U.S. Sec. & Exch. Comm'n v. Alpine Sec. Corp.
| Decision Date | 04 December 2020 |
| Docket Number | No. 19-3272,August Term, 2019,19-3272 |
| Citation | 982 F.3d 68 |
| Parties | UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. ALPINE SECURITIES CORPORATION, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Second Circuit |
Rachel M. McKenzie, Senior Counsel (Michael A. Conley, Solicitor; Daniel Staroselsky, Senior Litigation Counsel, on the brief), for Robert B. Stebbins, General Counsel, Securities and Exchange Commission, Washington, D.C., for Plaintiff-Appellee.
Maranda Fritz, Thompson Hine LLP, New York, NY (Brent R. Baker, Jonathan D. Bletzacker, Aaron D. Lebenta, Clyde Snow & Sessions, Salt Lake City, UT, on the brief) for Defendant-Appellant.
Before: Walker, Cabranes, and Sack, Circuit Judges.
The Securities and Exchange Commission (SEC) filed a civil enforcement action against Alpine Securities Corporation (Alpine), a registered broker-dealer specializing in penny stocks and micro-cap securities. The SEC claimed that Alpine's failure to comply with the reporting requirements for filing Suspicious Activity Reports (SARs) violated the reporting, recordkeeping, and record retention obligations under Section 17(a), of the Securities Exchange Act of 1934 (Exchange Act), and Rule 17a-8 promulgated thereunder. The District Court for the Southern District of New York (Denise L. Cote, J. ), granted in part and denied in part the SEC's motion for summary judgment and denied Alpine's motion for summary judgment.
On appeal, Alpine argues that the district court erred: (1) in concluding that the SEC has authority to bring an enforcement action under Section 17(a) and Rule 17a-8 on the basis of Alpine's failure to comply with the SAR provisions of the Bank Secrecy Act (BSA); (2) in concluding that Rule 17a-8 is valid; (3) in concluding that Rule 17a-8 does not violate the Administrative Procedure Act (APA); and (4) in finding Alpine liable for violations of Section 17(a) and Rule 17a-8 on the basis of its deficient SAR practices. Alpine further challenges the district court's imposition of a civil penalty under the Exchange Act in the amount of $12 million.
For the reasons that follow, we AFFIRM the judgment of the district court.
Prior to examining the issues in this case, a brief review of the relevant statutory and regulatory authority will be helpful.
Congress enacted the Foreign Transactions Reporting Act of 1970, or Bank Secrecy Act (BSA), in 1970 due to concerns over (1) the adequacy of records retained by domestic financial institutions, (2) the failure of such institutions to report to the government large deposits and withdrawals of currency,1 and (3) the use of foreign financial institutions to evade "domestic criminal, tax, and regulatory enactments."2
The BSA authorizes the Secretary of the Treasury to mandate certain recordkeeping and reporting requirements for United States financial institutions.3 In enacting the BSA, Congress concluded that such records and reports "have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings."4
When the BSA was initially enacted, Treasury regulations only required broker-dealers to retain records and file reports relating to domestic and foreign transactions above a certain dollar amount.5 In 2001, however, Congress amended the BSA through the USA PATRIOT Act to require the Treasury, after consultation with the SEC and Board of Governors of the Federal Reserve System, to publish regulations requiring broker-dealers to report suspicious transactions.6 The Secretary of the Treasury delegated that responsibility to the Financial Crimes Enforcement Network (FinCEN) within the Treasury Department.7
In 2002, FinCEN promulgated 31 C.F.R. § 1023.320, which requires every broker-dealer to file a report of any suspicious transaction relevant to a possible violation of law or regulation. Specifically, broker-dealers must file a SAR if a transaction "is conducted or attempted by, at, or through a broker-dealer, it involves or aggregates funds or other assets of at least $5,000, and the broker-dealer knows, suspects, or has reason to suspect that the transaction (or a pattern of transactions of which the transaction is a part):" (1) "[i]nvolves funds derived from illegal activity;" (2) is designed, "whether through structuring or other means, to evade" the BSA and its regulations; (3) "[h]as no business or apparent lawful purpose;" or (4) "[i]nvolves use of the broker-dealer to facilitate criminal activity."8 Section 1023.320 also requires broker-dealers to retain a copy of any SAR filed "for a period of five years from the date of filing" and to "make all supporting documentation available to FinCEN or any Federal, State, or local law enforcement agency, or any Federal regulatory authority that examines the broker-dealer for compliance with the Bank Secrecy Act, upon request."9
