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Posts by: Robert Loeb

The SEC’s Authority to Enforce the Bank Secrecy Act is Challenged

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In the past few years, the SEC has become increasingly active in bringing enforcement actions based on broker-dealers’ alleged failures to comply with requirements of the Bank Secrecy Act (BSA), in particular that requirement that they file “Suspicious Activity Reports,” or “SARs.” The SEC’s authority to bring such actions, however, has never been established by statute or appellate authority, and is being challenged in a petition for a writ of mandamus currently pending in the Second Circuit.  Though the procedural posture of that case makes it an unlikely vehicle for resolving the question, the issue it raises is likely to recur so long as the SEC continues to bring such enforcement actions despite its lack of any clear authority to do so.  Practitioners should be aware of this open issue so that it can be properly raised and preserved in BSA enforcement actions brought by the SEC.

The SEC’s Lack of Civil Penalty Authority under the BSA

The Bank Secrecy Act, enacted in 1970 to combat money-laundering, gives general examination and enforcement authority to the Secretary of the Treasury.  The Treasury Secretary is also authorized to “delegate duties and powers … to an appropriate supervising agency.”  31 U.S.C. § 5318.  By regulation, Treasury has delegated “[a]uthority to examine institutions to determine compliance with the requirements of” the BSA to various other agencies. 31 C.F.R. § 1010.810(b).  With respect to securities broker-dealers, such “authority to examine” has been delegated to the SEC. 31 C.F.R. § 1010.810(b)(6).  However, Treasury has kept “[a]uthority for the imposition of civil penalties” with the Financial Crimes Enforcement Network, or FinCEN, which is a bureau of Treasury.  31 C.F.R. § 1010.810(d).

Despite its lack of delegated authority, for more than a decade the SEC has initiated civil enforcement actions based on alleged failure of securities broker-dealers to comply with BSA requirements. In recent years, these enforcement actions have become more frequent, and have also changed in nature. Earlier enforcement actions typically focused on the requirement that broker-dealers establish and comply with a written Customer Identification Program. And in those cases where the SEC based its enforcement action on the requirement that broker-dealers file SARs, it was generally in circumstances where the broker-dealer in question failed to file any SARs at all for a protracted period. More recent enforcement actions, however, have challenged the adequacy of SARs that broker-dealers actually did file.

In these proceedings, the SEC has based its asserted enforcement authority under the BSA on Exchange Act Section 17(a), which allows the SEC to require that broker-dealers “make and keep for prescribed periods such records” that the Commission requires. Under that provision, the SEC promulgated Exchange Act Rule 17a-8—17 C.F.R. § 240.17a-8—which cross-references the regulations promulgated by the Treasury Department under the BSA and requires that securities broker-dealers comply with them.  In effect, then, the SEC has invoked its books-and-records authority as a means to assert for itself authority to enforce the requirements of the BSA.

The Pending SEC v. Alpine Securities Corp. Litigation

Although the SEC has been bringing enforcement actions based on securities broker-dealers’ alleged failures to comply with BSA requirements for more than a decade, its authority to do so was not challenged until recently.  The SEC brought a BSA enforcement action against Alpine Securities Corp. in the summer of 2017 in the Southern District of New York. That suit is representative of the SEC’s more recent BSA enforcement actions. According to the SEC’s allegations, Alpine did have a BSA compliance program, and did file thousands of SARs. The SEC, however, alleges that the SARs that Alpine filed were inadequate in various ways. And as in other BSA enforcement actions brought by the SEC, the agency alleged that these inadequate SARs violated Section 17(a) of the Exchange Act and Rule 17a-8.

In early 2018, Alpine moved for summary judgment, arguing that the SEC lacks authority to bring enforcement actions seeking civil penalties for alleged violations of the Bank Secrecy Act.  Alpine argued that the BSA expressly delegates authority to bring civil enforcement actions to the Treasury Secretary, and that the Treasury Secretary—while delegating authority to examine various institutions for BSA compliance to various other agencies—retained enforcement authority for itself.  Alpine contended that the SEC’s interpretation of the “books and record” provision as giving it the power to bring its own BSA enforcement actions was contrary to Congressional command, and that the SEC was improperly attempting to “bootstrap” itself into an area where it lacked jurisdiction.

