfelder, 425 U.
S. 185,
425 U. S. 194
n. 13 (1976), we reserved decision on the question whether the
respondents in that case could assert a private cause of action
against Ernst & Ernst under § 17(a).
[
Footnote 3]
At the time Touche Ross performed auditing services for Weis,
Commission Rule 17a-5 required Weis to file an annual report of its
financial condition, including a certificate by an independent
public accountant stating
"clearly the opinion of the accountant with respect to the
financial statement covered by the certificate and the accounting
principles and practices reflected therein."
17 CFR §§ 240.17a-5(a), (h) (1972).
See also SEC
Release No. 3338 (Nov. 28, 1942), X-17A-5. The Rule also required
the accountant's certificate to contain a
"reasonably comprehensive statement as to the scope of the audit
made, including a statement as to whether the accountant reviewed
the procedures followed for safeguarding the securities of
customers, . . . whether the audit was made in accordance with
generally accepted auditing standards applicable in the
circumstances; and . . . whether the audit made omitted any
procedure deemed necessary by the accountant under the
circumstances of the particular case."
17 CFR § 240.17a-5(g)(2) (1972). Nothing in the Rule was to be
interpreted to imply authority to omit any procedure the accountant
ordinarily would employ in the course of an audit made for the
purpose of expressing the opinions required by the Rule. §
240.17a-5(g)(3). Weis was required to attach an oath or affirmation
to the report that the financial statements were true and correct.
§ 240.17a-5(b)(2). The Commission has amended Rule 17a-5 since
1972.
See 17 CFR § 240-17a-5 (1978).
[
Footnote 4]
Some months later, several of Weis' officers were indicted, in
part, for a conspiracy to violate and a number of substantive
violations of the recordkeeping and reporting regulations adopted
by the Commission under § 17(a).
United States v. Levine,
73 Crim. 693 (SDNY);
see United States v. Solomon, 509
F.2d 863, 865 (CA2 1975). Four of the defendants pleaded guilty to
at least one substantive count; the other was found guilty of one
substantive count.
Ibid.
[
Footnote 5]
SIPC is a nonprofit organization of securities dealers
established by Congress in 1970 in the Securities Investor
Protection Act. 15 U.S.C. § 78ccc. SIPC maintains a fund, supported
by assessments of its members, which is used to compensate, up to
specified limits, customers of brokerage firms who incur losses as
a result of broker insolvencies. §§ 78ddd, 78fff(f). If SIPC
determines that a member has failed or is in danger of failing to
meet its obligations to customers and finds any one of five
specified conditions indicating possible financial instability, it
may apply to a court of competent jurisdiction for a decree
adjudicating that the customers of such member are in need of the
protection afforded by the Act. § 78eee(a)(2). SIPA also provides
procedures for the liquidation of brokerage firms when required. §
78fff.
See generally Securities Investor Protection Corp. v.
Barbour, 421 U. S. 412,
421 U. S.
415-418 (1975).
[
Footnote 6]
At the time Weis was liquidated, property on hand permitted the
Trustee to return to the Weis customers 67% of the property they
should have received. 592 F.2d 617, 620 n. 6 (CA2 1978). Subsequent
marshaling of assets and recoveries in other litigation apparently
have reduced the amount of the deficit in the fund of customer
property. Brief for Respondent Redington 10 n. 5. The Weis customer
accounts were protected by SIPA up to a maximum of $50,000 for each
customer, except that cash claims were limited to $20,000. 15 U.S.
C. § 78fff(f).
[
Footnote 7]
Approximately one year prior to institution of this action in
federal court, SIPC and the Trustee commenced a nearly identical
suit against Touche Ross in New York state court.
Redington v.
Touche Ross & Co., Index No. 13996/76 (N.Y.S.Ct.,
N.Y.County). The parties, factual allegations, claims, and requests
for damages are the same in the state court action as they are in
the federal suit, except that there is no claim in the state court
action under § 17(a). Touche Ross has begun discovery in the state
court action, but otherwise it has remained virtually inactive
since the filing of the complaint. 592 F.2d at 620 n. 7.
