United States Securities and Exchange Commission v. Alpine Securities ( 2020 )

19-3272
United States Securities and Exchange Commission v. Alpine Securities Corporation
In the
United States Court of Appeals
For the Second Circuit
________
AUGUST TERM, 2019
ARGUED: MARCH 31, 2020
DECIDED: DECEMBER 4, 2020
No. 19-3272
UNITED STATES SECURITIES AND EXCHANGE COMMISSION,
Plaintiff-Appellee,
v.
ALPINE SECURITIES CORPORATION,
Defendant-Appellant.
________
Appeal from the United States District Court
for the Southern District of New York.
________
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
2 No. 19-3272
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 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.
________
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
3 No. 19-3272
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.
________
JOHN M. WALKER, JR., Circuit Judge:
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
4 No. 19-3272
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.
BACKGROUND
Prior to examining the issues in this case, a brief review of the
relevant statutory and regulatory authority will be helpful.
i. The Bank Secrecy Act
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
1California Bankers Ass’n v. Shultz, 416 U.S. 21, 27-28 (1974).
2Id.; see also Ratzlaf v. United States, 510 U.S. 135, 138 (1994) (“Congress
enacted the Currency and Foreign Transactions Reporting Act (Bank
Secrecy Act) in 1970, Pub.L. 91–508, Tit. II, 84 Stat. 1118, in response to
increasing use of banks and other institutions as financial intermediaries by
persons engaged in criminal activity. The Act imposes a variety of
reporting requirements on individuals and institutions regarding foreign
and domestic financial transactions.”).
5 No. 19-3272
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
3California Bankers Ass’n, 416 U.S. at 26.
4Id. (citing 12 U.S.C. §§ 1829b(a)(2), 1951; 31 U.S.C. § 1051).
5 See id. at 30-38.
6 Financial Crimes Enforcement Network; Amendment to the Bank
Secrecy Act Regulations–Requirement that Brokers or Dealers in Securities
Report Suspicious Transactions, 67 Fed. Reg. 44,048 (July 1, 2002) (SAR
Regulation Adopting Release).
7 Treasury Order 180-01(a)-(b); Financial Crimes Enforcement Network,
67 Fed. Reg. 64,697 (Oct. 21, 2002).
6 No. 19-3272
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
8 31 C.F.R. § 1023.320(a)(2).
9 31 C.F.R. § 1023.320(d).
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Commission . . . and the registered securities associations and
national securities exchanges.” 10
ii. The Exchange Act
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
10 SAR Regulation Adopting Release, 67 Fed. Reg. at 44,049.
11 See 15 U.S.C. § 78b; id. § 78q–1.
12 15 U.S.C. § 78q(a)(1).
13 17 C.F.R. § 240.17a-8.
8 No. 19-3272
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
iii. Current Enforcement Action
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
14 Recordkeeping by Brokers and Dealers, 46 Fed. Reg. 61,454, 61,455
(Dec. 17, 1981) (Rule 17a-8 Adopting Release).
15 Id.
16 Id.
17 Technical Amendments to Rule 17a-8: Financial Recordkeeping and
Reporting of Currency and Foreign Transactions, 76 Fed. Reg. 11,327 (Mar.
2, 2011).
18 App’x 48, 50.
9 No. 19-3272
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
10 No. 19-3272
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
United States Sec. & Exch. Comm'n v. Alpine Sec. Corp., 308 F. Supp. 3d
19
775, 789 (S.D.N.Y. 2018), reconsideration denied, No. 17CV4179(DLC), 2018
WL 3198889 (S.D.N.Y. June 18, 2018), and reconsideration denied, No.
17CV4179(DLC), 2019 WL 4071783 (S.D.N.Y. Aug. 29, 2019).
20 Id. at 796.
21 Id.
22 Id. at 797.
11 No. 19-3272
government more efficient by incorporating the obligations that had
been and would be imposed by the Treasury.” 23
After discovery and additional briefing, the SEC moved for
summary judgment as to Alpine’s liability for thousands of Rule 17a-
8 violations based on deficient SARs reporting and recordkeeping
practices. Evaluating the specific violations alleged, the district court
granted summary judgment to the SEC as to 2,720 violations of Rule
17a-8 on the basis of Alpine’s SARs reporting and recordkeeping
practices in three categories: submitting SARs with deficient
narratives, failing to submit SARs on deposit-and-sales patterns, and
failing to retain support files for SARs. The district court denied
summary judgment as to hundreds of other alleged violations by
Alpine, which the SEC then declined to prosecute further. 24
The district court then imposed a $12 million civil penalty and
enjoined Alpine from future violations of Section 17(a) and Rule 17a-
8. This appeal followed.
DISCUSSION
On appeal, Alpine argues (1) this enforcement action is invalid
because the SEC lacks authority to enforce the SAR provisions of the
Id.