The district court judge—Judge Denise Cote—denied Alpine’s motion. First, the court concluded that Alpine was wrong to characterize the SEC’s suit as seeking to enforce the BSA, because the SEC in fact brought the suit under Section 17(a) and Rule 17a-8. Second, the court rejected Alpine’s challenge to the SEC’s interpretation of Section 17(a) of the Exchange Act.  Applying the two-step framework from Chevron v. Natural Resources Defense Council, 467 U.S. 837 (1984), the court concluded that Rule 17a-8, which requires compliance with certain BSA regulations, is a reasonable interpretation of Exchange Act Section 17(a).  The court further observed that “neither the Exchange Act nor the BSA expressly precludes joint regulatory authority by FinCEN and the SEC over the reporting of potentially suspicious transactions.”

Alpine moved for reconsideration of the court’s order or, in the alternative, for certification of an interlocutory appeal. The court denied both motions.  On June 22, 2018, Alpine filed a petition for a writ of mandamus in the Second Circuit, again arguing that the BSA expressly delegates enforcement authority to Treasury, and such authority cannot be usurped by the SEC. On July 9, the SEC filed an opposition to the mandamus petition.

Implications for White-Collar and Securities Practitioners

In light of the high bar for obtaining a writ of mandamus, the chances that the Second Circuit will grant the relief Alpine requests are likely low.  The reasoning and conclusion of the district court’s decision, however, are vulnerable to attack.  The district court focused its analysis almost exclusively on Exchange Act Section 17(a) and Rule 17a-8, and rejected Alpine’s challenge based on its determination that the SEC clearly has authority to impose record-keeping and production requirements on broker-dealers.  In FDA v. Brown & Williamson, however, the Supreme Court emphasized that, “[i]n determining whether Congress has specifically addressed the question at issue, a reviewing court should not confine itself to examining a particular statutory provision in isolation.”  529 U.S. 120, 132 (2000).  Rather, courts must “interpret the statute as a symmetrical and coherent regulatory scheme,” and must also take into account how one statute “may be affected by other Acts.”  Id. at 133 (internal citations omitted).  Similarly, the Second Circuit has held that where an Act of Congress “specifically and unambiguously targets” a particular issue and “unambiguously” gives enforcement authority to a particular agency, another agency’s “assertion of concurrent jurisdiction rings a discordant tone with the regulatory structure created by Congress.”  Nutritional Health All. v. FDA, 318 F.3d 92, 104 (2d Cir. 2003).

As long as the SEC continues to bring BSA enforcement actions, it appears inevitable that at some point a court of appeals will be called upon to determine whether the SEC does, in fact, have such enforcement authority. White-collar and securities practitioners defending broker-dealers in SEC enforcement actions based on the alleged failure to file SARs or comply with other requirements of the BSA should raise the issue during the investigation process and again during court proceedings to ensure that it is preserved, and ask the court to certify the question for interlocutory appeal under 28 U.S.C. 1292(b) if the court determines that the SEC does have such authority.  Although the district judge in the Alpine Securities case refused to certify an interlocutory appeal, in light of the dearth of appellate case law on the issue and the fundamental nature of the challenge, other district judges may be willing to certify.

Gordon v. Verizon: New York Parts Company with Delaware

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People at a Table

On February 2, 2017, the New York Appellate Division, First Department, issued a decision in Gordon v. Verizon Communications, Inc., No. 653084/13, 2017 WL 442871 (1st Dep’t 2017), approving the settlement of litigation over an acquisition by Verizon Communications (“Verizon”) and articulating a new test to evaluate the fairness of such settlements. The Gordon decision signals that New York will remain a friendly venue to disclosure-based M&A settlements and may see increased shareholder M&A lawsuits as a result

As we have repeatedly written about (here, here and here), Delaware Chancery Courts have spent the past year attempting to curtail, or eliminate altogether, M&A litigation settlements where the sole remedy is enhanced proxy disclosures. Chancellor Bouchard’s landmark decision in In re Trulia Stockholder Litigation, 129 A.3d 884 (Del. Ch. 2016), rejected these “disclosure-only” settlements, finding that the “enhanced” disclosures produced by such settlements were not “material or even helpful” to stockholders.  The Chancery Court bemoaned the proliferation of disclosure-only settlements in Delaware, and indicated that these types of settlements would be met by “continued disfavor” unless the supplemental disclosures are “plainly material,” i.e., they must “significantly alter the ‘total mix’ of information made available.”