[
Footnote 8]
In the District Court's view, § 17(a) was essentially a
bookkeeping provision. By its terms, it did not impose any duty on
accountants and did not "create any rights in anybody." 428 F.
Supp. at 489, 491. By contrast, the court noted that § 18(a) of the
1934 Act, 15 U.S.C. § 78r(a), did create an express private right
of action for damages arising from materially misleading statements
in any report filed pursuant to the 1934 Act in favor of any person
who, in reliance on the statements, purchased or sold a security
whose price was affected by the statements.
See n 12,
infra. SIPC and the
Trustee could not sue under § 18(a) because neither they nor Weis'
customers had bought or sold stock in reliance on the reports
Touche Ross had prepared and certified. In view of § 18(a), the
court declined to infer a private right of action under § 17(a)
broader than the express remedy Congress had created in the very
next section of the Act. The court concluded that the subject
matter, titles, and juxtaposition of the two sections "strongly
suggest a legislative intent that the only private claim for a
violation of Section 17 was the claim created in Section 18." 428
F. Supp. at 489.
The District Court also held that, since the § 17(a) claim
should be dismissed, there was no basis for exercising pendent
jurisdiction over the common law claims, and that there was no
other basis for exercising subject matter jurisdiction over the
common law claims. 428 F. Supp. at 492-493. None of these latter
rulings is before us.
[
Footnote 9]
The court rejected the District Court's conclusion that § 18(a)
was intended to be the exclusive remedy for violation of § 17(a).
Because, in the court's view, it was plain that brokers' customers
were the "favored wards" of § 17(a), it could not agree that
"Congress simultaneously sought to protect a class and deprived the
class [by virtue of § 18's limiting language] of the means of
protection." 592 F.2d at 623. The court held that the Trustee could
assert the § 17(a) action on behalf of the Weis customers as
"bailee" of the customer property that he was unable to return, and
that SIPC could sue on behalf of the customers as "subrogee" of the
customers whose claims it had paid. 592 F.2d at 624-625. The court
also held that the Trustee could not maintain the § 17(a) action in
its own right, and it reserved decision on whether "SIPC could ever
have a claim for damages other than on behalf of a broker's
customers." 592 F.2d at 624, and n. 13. The court remanded the case
to the District Court for consideration of whether to exercise
pendent jurisdiction over the state actions in light of the Court
of Appeals' ruling on § 17(a) and whether to stay the federal
action pending determination of the state action. 592 F.2d at 619
n. 3, 625. Since we hold that the Court of Appeals wrongly implied
a private federal claim under § 17(a), it is unnecessary to reach
these other rulings by the Court of Appeals.
[
Footnote 10]
See, e.g., Study of Unsafe and Unsound Practices of
Brokers and Dealers, Report and Recommendations of the Securities
and Exchange Commission, H.R.Doc. No. 92-231, pp. 7-8, 15, 22, 24
(1971); Exchange Act Release No. 11497 (1975);
National Assn.
of Securities Dealers, Inc., 12 S.E.C. 322, 329 n. 9 (1942).
The net capital rule requires a broker to maintain a certain
minimum ratio of net capital to aggregate indebtedness so that the
broker's assets will always be sufficiently liquid to enable him to
meet all of his current obligations.
See 15 U.S.C. §
780(c)(3); 17 CFR § 24.15c3-1 (1978).
A number of provisions of the 1934 Act provide the Commission
with the authority needed to enforce the reporting requirements of
§ 17(a) and the rules adopted thereunder.
E.g., §
15(b)(4), 15 U.S.C. § 780(b)(4) (authorizes institution of
administrative proceedings and imposition of sanctions against
brokers for,
inter alia, materially misleading statements
in reports or applications required to be filed with the
Commission); § 21, 15 U.S.C. § 78u (allows Commission to
investigate and enjoin violations and to refer violations to the
Attorney General for possible prosecution); § 32, 15 U.S.C. § 78ff
(authorizes criminal sanctions for violations of statute and rules
and for materially misleading statements in reports or documents
required to be filed by the statute or rules);
see
n 4,
supra.