23
24 See, e.g., United States Sec. & Exch. Comm'n v. Alpine Sec. Corp., 354 F.
Supp. 3d 396, 430-31, 443 (S.D.N.Y. 2018), reconsideration denied, No.
17CV4179(DLC), 2019 WL 4071783 (S.D.N.Y. Aug. 29, 2019).
12 No. 19-3272
BSA; (2) Rule 17a-8, which requires compliance with BSA
requirements, is invalid because it is not a reasonable interpretation
of the Exchange Act; (3) Rule 17a-8 is invalid because its promulgation
did not comply with the APA; and (4) the district court erred in
finding that Alpine violated Section 17(a) and Rule 17a-8 on the basis
of SAR compliance. Alpine further argues that the district court erred
in imposing a civil penalty of $12 million on Alpine.
We review motions for summary judgment de novo. 25
I. The SEC Has Authority to Enforce Section 17(a) of the
Exchange Act Through This Civil Action
Alpine first contends that the SEC is not authorized to bring
this civil enforcement action because the Treasury Department has
sole authority to enforce the BSA. We disagree.
This enforcement action was brought solely under Section 17(a)
of the Exchange Act and Rule 17a-8 promulgated thereunder. This
suit therefore falls within the SEC’s independent authority as the
primary federal regulator of broker-dealers to ensure that they
comply with reporting and recordkeeping requirements of those
provisions. 26 The fact that Rule 17a-8 requires broker-dealers to
25See United States v. Epskamp, 832 F.3d 154, 160 (2d Cir. 2016) (quoting
Roach v. Morse, 440 F.3d 53, 56 (2d Cir. 2006)); Mario v. P & C Food Mkts,
Inc., 313 F.3d 758, 763 (2d Cir. 2002).
26 See, e.g., VanCook v. SEC, 653 F.3d 130 (2d Cir. 2011) (enforcement
action for violation of Section 17(a)).
13 No. 19-3272
adhere to the dictates of the BSA in order to comply with the
recordkeeping and reporting provisions of the Exchange Act does not
constitute SEC enforcement of the BSA. We thus reject Alpine’s
argument that the SEC is enforcing the BSA, and not the Exchange
Act.
II. Rule 17a-8, Which Requires Compliance with BSA
Requirements, Is a Reasonable Interpretation of
Section 17(a) of the Exchange Act
Alpine next challenges the validity of Rule 17a-8, which
requires compliance with BSA requirements, on that basis that it is
not a reasonable interpretation of the Exchange Act.
We review questions of statutory interpretation de novo. 27
Because this issue centers on an agency’s interpretation of a statute,
we turn to the analytical framework established in Chevron, U.S.A. Inc.
v. Nat. Res. Def. Council, Inc. 28 “[A] reviewing court must first ask
whether Congress has directly spoken to the precise question at
issue.” 29 Only if the statute is ambiguous or silent on the question
need a court proceed in the analysis. If Congress has not clearly
See United States v. Epskamp, 832 F.3d 154, 160 (2d Cir. 2016) (quoting
27
Roach v. Morse, 440 F.3d 53, 56 (2d Cir. 2006))
28 467 U.S. 837 (1984).
29 Food & Drug Admin. v. Brown & Williamson Tobacco Corp., 529 U.S. 120,
132 (2000) (internal quotation marks omitted) (quoting Chevron, 467 U.S. at
842).
14 No. 19-3272
spoken, “a reviewing court must respect the agency’s construction of
the statute so long as it is permissible.” 30
The Exchange Act expressly delegates to the SEC the authority
to determine which reports from covered entities, including brokers
and dealers, are “necessary or appropriate” to further the goals of the
Exchange Act. The SEC, pursuant to that authority, may promulgate
rules defining the recordkeeping and reporting obligations of broker-
dealers that the SEC deems necessary to pursue those statutory
aims. 31
That is exactly what the SEC has done by promulgating Rule
17a-8. The Exchange Act aims to protect the national securities
market and “safeguard[] . . . securities and funds related thereto.” 32
The SEC determined that the SARs, which assist the Treasury
Department in targeting illegal securities transactions, would also
serve to further the aims of the Exchange Act by protecting investors
and helping to guard against market manipulation. For example,
SARs facilitate the SEC’s effective enforcement with regard to market
abuses associated with penny stock trading. 33 The SEC thus
30Id. (citing INS v. Aguirre-Aguirre, 526 U.S. 415, 424 (1999)).
31 15 U.S.C. § 78q(a)(1).
32 15 U.S.C. § 78b; see also 15 U.S.C. § 78q–1.
