In the possible final stage of the Alpine Securities saga (as we blogged about here, here and here), Judge Clark Waddopous of the United States District Court for the District of Utah issued an opinion granting the Securities and Exchange Commission’s (“SEC”) motion to dismiss the amended complaint filed by plaintiff brokerage firm Scottsdale Capital Advisors (“SCA”).

SCA’s suit, distilled greatly, challenged the SEC’s authority to enforce, administer and interpret the Suspicious Activity Report (“SAR”) regulations issued under the Bank Secrecy Act (“BSA”) and incorporated into the securities laws. What makes this case interesting is that the SEC did not impose penalties for failure to comply with the SAR requirements against SCA; rather, the agency sought penalties against SCA’s contractual partner, Alpine Securities Corporation (“Alpine”), a Salt Lake City-based brokerage firm. SCA became involved because it agreed to act as an introducing broker-dealer for transactions cleared through Alpine. SCA’s amended complaint alleged that it had suffered harm as a result of the SEC’s improper enforcement action against Alpine.

The ultimate reason the Court dismissed the suit is because SCA had to show standing under the Administrative Procedures Act, 5 U.S.C. §§ 550, et seq., (“APA”) and failed to satisfy this requirement because there was neither a “final agency action” nor an “injury” for APA purposes.

The opinion is important because all types of financial institutions covered by the BSA routinely enter into contracts with third parties (which themselves may or may not be covered by the BSA) involving the fulfillment of anti-money laundering (“AML”) compliance requirements.  These relationships can involve fintech-bank partnerships, third parties tasked with collecting customer information, and much more.  As the opinion reflects, if a regulator goes after an entity’s contractual partner for alleged AML failures, that entity can suffer downstream consequences – including a contract and indemnification dispute – with little to no ability to affect the regulator’s actions through the APA.

We first briefly review the complicated history of Alpine, SCA, and the SEC, and then discuss the opinion by the District Court of Utah.

Background: SCA’s and Alpine’s Suit with the SEC

SCA is a retail brokerage firm trading in securities and registered with the SEC as a broker-dealer since 2002. In February 2009, SCA and Alpine entered into a “Fully Disclosed Clearing Agreement.” SCA agreed to act as an introducing broker-dealer for transactions cleared through Alpine. Under the agreement, SCA had the sole responsibility for “(1) complying with all applicable laws, regulations, and self-regulatory requirements regarding transactions and accounts, including [anti-money laundering] obligations, (2) maintaining procedures to ensure compliance, and (3) knowledge of the customer, including ‘all essential facts’ relating to each customer and their accounts.”

In 2017, the SEC charged Alpine for (among other things) its alleged practice of clearing transactions for microcap stocks that were used in several manipulative schemes (see our previous post on the civil action here). In its complaint, the SEC alleged that Alpine systematically failed to file required Suspicious Activity Reports (“SARs”) for stock transactions that it flagged as suspicious and, when Alpine did file SARs, allegedly did not correctly and completely fill out the SAR narrative section.

The SEC asserted jurisdiction against Alpine on the basis of Exchange Act Section 17(a), which allows the agency to require that broker-dealers “make and keep for prescribed periods such records.” Pursuant to that provision, the SEC promulgated Exchange Act Rule 17a-8, which incorporates the regulations promulgated by the Financial Crimes Enforcement Network (“FinCEN”) under the BSA and requires broker-dealers to comply with them. See 17 C.F.R. § 240.17a-8. Put another way, the SEC has made use of its books-and-records authority as a means to incorporate and enforce the requirements of the BSA. Alpine argued that the SEC did not have authority to enforce the BSA regulations because, abbreviated, FinCEN has promulgated regulations for SARs, the SEC has not, and the SEC impermissibly used FinCEN’s regulations.

Judge Denise Cote of the Southern District of New York (“S.D.N.Y.”) sided with the SEC, holding that the agency was not purporting to enforce FinCEN’s BSA regulations but was instead bringing the action pursuant to the Exchange Act and Rule 17a-8.

Alpine and SCA together filed the action in the Utah District Court seeking (1) a declaration that the SEC had violated the APA and (2) to enjoin the SEC from further enforcing the BSA regulations pursuant to Rule 17a-8. The Utah action was stayed while the S.D.N.Y. action proceeded on appeal. The United States Court of Appeals for the Second Circuit affirmed and the Supreme Court denied a petition for a writ of certiorari. At the conclusion of the appeals process in the S.D.N.Y. action, Alpine was liable for a civil penalty in the amount of $12 million.

SCA’s Amended Complaint and the SEC’s Motion to Dismiss

With the S.D.N.Y. action resolved, the stay on the joint action by Alpine and SCA in the Utah District Court was lifted. Alpine voluntarily dismissed its claims. SCA took a different route and filed an amended complaint on February 1, 2022, arguing principally similar claims as in the original joint complaint with Alpine. The SEC sought to dismiss SCA’s amended complaint.

Standing Under the APA And Not Article III as a Threshold

Judge Waddopous began the analysis not with whether SCA alleged sufficient facts to show standing under Article III but whether SCA had alleged sufficient facts to show standing under the APA. If there was no APA standing, then the Court “will not need to reach the complicated constitutional standing issues implicated by Article III.”