[
Footnote 11]
What legislative history there is of § 17(a) simply confirms our
belief that § 17(a) was intended solely to be an integral part of a
system of preventative reporting and monitoring, and not to provide
remedies to customers for losses after liquidation. S.Rep. No. 792,
73d Cong., 2d Sess., 13, 21 (1934); H.R.Rep. No. 1383, 73d Cong.,
2d Sess., 25 (1934); Hearing on H.R. 7852
et al. before
the House Committee on Interstate and Foreign Commerce, 73d Cong.,
2d Sess., 22, 225-226 (1934).
See also S.Rep. No. 94-75,
p. 119 (1975) (legislative history of the 1975 amendments to §
17).
[
Footnote 12]
Section 18(a), as set forth in 15 U.S.C. § 78r(a), provides:
"
Liability for misleading statements"
"(a) Any person who shall make or cause to be made any statement
in any application, report, or document filed pursuant to this
chapter or any rule or regulation thereunder or any undertaking
contained in a registration statement as provided in subsection (d)
of section 780 of this title, which statement was at the time and
in the light of the circumstances under which it was made false or
misleading with respect to any material fact, shall be liable to
any person (not knowing that such statement was false or
misleading) who, in reliance upon such statement, shall have
purchased or sold a security at a price which was affected by such
statement, for damages caused by such reliance, unless the person
sued shall prove that he acted in good faith and had no knowledge
that such statement was false or misleading. A person seeking to
enforce such liability may sue at law or in equity in any court of
competent jurisdiction. In any such suit the court may, in its
discretion, require an undertaking for the payment of the costs of
such suit, and assess reasonable costs, including reasonable
attorneys' fees, against either party litigant."
[
Footnote 13]
In another action arising out of the Weis financial collapse,
the District Court has sustained a § 18(a) claim against Touche
Ross by a bank that allegedly purchased securities of Weis in
reliance upon the § 17(a) reports involved in this case.
Exchange National Bank v. Touche Ross & Co., 75 Civ.
916 (SDNY);
see 592 F.2d at 631 n. 5 (Mulligan, J.,
dissenting). And in a case related to the instant case, the
customers of Weis brought a class action against Touche Ross under
§ 18(a), claiming,
inter alia, that Touche Ross violated
Commission Rule 17a-5, 17 CFR § 240.17a-5 (1972). The District
Court in that case dismissed the complaint on the ground that the
plaintiffs did not meet the purchaser-seller requirement of §
18(a), and thus could not maintain an action under that section.
Rich v. Touche Ross & Co., 415 F. Supp.
95, 102-104 (SDNY 1976). We express no view as to the
correctness of either of these rulings.
[
Footnote 14]
For example, the complaint alleges:
"Weis' 1973 forced liquidation under [SIPA] would not have
become necessary, and most, if not all, of Weis' assets and its
good will as a going concern could have been preserved by a number
of means, including [infusion of capital or merger with another
firm]. . . . Moreover, if a liquidation of Weis had become
necessary as the result of . . . truthful reporting, such
liquidation could have occurred at the end of Weis' 1972 fiscal
year, when its assets were greater and the aggregate of its
liabilities was lower than a year later."
App. 8-9.
[
Footnote 15]
For example, Senator Fletcher in introducing the bill that
formed the basis for the 1934 Act, stated that "Section [18]
imposes civil liability for false or misleading statements
in
any of the reports or records required under this act." 78
Cong.Rec. 2271 (1934) (emphasis added). Richard Whitney, President
of the New York Stock Exchange, testified at length regarding the
1934 Act proposals. In testimony before the Senate Committee on
Banking and Currency, he indicated his understanding that § 18(a)
liability extended to "persons transacting business in securities."
Hearings on S.Res. 84
et al. before the Senate Committee
on Banking and Currency, 73d Cong., 1st Sess., pt. 15, p. 6638
(1934).