33 See Ronald S. Bloomfield, Robert Gorgia, & John Earl Martin, Sr., S.E.C.
Release No. 9553 (Feb. 27, 2014), vacated in part on other grounds, Robert
Gorgia, S.E.C. Release No. 9743 (Apr. 8, 2015) (“Penny stocks present risks
of trading abuses due to the lack of publicly available information about the
15 No. 19-3272
promulgated Rule 17a-8, which requires compliance with those BSA
regulations. In promulgating Rule 17a-8, the SEC acted pursuant to
an express delegation of rulemaking authority. We thus hold that the
SEC’s interpretation of Section 17(a), as expressed in Rule 17a-8, is
reasonable. 34
Alpine contends that in authorizing the Treasury to regulate
suspicious activity in recordkeeping and reporting by broker-dealers
under the BSA, Congress has precluded the SEC from regulating
recordkeeping and reporting under the Exchange Act.
When “[c]onfronted with two Acts of Congress allegedly
touching on the same topic, this Court is not at ‘liberty to pick and
choose among congressional enactments’ and must instead strive ‘to
penny stock market in general and the price and trading volume of
particular penny stocks.”); see also Testimony Before the S. Comm. on Banking,
Housing and Urban Affairs, 2002 WL 169600 (Jan. 29, 2002) (Annette L.
Nazareth, Director, SEC Division of Market Regulation) (stating that the
“SEC and Treasury staff readily reached consensus” on extending
comparable SAR obligations to combat “money laundering risks.”).
34 Alpine’s argument that the district court improperly applied Auer
deference lacks merit. See Auer v. Robbins, 519 U.S. 452 (1997). As an initial
matter, in Kisor v. Wilkie, the case on which Alpine relies, the Supreme Court
held that “Auer deference retains an important role in construing agency
regulations.” 139 S. Ct. 2400, 2408 (2019). Here, the text of Rule 17a-8
unambiguously encompasses the suspicious activity recordkeeping and
reporting requirements of Section 1023.320 by referring to the chapter of the
Code of Federal Regulations in which those provisions appear. To the
extent there is any ambiguity in Rule 17a-8, the SEC’s interpretation is
reasonable and not “plainly erroneous or inconsistent with the regulation.”
Nat. Res. Def. Council v. EPA, 808 F.3d 556, 569 (2d Cir. 2015) (citation
omitted).
16 No. 19-3272
give effect to both.’” 35 Because Alpine’s position is that the Exchange
Act and the BSA cannot be “harmonized,” it “bears the heavy
burden” of showing, based upon “a clearly expressed congressional
intention,” that such a result should follow. 36 Such an intention must
be “clear and manifest,” and courts “come armed with the stron[g]
presum[ption] that repeals by implication are disfavored and that
Congress will specifically address preexisting law when it wishes to
suspend its normal operations in a later statute.” 37
Here, the statutory and regulatory provisions are easily
harmonized. Rule 17a-8 requires broker-dealers to comply with the
duties imposed by the Treasury Department through the BSA. 38 Far
from conflicting, those duties imposed on broker-dealers by the BSA
are “consistent with the purposes of the Exchange Act and the [SEC]’s
obligation to enforce broker-dealer recordkeeping requirements.” 39
Rule 17a-8’s incorporation of the BSA’s reporting obligation serves
35Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612, 1624 (2018) (some internal
quotation marks omitted) (quoting Morton v. Mancari, 417 U.S. 535, 551
(1974)).
36 Id. (quoting Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer, 515 U.S.
528, 533 (1995)).
37 Id. (internal citations and quotation marks omitted).
38 Specifically, the rule requires that “[e]very 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.” 17 C.F.R. § 240.17a-8.
39 Rule 17a-8 Adopting Release, 46 Fed. Reg. at 61,455.
17 No. 19-3272
the goal of regulatory enforcement by minimizing regulatory costs on
broker-dealers, who need only comply with one set of reporting
requirements. 40 And the Treasury and the SEC have plainly worked
in tandem, issuing policy statements and reports, and initiating
enforcement actions since the BSA’s inception. 41 For example,
FinCEN’s adoption of the SAR regulation in 2002 expressly
referenced Rule 17a-8 when it stated that “both the SEC and SROs
[self-regulatory organizations] will address broker-dealer
compliance” with the SAR reporting rule. 42
The two cases upon which Alpine relies, Food & Drug Admin. v.
Brown & Williamson Tobacco Corp. 43 and Nutritional Health All. v. Food
& Drug Admin, 44 are unavailing. In Brown & Williamson, the Supreme
Court rejected the claimed authority of the Food and Drug
Administration (FDA) to regulate tobacco products through the Food,
40Congress was fully aware of this enforcement design. See Testimony
Before the S. Comm. on Banking, Housing and Urban Affairs, 2002 WL 169600
(Jan. 29, 2002) (Annette L. Nazareth, Director, SEC Division of Market
Regulation) (stating that the SEC expected that, after Section 1023.320’s
promulgation, “bank-affiliated broker-dealers should be subject to
Treasury’s rule, rather than two separate SAR rules”).
