Securities Regulation Daily Wrap Up, SUPREME COURT DOCKET—U.S.: Court drops petition on SEC exercise of BSA enforcement powers, (Nov 8, 2021)
The petition contended that the SEC's enforcement of BSA powers opens the door for the SEC to enforce any statute with a connection to the Exchange Act's purposes.
The Supreme Court has declined to hear a petition challenging the SEC's enforcement of FinCen's SAR regulations. In this case, the Commission relied on an Exchange Act books and records provision to enforce violations of the Bank Secrecy Act's rules concerning reporting suspicious activities. The Commission also applies harsher standards than FinCen, giving it significant settlement leverage. The petitioner argued that this power belongs solely to the Treasury Department and has never been delegated to the SEC.
"Gotcha game." The petition for certiorari in Alpine Securities Corporation v. SEC argued that the SEC unlawfully exercises Bank Secrecy Act enforcement powers that do not belong to it. In this case, Alpine had been charged with failing to file, or filing deficient, Suspicious Activity Reports (SARs). The district court imposed a permanent injunction and $12 million civil penalty, finding that the Commission met its burden of showing over 2,700 separate violations.
On appeal before the Second Circuit, Alpine argued that the SEC had no authority to enforce the SAR provisions of the BSA via Exchange Act Rule 17a-8. According to Alpine, Congress expressly delegated the power to administer and enforce the BSA to the Department of the Treasury as delegated to FinCEN. While this case was nominally brought under Rule 17a-8, the claims were predicated solely on violations of the BSA, Alpine, said. The panel upheld the district court judgment, stating, among other findings, that while Rule 17a-8 requires adherence to the dictates of the BSA in order to comply with the recordkeeping and reporting requirements under the Exchange Act, it does not constitute SEC enforcement of the BSA.
The petition's central point was that the SEC engineered a power grab from Treasury and FinCEN that created a tilted playing field. The SEC has turned SAR enforcement into an unforgiving "gotcha game," Alpine said, by taking a much more rigid view than FinCEN about what is an actionable violation and then bringing actions under the Exchange Act's harsher penalty regime. A special area of concern is the interaction between FinCEN and the SEC because the former is an executive agency and is more directly accountable to the president than is the SEC (whose members can be removed for-cause). The petition also cited a string of Supreme Court precedents discussing the scenario in which one agency enforces laws governing another agency.
In its response, the SEC maintained that the Second Circuit's decision does not conflict with any decision by the Supreme Court, or any appellate court, and that further review is not warranted. The Commission emphasized that this enforcement action was brought under Exchange Act Section 17(a), which gives the SEC authority to regulate broker dealers, and that it is not an action to enforce the BSA. This authority indisputably encompasses records and reports like SARs, and nothing in the BSA precludes the SEC from requiring broker-dealers to file SARs or any other report—and there is no indication that Congress believes otherwise, the response says. The brief notes that FinCen itself has reiterated a decades-long understanding that the SEC, among other regulators, may have its own enforcement authority in this area.
In its final reply brief, Alpine responded that the SEC failed to address the "extensive textual and contextual evidence" that only Treasury enforces the BSA. Plus, the SEC admits, Alpine said, that it applies a lower mens rea standard and imposes harsher penalties than does FinCen, meaning that there are two conflicting enforcement regimes for the BSA. If the SEC can do this, the brief suggested, it can also enforce other laws "committed to more expert and politically accountable agencies." This ultra vires authority is "too troubling" to go unreviewed, Alpine said.
Is legal counsel an affiliate? A new petition for certiorari filed on October 26, 2021 asks the Supreme Court to consider whether an attorney providing a legal opinion is an "affiliate" of an issuer as defined in Rule 144. In Hand v. U.S., the pro se petitioner is a securities attorney convicted of securities fraud, wire fraud, and conspiracy for his participation in a "pump and dump" scheme; the conviction and sentence were affirmed by the First Circuit. The attorney, who was the legal counsel for the companies involved in the scheme, argues that liability under the antifraud provisions cannot exist if the purchasers are warned that a stock promotion is a scam. The petition also asserts that his position as pro bono legal counsel did not make him a "control" person or "affiliate" of the issuers under Rules 144 and 405. The petition also calls for the Court to "finally" overturn Chevron and not defer to the SEC's interpretation of control in Rule 405. Finally, the petition takes issue with the $1 million fine imposed on the attorney, contending that he produced evidence of his inability to pay. A response is due on December 2, 2021.
Read the Docket. These cases, and others before the Court may be referenced in the latest version of the Supreme Court Docket. Issued opinions, granted petitions, pending petitions, and denied petitions are listed separately, along with a summary of the questions presented and the current status of each appeal.
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