[
Footnote 16]
Touche Ross insists that the existence of SIPA also is relevant
to the question whether to imply a private right of action in §
17(a). Congress specifically enacted SIPA in 1970 to afford
customers of broker-dealers, such as Weis' customers, protection
against losses they might incur as a result of the financial
failure of their broker-dealer. SIPA established a comprehensive
plan of insurance for customers of brokerage firms.
See
n 5,
supra. And
recently, Congress has increased the amounts by which customer
accounts are insured to $40,000 for cash claims and $100,000 for
cash and securities claims. Securities Investor Protection Act
Amendments of 1978, § 9, 92 Stat. 265, 15 U.S.C. § 78fff-3 (1976
ed., Supp. III). Touche Ross asserts that there is no indication in
the legislative history of SIPA or its amendments that Congress
thought the 1934 Act contained a remedy for customers of insolvent
brokerage firms. Brief for Petitioner 62, n. 37; Reply Brief for
Petitioner 11-12. It claims that Congress believed it was
"
filling a regulatory void'" when it passed SIPA. Id.
at 12; see S.Rep. No. 91-1218, p. 3 (1970). Given the fact
that our task is to discern the intent of Congress when it enacted
§ 17(a) in 1934, we doubt the relevance of SIPA to our inquiry. And
even if the 91st Congress had believed that there was an implied
right of action under § 17(a), SIPA still would have been needed to
protect customers in situations where there was no fraud or where
the fraud was committed only by the broker, who, because of its
insolvency, would probably be judgment-proof. Accordingly, our
decision not to infer a right of action in favor of brokerage
customers from § 17(a) is not influenced by the existence of
SIPA.
[
Footnote 17]
Section 27, as set forth in 15 U.S.C. § 78aa, provides as
follows:
"The district courts of the United States, and the United States
courts of any Territory or other place subject to the jurisdiction
of the United States, shall have exclusive jurisdiction of
violations of this chapter or the rules and regulations thereunder,
and of all suits in equity and actions at law brought to enforce
any liability or duty created by this chapter or the rules and
regulations thereunder. Any criminal proceeding may be brought in
the district wherein any act or transaction constituting the
violation occurred. Any suit or action to enforce any liability or
duty created by this chapter or rules and regulations thereunder,
or to enjoin any violation of such chapter or rules and
regulations, may be brought in any such district or in the district
wherein the defendant is found or is an inhabitant or transacts
business, and process in such cases may be served in any other
district of which the defendant is an inhabitant or wherever the
defendant may be found. Judgments and decrees so rendered shall be
subject to review as provided in sections 1254, 1291, and 1292 of
Title 28. No costs shall be assessed for or against the Commission
in any proceeding under this chapter brought by or against it in
the Supreme Court or such other courts."
[
Footnote 18]
SIPC and the Trustee also appear to suggest that the rules
adopted under § 17(a) can themselves provide the source of an
implied damages remedy, even if § 17(a) itself cannot.
See
Brief for Respondent SIPC 27-31; Brief for Respondent Redington
25-35;
n 3,
supra. It
suffices to say, however, that the language of the statute, and not
the rules, must control.
Ernst & Ernst v. Hochfelder,
425 U.S. at
425 U. S. 214;
Santa Fe Industries, Inc. v. Green, 430 U.
S. 462,
430 U. S. 472
(1977).
[
Footnote 19]
We also have found implicit within § 10(b) of the 1934 Act a
private cause of action for damages.
See Superintendent of
Insurance v. Bankers Life & Cas. Co., 404 U. S.
6,
404 U. S. 13 n. 9
(1971). But we recently have stated that. in
Superintendent, this Court simply explicitly acquiesced in
the 25-year-old acceptance by the lower federal courts of an
implied action under § 10(b).
Cannon v. University of
Chicago, 441 U.S. at
441 U. S.
690-693, n. 13;
see Ernst & Ernst v. Hochfelder,
supra at
425 U. S. 196;
Blue Chip Stamps v. Manor Drug Stores, 421 U.
S. 723,
421 U. S. 730
(1975). There is no similar history of longstanding lower court
interpretation in this case. Indeed, only one other court in the
45-year history of the 1934 Act has held that a private cause of
action for damages is available under § 17(a).