41 See, e.g., Pinnacle Capital Markets, LLC, FinCEN No. 2010-4 (Aug. 26,
2010); Oppenheimer & Co., Inc., SEC Release No. 74141, 2015 WL 331117
(Jan. 27, 2015); SEC & FinCen, SEC and FinCEN Sign Information Sharing
Agreement (Dec. 21, 2006).
42 SAR Regulation Adopting Release, 67 Fed. Reg. at 44,049.
43 529 U.S. 120 (2000).
44 318 F.3d 92, 104 (2d Cir. 2003).
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Drug, and Cosmetic Act (FDCA). 45 In support, the Court pointed out
that such FDA authority would conflict with congressional intent
because, if that were the case, the FDCA would “require the agency
to ban [cigarettes]” which would “contradict Congress’ clear intent as
expressed in its more recent, tobacco-specific legislation.” 46 The
Court supported its holding by pointing out that: (1) Congress had
“considered and rejected bills that would have granted the FDA such
jurisdiction”; and (2) the FDA had taken the “long-held position that
it lacks jurisdiction under the FDCA to regulate tobacco products.” 47
Nothing approaching these circumstances is present here. Fully
aware that the SEC enforces the SAR provisions, Congress has never
indicated its disapproval of joint SAR reporting enforcement.
In Nutritional Health, we found that congressional intent
conflicted with FDA jurisdiction over certain products. 48 The FDA
claimed delegated authority under the FDCA to regulate the
packaging of dietary supplements and drugs for the purpose of
poison prevention. 49 We held the FDA’s interpretation of its authority
to be unreasonable because Congress had later passed the Poison
Prevention Packing Act (PPP Act), which “specifically targeted the
45 529 U.S. at 126.
46 Id. at 137, 143.
47 Id. at 144.
48 318 F.3d at 95.
49 Id. at 94.
19 No. 19-3272
problem of accidental poisoning,” 50 and the PPP Act “expressly
prohibited the FDA from prescribing ‘specific packaging designs,
product content, package quantity, or with [one] exception . . . [,]
labeling.’” 51 In our view, the FDA’s interpretation was impermissible
because the PPP Act “specifically and unambiguously” targeted and
prescribed its own regulatory approach to addressing the accidental
poisoning problem through packaging standards, and the Consumer
Product Safety Act “unambiguously transferred authority to
administer and enforce the PPP Act from the FDA to the [Consumer
Product Safety Commission (CPSC)].” 52 In both Brown & Williamson
and Nutritional Health, a history of expressed congressional intent
compelled the conclusion that the FDA lacked authority. No such
history is present here.
Alpine contends that Nutritional Health requires us to hold that
the later-enacted SAR provision “specifically and unambiguously”
demonstrates congressional intent for the Treasury to possess sole
authority to “address money laundering and terrorist financing
through the compilation of data derived from various financial
institutions.” According to Alpine, this “specific authorization” to the
50 Id. at 102.
51 Id. at 104.
52 Id. (citing Brown & Williamson, 529 U.S. at 132-33)).
20 No. 19-3272
Treasury Department trumps the general authorization to the SEC.
We disagree.
The SEC’s Rule 17a-8 Adopting Release, in 1981, expressly stated
that the “Treasury has delegated to the Commission the responsibility
for assuring compliance with the Currency Act and Treasury
regulations.” 53 No comments, or objections, were received from the
public in response to proposed Rule 17a-8. 54 Later, when FinCEN
adopted the SAR reporting requirements through 31 C.F.R. §
1023.320, it expressly stated that the Exchange Act enables “the SROs,
subject to SEC oversight, to examine for BSA compliance” and
therefore “both the SEC and SROs will address broker-dealer
compliance with this rule.” 55 That Congress never proposed to silo
SAR enforcement authority in the Treasury strongly suggests that
Congress intended for the SEC to maintain its compliance authority
and from the outset, it was envisioned by both agencies that the SEC
would have enforcement authority over broker-dealers.
In sum, Alpine has not met its “heavy burden” to show that
Congress “clearly expressed [its] intention” 56 to preclude the SEC
Rule 17a-8 Adopting Release, 46 Fed. Reg. at 61,454.
53
Id. Additionally, when this rule was proposed, FinCEN recognized
54
that the SEC played a primary role in “reporting and maintaining data
about securities law violations” and that the SEC had the authority, under
Rule 17a-8, to examine for BSA compliance. SAR Regulation Adopting
Release, 67 Fed. Reg. at 44,051.