In Trulia’s wake, the number of M&A suits filed in Delaware plummeted—declining by almost 75% in the first half of 2016—as plaintiffs’ counsel opted to file in federal court or states other than Delaware in the hope of finding more hospitable fora for “disclosure-only” resolutions.  READ MORE →

Supreme Court Issues Two Decisions That Limit Access to Federal Courts

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On May 16, 2016, the United States Supreme Court handed down two decisions that may, in practice, limit the ability to access federal district courts.  In Spokeo, Inc. v. Robins, No. 13-1339, 578 U.S. ___ (2016), the Supreme Court rejected the Ninth Circuit’s conclusion that statutory violations are per se sufficient to confer Article III standing, and, in Merrill Lynch, Pierce, Fenner & Smith Inc. v. Manning, No. 14-1132, 578 U.S. ___ (2016), the Court concluded that jurisdiction under Section 27 of the Securities and Exchange Act (Exchange Act) is limited to suits brought under the Exchange Act and state law claims that turn on the plaintiff’s ability to prove the violation of a federal duty.

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BREAKING NEWS: Supreme Court Declines to Address the Constitutionality of Securities and Exchange Administrative Forum

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On March 28, 2016, the Supreme Court denied a petition for certiorari review brought by Laurie Bebo, the former CEO of Assisted Living Concepts Inc., who challenged the constitutionality of proceedings conducted in an SEC administrative tribunal.  Although the Court denied review, there are many more cases like it winding their way through the federal system, and in the likely event a split develops among the circuits, the Supreme Court may be inclined to address the issue, especially given the amount of attention the issue has received.  Indeed, Bebo’s petition itself attracted the notice of celebrity entrepreneur Mark Cuban, who filed an amicus brief in her case arguing that the SEC’s administrative tribunal is a “farce” and unconstitutional.

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Supreme Court Affirms Class Certification and Judgment Predicated upon “Representative Evidence”

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On March 22, 2016, the Supreme Court issued a decision permitting class plaintiffs to rely on “representative” or “sample” evidence to satisfy the prerequisites to class certification and certain elements of their claims.  See Tyson Foods, Inc. v. Bouaphakeo, No. 14-1146, 2016 WL 1092414 (Mar. 22, 2016).  This is one of the relatively few recent class action decisions by the Court that could be construed as something other than a victory for class defendants.  As Justice Thomas stated in dissent, the decision arguably is inconsistent with the Court’s pro-defendant decisions in Wal-Mart and Comcast.  We have previously discussed the Supreme Court’s recent class action jurisprudence, including the Wal-Mart and Comcast decisions.

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United States Supreme Court Poised to Address Standard for Insider Trading Following Second Circuit’s Decision in United States v. Newman

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​Today, the Solicitor General filed a petition for a writ of certiorari in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), asking the United States Supreme Court to address the standard for insider trading in a tipper-tippee scenario.  Specifically, the Solicitor General argues that the Second Circuit’s Newman decision is in conflict with the Supreme Court’s 1983 decision in Dirks v. SEC, 463 U.S. 646 (1983), and the Ninth Circuit’s recent decision in United States v. Salman,  No. 14-10204 (9th Cir. July 6, 2015).   Because the Supreme Court grants certiorari in nearly three out of four cases filed by the Solicitor General, the likelihood of a cert grant in Newman is particularly high.

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The Supreme Court’s Omnicare Decision: Implications And Remaining Questions Regarding When Opinions Are Actionable Under The Federal Securities Laws

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On March 24, 2015, the Supreme Court issued its much anticipated decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, No. 13-435, 2015 WL 1291916 (Mar. 24, 2015).  With some significant caveats (discussed below), the decision is largely protective of issuers: it enshrines the distinction between “opinions” and “facts,” and generally makes it difficult to hold issuers liable for securities fraud based on statements of opinion.

In brief, the Court held that issuers that include opinions in a registration statement may be liable under Section 11 of the Securities Act of 1933 (the “Securities Act”) for making an untrue statement of fact only when the issuer does not subjectively believe the stated opinion.  In so holding, the Court rejected the Sixth Circuit’s view that an honestly-held opinion that was at the time or later proved to be untrue could subject the issuer to liability.  As the Court put it, Section 11 “is not, as the Court of Appeals and the [plaintiffs] would have it, an invitation to Monday morning quarterback an issuer’s opinions.”

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