Upon the issuance of this regulation, FinCEN announced that the "regulation of the securities industry in general and of broker-dealers in particular relies on both the Securities and Exchange Commission ... and the registered securities associations and national securities exchanges."10
The Exchange Act delegates to the SEC broad authority to regulate brokers and dealers in securities.11 Section 17(a) of the Exchange Act authorizes the SEC to promulgate rules to carry out Section 17(a)’s requirement that brokers and dealers "make and keep for prescribed periods such records ... and disseminate such reports as the Commission, by rule, prescribes as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of this chapter."12
In 1981, the SEC promulgated Rule 17a-8 under Section 17(a). Rule 17a-8, instead of duplicating the reporting and retention requirements of the BSA, incorporated those requirements by mandating that every registered broker or dealer "who is subject to the requirements of the Currency and Foreign Transactions Reporting Act of 1970 [Bank Secrecy Act] shall comply with the reporting, recordkeeping and record retention requirements of chapter X of title 31 of the Code of Federal Regulations."13 Chapter X of Title 31 concerns the Treasury's rules for brokers or dealers in securities, including FinCEN's SAR requirements under Section 1023.320.
The SEC observed that by not duplicating the existing BSA Treasury requirements, Rule 17a-8 would impose "no burden on competition."14 The SEC further specified that the Rule was not confined to any specific identifiable reports and records so as to allow for any revisions to reporting requirements that the Treasury may adopt in the future.15 No comments were received from the public in response to the proposed rule.16 In 2011, the SEC amended Rule 17a-8 to make clear that it still considered the Treasury's reporting obligations, which at that point included the SAR reporting requirement, as promoting the goals of the Exchange Act.17
Alpine is a registered broker-dealer and Financial Industry Regulatory Authority (FINRA) member that "acts as a clearing firm."18 Over the years, the SEC and FINRA, which is overseen by the SEC, found numerous deficiencies in Alpine's SAR reporting standards and submissions. In 2012, FINRA found that Alpine failed to file SARs over a two-month and a four-month period in 2011 and that many SARs that Alpine did file were inadequate. In 2015, the SEC found that for half of the SARs it reviewed, Alpine failed to provide a clear and complete description of the financial activity reported and that frequently Alpine was intentionally trying to obscure the suspicious nature of that activity.
On June 5, 2017, the SEC filed this civil action against Alpine to enforce reporting and recordkeeping requirements of the securities laws. The SEC alleged that, through non-compliant SAR practices, Alpine violated the reporting, recordkeeping, and record retention obligations under Section 17(a) and Rule 17a-8. The SEC moved for partial summary judgment, submitting SARs to exemplify the categories of Section 17(a) and Rule 17a-8 violations it was alleging. Alpine cross-moved for summary judgment, principally arguing that the SEC lacked authority to bring such a suit because the Treasury had sole authorization to enforce the BSA requirements.
The district court granted the SEC's motion in part, but deferred its resolution of categories of allegedly deficient SARs pending discovery and additional briefing. The district court also denied Alpine's motion, rejecting Alpine's argument that the SEC was improperly enforcing the BSA and upholding the SEC's authority to enforce the reporting and recordkeeping provisions of the Exchange Act on the basis of non-compliance with SAR requirements.19
The district court determined that Rule 17a-8 was a reasonable interpretation of the Exchange Act because the SEC concluded that the SARs, which assist the Treasury Department in targeting illegal securities transactions, would also serve to protect investors by providing information relevant to determining whether there is any market manipulation.20 The district court further found that nothing in the Exchange Act or the BSA expressly precluded FinCEN and the SEC from exercising concurrent regulatory and enforcement authority.21
The district court also rejected Alpine's argument that the SEC violated the APA when promulgating Rule 17a-8. Specifically, the district court noted that the "text of the regulation itself, as well as the SEC's 1981 notice of final rule, unambiguously demonstrate[d] the SEC's intent [that] the nature of the Rule 17a-8 reporting obligation [would] evolve over time through the Treasury's regulations."22 The district court observed that Rule 17a-8's evolving nature "made government more efficient by incorporating the obligations that had been and would be imposed by the Treasury."23
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