55 SAR Regulation Adopting Release, 67 Fed. Reg. at 44,049.
56 See Epic Sys. Corp., 138 S. Ct. at 1624.
21 No. 19-3272
from examining for SAR compliance in conjunction with FinCEN and
pursuant to authority delegated under the Exchange Act.
III. Rule 17a-8 Does Not Violate the Administrative
Procedure Act
Alpine next contends that, even if the SEC does have
rulemaking authority under Section 17(a), Rule 17a-8 violates the
APA. Specifically, Alpine argues that the open-ended nature of Rule
17a-8, which permits the automatic incorporation of future BSA
requirements, impermissibly allows the SEC to bypass the notice-
and-comment requirements of the APA. We disagree.
The APA “requires an agency conducting notice-and-
comment rulemaking to publish in its notice of proposed rulemaking
‘either the terms or substance of the proposed rule or a description of
the subjects and issues involved.’” 57 The public had an opportunity
to comment on both Rule 17a-8 and Section 1023.320(a)(2) of the BSA
regulations.
As discussed earlier, Rule 17a-8 was promulgated in 1981
before FinCEN adopted its current SAR reporting requirements. At
the time, the BSA regulations required broker-dealers to submit
reports of currency transactions and transactions involving foreign
accounts. The SEC indicated, when it proposed Rule 17a-8, that
Long Island Care at Home, Ltd. v. Coke, 551 U.S. 158, 174 (2007) (quoting 5
57
U.S.C. § 553(b)(3)).
22 No. 19-3272
requiring broker-dealers to comply with the BSA was “consistent
with the purposes of the Exchange Act and the [SEC]’s obligation to
enforce broker-dealer recordkeeping requirements.” 58
Moreover, when it was published for notice and comment, the
proposed Rule 17a-8 expressly stated that it did “not specify the
required reports and records so as to allow for any revisions the
Treasury may adopt in the future.” 59 When the SEC formally adopted
the Rule, in its Rule 17a-8 Adopting Release, the SEC further made clear
that the Rule would “allow for any revisions the Treasury may adopt
in the future.” 60
Accordingly, we conclude that the public was afforded the
requisite notice and opportunity to comment on Rule 17a-8 and, in
particular, its potential to require additional reporting requirements
should the Treasury regulations specify them.
Recordkeeping by Brokers & Dealers, Release No. 18073 (Aug. 31, 1981).
58
Rule 17a-8 Adopting Release, 46 Fed. Reg. at 61,455. Alpine argues
59
that the SEC’s Rule 17a-8 Adopting Release also acknowledged that its role,
with respect to the BSA, was limited to merely examination authority. That
seems to be a mischaracterization. Rule 17a-8 Adopting Release stated that
“most effective means of enforcing compliance” with the BSA requirements
was through on-site “examinations” but there is no indication that SEC was
limited to mere examination and could not enforce the BSA provisions. The
same notice stated that the “Treasury has delegated to the Commission the
responsibility for assuring compliance with the Currency Act and Treasury
regulations.” 46 Fed. Reg. at 61,454.
60 Rule 17a-8 Adopting Release, 46 Fed. Reg. at 61,454.
23 No. 19-3272
The suspicious activity recordkeeping and reporting
requirements of Section 1023.320(a)(2), incorporated into Rule 17a-8,
were also subject to public notice-and-comment. In 2002, when it
proposed Section 1023.320(a)(2), FinCEN publicly stated that both the
SEC and SROs would “address broker-dealer compliance” with its
requirements, including through enforcement actions, as they had
done with other BSA recordkeeping and reporting requirements for
decades. 61 In response to comments it received, FinCEN revised its
proposed rule in “significant respects” and provided extensive
guidance regarding, among other matters, the standard and scope of
reporting. 62 The publication of the SAR regulations under Section
1023.320(a)(2) provided ample notice-and-comment opportunities in
satisfaction of the APA’s requirements.
We reject Alpine’s argument that the SEC was required to seek
future public comments each time FinCEN issued new BSA reporting
requirements to avoid an “improper delegation [to Treasury] of
rulemaking authority under the Exchange Act.” Alpine Br. 42-43.
“An agency delegates its authority when it shifts to another
party almost the entire determination of whether a specific statutory
Financial Crimes Enforcement Network; Proposed Amendment to the
61
Bank Secrecy Act Regulations—Requirement of Brokers or Dealers in
Securities to Report Suspicious Transactions, 66 Fed. Reg. 67,670 (Dec. 31,
2001).
62 SAR Regulation Adopting Release, 67 Fed. Reg. at 44,049.
24 No. 19-3272
requirement . . . has been satisfied, or where the agency abdicates its
final reviewing authority.” 63 But Rule 17a-8 does not charge the
Treasury with deciding which recordkeeping and reporting
requirements would further the purposes of the Exchange Act.