Hawkins v.
Merrill, Lynch, Pierce, Fenner & Beane, 85 F. Supp.
104, 124 (WD Ark.1949). In
Hawkins, a national
brokerage firm was held liable for damages under § 17(a) to a
defalcating correspondent's customers for improperly advising the
correspondent, who was found to be controlled by the national firm,
to describe its business in such a way as to avoid filing certified
financial statements with the Commission under § 17(a). Citing
Kardon v. National Gypsum Co., 69 F. Supp.
512 (ED Pa.1946), the District Court simply stated that
violation of any of the provisions of the 1934 Act would give rise
to a civil suit for damages on the part of the one injured, and
that the defendants did not contend to the contrary. 85 F. Supp. at
121.
MR. JUSTICE BRENNAN, concurring.
I join the Court's opinion. The Court of Appeals implied a cause
of action for damages under § 17(a) of the Securities Exchange Act
of 1934, 15 U.S.C. § 78q(a), in favor of respondents, who purport
to represent customers of a bankrupt brokerage firm, against
petitioner accounting firm, which allegedly injured those customers
by improperly preparing and certifying the reports on the brokerage
firm required by § 17(a) and the rules promulgated thereunder.
Under the tests established in our prior cases, no cause of action
should be implied for respondents under § 17(a). Although analyses
of the several factors outlined in
Cort v. Ash,
422 U. S. 66
(1975), may often overlap, I agree that, when, as here, a statute
clearly
Page 442 U. S. 580
does not "create a federal right in favor of the plaintiff,"
id. at
422 U. S. 78,
i.e., when the plaintiff is not "
one of the class for
whose especial benefit the statute was enacted,'" ibid.,
quoting Texas & Pacific R. Co v. Rigsby, 241 U. S.
33, 241 U. S. 39
(1916), and when there is also in the legislative history no
"indication of legislative intent, explicit or implicit, . . . to
create such a remedy," 422 U.S. at 422 U. S. 78,
the remaining two Cort factors cannot, by themselves, be a
basis for implying a right of action.
MR JUSTICE MARSHALL, dissenting.
In determining whether to imply a private cause of action for
damages under a statute that does not expressly authorize such a
remedy, this Court has considered four factors:
"First, is the plaintiff 'one of the class for whose especial
benefit the statute was enacted,' -- that is, does the statute
create a federal right in favor of the plaintiff? Second, is there
any indication of legislative intent, explicit or implicit, either
to create such a remedy or to deny one? Third, is it consistent
with the underlying purposes of the legislative scheme to imply
such a remedy for the plaintiff? And finally, is the cause of
action one traditionally relegated to state law, in an area
basically the concern of the States, so that it would be
inappropriate to infer a cause of action based solely on federal
law?"
Cort v. Ash, 422 U. S. 66,
422 U. S. 78
(1975) (citations omitted). Applying these factors, I believe
respondents are entitled to bring an action against accountants who
have allegedly breached duties imposed under § 17(a) of the
Securities Exchange Act of 1934, 15 U.S.C. § 78q(a).
Since respondents seek relief on behalf of brokerage firm
customers, the first inquiry is whether those customers are the
intended beneficiaries of the regulatory scheme. Under § 17(a),
brokers must file such reports "as the [SEC], by rule, prescribes
as necessary or appropriate . . .
for the protection of
investors." 15 U.S.C. § 78q(a)(1) (emphasis added).
Cf.
Page 442 U. S. 581
J. I. Case Co. v. Borak, 377 U.
S. 426,
377 U. S. 432
(1964). Pursuant to this authority, the SEC requires brokers to
provide a battery of financial statements, and directs independent
accountants to verify the brokers' reports. 17 CFR § 240.17a-5
(1978);
see also ante at
442 U. S.
563-564, n. 3. The purpose of these requirements, as the
Commission has consistently emphasized, is to enable regulators
to
"monitor the financial health of brokerage firms and protect
customers from the risks involved in leaving their cash and
securities with broker-dealers."