Judicial review of an agency action is governed by 5 U.S.C. § 702 (“[a] person suffering legal wrong because of agency action, or adversely affected or aggrieved by agency action within the meaning of a relevant statute, is entitled to judicial review thereof.”). SCA had to satisfy two requirements.  First, it had to seek judicial review of a “final agency action.” Second, it had to allege facts showing that it suffered a “legal wrong” or had been “adversely affected or aggrieved” because of that action. The Court concluded that SCA failed both requirements.

No Adequate Allegation of Injury

We begin at the end of the opinion.  The Court found that even if the SEC’s decision to file the Alpine Enforcement Action was a “final agency action,” SCA still failed to sufficiently allege it suffered a “legal wrong” or had been “adversely affected or aggrieved.”

In its complaint, [SCA] alleges that it has been harmed by the SEC’s enforcement of FinCEN’s SAR regulations because it has been required to spend additional time and resources to update its BSA compliance program. It also alleges that since the SEC’s SAR filing standard purportedly differ from FinCEN’s, it faces regulatory uncertainty resulting from having to comply with two inconsistent SAR filing regimes. [SCA] also alleges that it faces contractual liability for any enforcement action taken against Alpine under its Fully Disclosed Clearing Agreement with Alpine.

The opinion found that SCA did not show “a causal connection between any of the injuries alleged in its complaint and the SEC’s decision to file the Alpine Enforcement Action.” SCA’s argument that its compliance costs increased from the SEC’s aggressive enforcement stance failed because the SEC’s S.D.N.Y. action against Alpine did not impose any new or different legal obligations with respect to SAR compliance. The Court also was unconvinced by SCA’s additional argument that it suffered adequate injury under the APA as a result of uncertainty in the regulatory landscape. Finally, any alleged injury due to increased contractual liability was the result of SCA’s decision to enter in an agreement with Alpine and not the SEC’s decision to proceed against Alpine in the S.D.N.Y.

There Must Be a Final Agency Action

SCA also argued that it did not have to show a final agency action. Doing so would allow the SEC to “make their actions unreviewable by failing completely to engage in any required process to promulgate or amend a rule before imposing new substantive obligations.” Judge Waddopous found that the one case cited by SCA did not support this proposition.

More importantly, the opinion read SCA’s argument to mean that requiring SCA “to identify a specific final agency action might allow the SEC to evade judicial review of its incorporation of FinCEN’s SAR requirements into Rule 17a-8.” This is the real crux of the opinion’s discussion on final agency action: to prevail (or have a chance to prevail) SCA needed judicial review of the original and amended adoptions of Rule 17a-8 in 1981 and 2011, respectively. According to the opinion, these two rule adoptions were final agency actions subject to review under the APA. But SCA was “likely” not seeking their review “because [SCA] understands that such challenges would be barred by the relevant statute of limitations.” The Court also discussed why the new Supreme Court opinion in Corner Post, which held that the statute of limitations under the APA does not begin to run until a plaintiff has been injured by final agency action, did not rescue SCA’s amended complaint, which could have been brought after the 2011 amendment to Rule 17a-8.  Thus, the Court found that SCA did not identify a final agency action subject to challenge under the APA within the statute of limitations. 

There Was No Final Agency Action Subject to Review  

SCA’s substantive argument with regard to a final agency action was that the SEC’s enforcement action against Alpine was a final agency action. This required a showing that the action both (1) marked the “consummation” of the agency’s decisionmaking process and (2) is one “by which ‘rights or obligations have been determined,’ or from which ‘legal consequences will flow.’” The opinion found that SCA failed this showing and, therefore, did not have standing to bring its claims.

Engaging in a lengthy discussion of competing authorities on the meaning of “final agency action”, Judge Waddopous concluded that the SEC’s complaint against Alpine was such an “agency action” but it was not “final.” The opinion relied on the Supreme Court’s 1980 ruling in Federal Trade Commission v. Standard Oil Company of Calif. that the issuance of a complaint to initiate an administrative enforcement action was an “agency action” for purposes of the APA. But the opinion differentiated the SEC’s Alpine enforcement action from the administrative action at issue in Standard Oil with regard to finality:

Where the filing of an administrative action constitutes only a threshold determination that further agency inquiry and decisionmaking is appropriate, the decision to file an enforcement action in federal court arguably represents the conclusion of the agency’s deliberations and a final decision that judicial action is necessary. Once an agency initiates a judicial action, the progress of the enforcement proceedings are outside of its exclusive control and further decisionmaking is lodged in the court. And any judgment that would be entered in the action would be entered by the court, rather than the agency.

Assuming that the SEC’s decision to proceed in the S.D.N.Y. against Alpine “constituted the consummation of the SEC’s determination that Alpine had violated Rule 17a-8 and the Exchange Act,” the Court held that SCA failed to show a determination of its rights or obligations. The opinion recognized that as a result of the S.D.N.Y. action Alpine and SCA might have “spent substantial resources in their attempt to defend against the claims asserted . . . [but]  the burden imposed by needing to defend against the SEC’s allegations are no different than those that would be imposed on any other party that vigorously defends themselves in major litigation.” Stated differently, defending a lawsuit is not a determination of rights or obligations for APA purposes.

Whether or not SCA appeals the District Court of Utah’s opinion remains to be seen. What is clear is that the SEC will continue to enforce compliance with AML requirements and impose penalties for failure to adhere to the SAR regulations. What is also clear is that financial institutions covered by the BSA must pay attention to the AML compliance provisions of their third-party contracts.

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