Instead, the SEC determined, through notice-and-comment
rulemaking, that any reporting requirements that the Treasury
imposed on broker-dealers pursuant to its independent authority
under the BSA would be “consistent with the purposes of the
Exchange Act and the [SEC’s] obligation to enforce the broker-dealer
recordkeeper requirements.” 64
Moreover, the SEC has not taken the position that Rule 17a-8
obliges the SEC to automatically adopt any changes the Treasury may
make to the BSA’s recordkeeping and reporting requirements,
regardless of whether they are consistent with the purposes of the
Exchange Act. Rather, the SEC has worked together with FinCEN on
the SAR regulation, “update[d] the reference to the BSA
implementing regulations” in 2011, and in a formal adjudication,
reiterated that requiring broker-dealers to maintain records and file
reports of suspicious activity is consistent with the purposes of the
63Fund for Animals v. Kempthorne, 538 F.3d 124, 133 (2d Cir. 2008)
(internal citations and quotation marks omitted).
64 Rule 17a-8 Adopting Release, 46 Fed. Reg. at 61,455.
25 No. 19-3272
Exchange Act. 65 Alpine has failed to demonstrate either that the SEC
has impermissibly delegated authority to the Treasury under the
Exchange Act, or that it has abdicated its final reviewing authority
relating to broker-dealer recordkeeping and reporting requirements.
Accordingly, in this case, there are no APA concerns because
the public was fully aware of the interrelated and cohesive nature of
the regulations of both agencies. Holding otherwise would only serve
to waste governmental resources and hinder efficient enforcement.
Because both Rule 17a-8 and the SAR regulation were open to
public comment, this situation is distinguishable from United States v.
Picciotto 66 and City of Idaho Falls v. F.E.R.C. 67 on which Alpine relies.
Neither case is apposite.
In United States v. Picciotto, the D.C. Circuit held that additional
conditions that were added to regulations governing the United
States Park Service violated the APA, notwithstanding that the
regulation contained an open-ended provision that had gone through
notice and comment. 68 But, unlike this case, in which the SAR
requirement had been promulgated by the Treasury in compliance
Technical Amendments to Rule 17a-8, 76 Fed. Reg. at 11,328; see also
65
Ronald S. Bloomfield et al., Release No. 71632, 2014 WL 768828 (Feb. 27,
2014).
66 875 F.2d 345 (D.C. Cir. 1989).
67 629 F.3d 222 (D.C. Cir. 2011).
68 875 F.2d at 346-47.
26 No. 19-3272
with the APA, the additional regulatory conditions in Picciotto were
never issued in compliance with the APA. 69
In City of Idaho Falls v. F.E.R.C, the Federal Energy Regulatory
Commission (FERC) had previously approved a methodology, used
by the Forest Service, for setting rental fees. 70 FERC then incorporated
a new Forest Service rental fee schedule without providing an
opportunity for notice and comment. 71 The D.C. Circuit held that
“[b]ecause FERC previously approved and used the old Forest
Service methodology, its implicit acceptance of the new methodology
in the 2009 Update marked a change in its own regulations” which
required notice-and-comment rulemaking. 72 Our case differs from
City of Idaho Falls because all changes to FinCEN reporting regulations
are open to public comment and will be APA compliant whenever
such changes occur, as happened with the issuance of Section
1023.320.
In sum, we find that because: (1) the SEC made clear in its
request for public comment that Rule 17a-8 incorporated present and
future Treasury SAR reporting requirements, and would be modified
accordingly; (2) FinCEN itself published its SAR reporting
requirements for public comment; and (3) FinCEN expressly notified
69 Id.
70 629 F.3d at 223.
71 Id. at 227-29.
72 Id. at 231.
27 No. 19-3272
the public that the SEC would continue to enforce the BSA’s reporting
changes, Rule 17a-8 did not violate the notice-and-comment
requirements of the APA.
IV. The District Court Did Not Err in Granting Summary
Judgment with Respect to the SARs
The district court granted summary judgment to the SEC as to
2,720 violations of Rule 17a-8 on the basis of certain of Alpine’s SARs
reporting and recordkeeping practices—specifically, submitting
SARs with deficient narratives, failing to submit SARs on deposit-
and-sales patterns, and failing to retain support files for SARs. Alpine
argues that the district court erred when it: (1) deferred to the SEC’s
interpretation of FinCEN guidance; and (2) applied a “purely
mechanical” test in finding that Alpine did not adequately comply
with its SAR reporting requirements. Both arguments are without
merit.