Ante at
442 U. S. 570.
[
Footnote 2/1] In addition, at the
time of the events giving rise to this suit, the rules implementing
§ 17 mandated that brokers disclose to customers whether an
accountant's audit had revealed any "material inadequacies" in
financial procedures. 37 Fed.Reg. 14608 (1972). Thus, it is clear
that brokerage firm customers are the "favored wards" of § 17, 592
F.2d 617, 623 (CA2 1978), and that the initial test of
Cort v.
Ash is satisfied here. [
Footnote
2/2]
With respect to the second
Cort factor, the legislative
history does not explicitly address the availability of a damages
remedy under § 17. The majority, however, discerns an intent to
deny private remedies from two aspects of the statutory scheme.
Because unrelated sections in the 1934 Act expressly grant private
rights of action for violation of their terms, the Court suggests
that Congress would have made such provision under § 17 had it
wished to do so. But as we noted recently in
Cannon v.
University of Chicago, 441 U.S.
Page 442 U. S. 582
677,
441 U. S. 711
(1979),
"that other provisions of a complex statutory scheme create
express remedies has not been accepted as a sufficient reason for
refusing to imply an otherwise appropriate remedy under a separate
section."
The Court finds a further indication of congressional intent in
the interaction between §§17 and 18 of the 1934 Act. Section 18(a),
15 U.S.C. 78r(a), affords an express remedy for misstatements in
reports filed with the Commission, apparently including reports
required by §17, but limits relief to purchasers or sellers of
securities whose price was affected by the misstatement. In light
of this limitation, the majority reasons, we should not imply a
remedy under § 17 which embraces a broader class of plaintiffs.
However, § 18 pertains to investors who are injured in the course
of securities transactions, while § 17 is concerned exclusively
with brokerage firm customers who may be injured by a broker's
insolvency. Given this divergence in focus, §18 does not reflect an
intent to restrict the remedies available under § 17. Indeed, since
false reports regarding a broker's financial condition would not
affect the price of securities held by the broker's customers, § 18
would provide these persons with no remedy at all. I am unwilling
to assume that "Congress simultaneously sought to protect a class
and deprived [it] of the means of protection." 592 F.2d at 623.
A cause of action for damages here is also consistent with the
underlying purposes of the legislative scheme. Because the SEC
lacks the resources to audit all the documents that brokers file,
it must rely on certification by accountants.
See J. I. Case
Co. v. Borak, supra at
377 U. S. 432;
Allen v. State Board of Elections, 393 U.
S. 544,
393 U. S. 556
(1969);
see also 592 F.2d at 623 n. 12. Implying a private
right of action would both facilitate the SEC's enforcement efforts
and provide an incentive for accountants to perform their
certification functions properly.
Finally, enforcement of the 1934 Act's reporting provisions is
plainly not a matter of traditional state concern, but rather
Page 442 U. S. 583
relates solely to the effectiveness of federal statutory
requirements. And, as the Court of Appeals held, since the problems
caused by broker insolvencies are national in scope, so too must be
the standards governing financial disclosure.
Id. at
623.
In sum, straightforward application of the four
Cort
factors compels affirmance of the judgment below. Because the Court
misapplies this precedent and disregards the evident purpose of §
17, I respectfully dissent.
[
Footnote 2/1]
See SEC, Study of Unsafe and Unsound Practices of
Brokers and Dealers, H.R.Doc. No. 92-231, p. 24 (1971); Exchange
Act Release No. 8024 (1967); Exchange Act Release No. 11497 (1975);
see also 592 F.2d 617, 621 622 (CA2 1978).
[
Footnote 2/2]
In the Court's view, it is inappropriate to imply a private
remedy because § 17(a) "neither confers rights on private parties
nor proscribes any conduct as unlawful."
Ante at
442 U. S. 569.
But § 17 does impose duties for the benefit of private parties; in
that sense, it both generates expectations, on which customers may
appropriately rely, that those duties will be performed, and
prohibits conduct inconsistent with the obligations created.