First, there is no indication in this record that the district court
improperly deferred to the SEC. The district court did nothing other
than independently interpret the supporting FinCEN documentation,
which was consistent with the SEC’s interpretation.
The district court stated that it was relying on “instructions on
the 2002 SAR Form, the 2012 SAR Instructions, and the SAR Narrative
Guidance issued [by FinCEN] in 2003.” 73 As relevant here, the 2002
73 Alpine Sec. Corp., 354 F. Supp. 3d at 414.
28 No. 19-3272
SAR Form makes clear that the narrative section of the SAR “is
critical.” 74 It further provides,
The care with which [the narrative section] is completed
may determine whether or not the described activity and its
possible criminal nature are clearly understood by
investigators. Provide a clear, complete and chronological
description . . . of the activity, including what is unusual,
irregular or suspicious about the transaction(s), using the
checklist below as a guide. 75
The district court read the totality of the FinCEN guidance, in the 2002
SAR Form, 2003 Narrative Guidance, and 2012 Instructions, to
indicate that certain “red flags” may evidence SAR reporting
violations. The “red flags” included: (1) related litigation; (2) shell
companies and derogatory stock history; (3) stock promotion; (4)
unverified issuers; (5) low trading volume; (6) foreign involvement;
(7) basic customer information. 76
As one example, the district court found that Alpine failed on
multiple occasions to provide SAR information regarding related
litigation. Specifically, Alpine “omitted information, which was
present in Alpine’s support files for the SARs, [that] indicated that the
Id. at 413 (emphasis in original); 2002 SAR Form at 3 (emphasis in
74
original).
75 Alpine Sec. Corp., 354 F. Supp. 3d at 413-14 (emphasis in original).
76 Id. at 426-40.
29 No. 19-3272
SEC had sued one customer and its CEO for fraud in connection with
asset valuations and improper allocations of expenses, that another
customer had pleaded guilty to conspiracy related to counterfeiting,
and that yet another customer had a history of being investigated by
the SEC for misrepresentations.” 77
Once the district court determined that such “red flags”
triggered certain SAR obligations, it then used an objective test to
determine whether summary judgment was warranted. We agree
with the district court’s approach to summary judgment in this case
and reject Alpine’s argument that its own subjective belief as to what
needed to be reported sufficed.
Importantly, the text of 31 C.F.R. § 1023.320(a)(2) supports the
district court’s finding that the SAR regulation imposes an objective
test (i.e., broker-dealers shall file an SAR if it “knows, suspects, or has
reason to suspect” that a transaction is suspicious). Alpine points to
isolated parts of FinCEN guidance in support of its argument that a
subjective test must be utilized. 78 But, Alpine does so while ignoring
FinCEN’s express statement that the SAR reporting provision
requires an objective standard:
The final rule retains the “has reason to suspect” language.
FinCEN believes that compliance with the rule cannot be
77 Id. at 426-27.
78 Alpine Br. 49.
30 No. 19-3272
adequately enforced without an objective standard. The
reason-to-suspect standard means that, on the facts existing
at the time, a reasonable broker-dealer in similar
circumstances would have suspected the transaction was
subject to SAR reporting. This is a flexible standard that
adequately takes into account the differences in operating
realities among various types of broker-dealers, and is the
standard contained in the existing SAR rules for depository
institutions and money services businesses. 79
While subjective factors may be relevant where the enforcing agency
shows that the broker-dealer actually “knows” or “suspects” that the
transaction is subject to SAR reporting, the “reason to suspect”
standard sensibly permits the use of objective “red flags” that would
alert reasonable broker-dealers to the fact that that the transaction
required a SAR report. 80 Accordingly, the district court did not err in
its determination that an objective analysis was proper.
We also reject Alpine’s claim that the district court’s
examination was “purely mechanical.” The district court inspected
the allegedly deficient SARs before making its determination. In its
100-page opinion, the district court recognized that each “SAR must,
SAR Regulation Adopting Release, 67 Fed. Reg. at 44,053 (emphasis
79
added).
80 See SEC Br. 65.
31 No. 19-3272
of course, be examined individually” and, without announcing a
mechanical or bright-line test, reviewed all of the alleged deficiencies
before concluding that, given the “sheer number of [Alpine’s] lapses
at issue in this case[,]” summary judgment was warranted. 81 Indeed,
Alpine did not “contest in a large number of instances that it failed to
include information in SAR narratives that the SAR Form itself directs
a broker-dealer to include.” 82
Alpine finally argues that the district court “ignore[d]” that
certain assertions created genuine disputes of fact. 83 We disagree. As
noted above, in many instances, Alpine did not dispute the fact that
it failed to include required information in SAR narratives. When
Alpine raised properly supported factual disputes as to specific SARs,
the district court ruled in its favor. 84 But, for example, the district
court did not err in rejecting as “vague and conclusory” Alpine’s
assertion that it filed SARs for large deposits of low-priced securities
even though it concluded it was not required to do so. 85 Plainly, when
Alpine’s evidence did create genuine disputes of material fact as to
particular SARs, the district court considered it.
81 Alpine Sec. Corp., 354 F. Supp. 3d at 419, 436 (emphasis added).
82 Id. at 419.
83 Alpine Br. 69.
84 See, e.g., Alpine Sec. Corp., 354 F. Supp. 3d at 431.
85 Id. at 423 n.44.
32 No. 19-3272
In sum, the district court did not err in granting summary
judgment to the SEC as to Alpine’s liability on the basis of 2,720
violations of the reporting, recordkeeping, and record retention
requirements of Section 17(a) and Rule 17a-8.
V. In Imposing the Civil Penalty, the District Court Did
Not Abuse Its Discretion
Alpine finally challenges the district court’s imposition of a $12
million civil penalty for the 2,720 SAR violations of the reporting,
recordkeeping, and record retention requirements of Section 17(a)
and Rule 17a-8. The SEC requested that the district court impose a
tier-one civil penalty of $10,000 for each SAR violation and $1,000 for
each support-file violation, totaling $22.7 million. 86 Alpine argued
that the total penalty should fall between $80,000 and $720,000. 87
Section 21(d) of the 1934 Exchange Act authorizes monetary
penalties for statutory violations. 88 In assessing a penalty, a court may
impose “a first-tier penalty . . . for any violation,” regardless of mental
state or other factors. 89 Within the maximum penalty authorized by
the statute, the “actual amount of the penalty” is left “up to the
discretion of the district court.” Because the amount of the penalty is
United States Sec. & Exch. Comm’n v. Alpine Sec. Corp., 413 F. Supp. 3d
86
235, 245 (S.D.N.Y. 2019).
87 Id. at 248.
88 See 15 U.S.C. § 77t(d); 15 U.S.C. § 78u(d)(3).
89 SEC v. Ramilovic, 738 F.3d 14, 38 (2d Cir. 2013).
33 No. 19-3272
left to the sound discretion of the district court, we review an award
of penalties for abuse of discretion. 90
Here, we conclude that the district court did not abuse its
discretion in imposing the $12 million civil penalty. The breadth and
duration of Alpine’s deficient reporting and recordkeeping activity
supports the district court’s imposition of the civil penalty. The
district court did recognize that Alpine “took some steps to improve
. . . compliance.” 91 But as the district court noted, “[a]lthough the
extraordinary scale of Alpine’s violations decreased over the years,
the violations did not cease.” 92 The district court found that the “scale
and duration” of the violations “undermine[d] Alpine’s assertion that
its conduct was, at worst, merely negligent.” 93
Alpine’s arguments to the contrary are without merit. Insofar
as Alpine’s challenge to the civil penalty is based on the premise that
the district court erroneously concluded that Alpine acted with
“scienter,” the district court expressly noted that “a finding of scienter
is not required to impose the tier-one penalty sought by the SEC.” 94
Nor does the “sheer, unprecedented” amount of the penalty itself rise
90 Id.
91 Sp. App’x 253.
92 Sp. App’x 256.
93 Sp. App’x 253.
94 Sp. App’x 252-53 (emphasis added).
34 No. 19-3272
to the level of abuse of discretion. 95 The total amount was driven by
the “unprecedented number of violations” of Section 17(a) and Rule
17a-8 committed by Alpine. 96 Alpine’s argument that the district
court disregarded evidence of the firm’s financial condition is
similarly unavailing. The district court expressly stated that Alpine’s
financial records indicated that it would have had the ability to pay
the $22.7 million penalty requested by the SEC, but it still imposed a
penalty that was “substantially less” due to Alpine’s financial
condition. 97
All in all, the district court acted within its discretion to impose
the $12 million civil penalty in light of the particular facts and
circumstances of this case, namely, Alpine’s “systematic and
widespread evasion of the law.” 98
We have considered Alpine’s remaining arguments on appeal
and conclude that they are without merit.
95Alpine Br. 81. Notably, Alpine itself does not argue that the individual
$5,000 penalty for failing to file an SAR or filing a deficient SAR, or $1,000
penalty for failing to produce a SAR support file upon request, are
unreasonable.
96 See SEC Br. 100. Alpine’s argument that the penalty is excessive in
light of the BSA’s comparable penalty provisions is of no moment. As
discussed, the SEC brought this enforcement action pursuant to Section 17
of the Exchange Act.
97 Sp. App’x 265.
98 Sp. App’x 259-60.
35 No. 19-3272
CONCLUSION
For the reasons stated above, the judgment of the district court
is AFFIRMED.