by H. Christopher Boehning, Jessica S. Carey, Michael E. Gertzman, Roberto J. Gonzalez, David S. Huntington, Brad S. Karp, Raphael M. Russo, Richard S. Elliott, Rachel M. Fiorill, Karen R. King, Anand Sithian, and Katherine S. Stewart
Decision Provides Rare Judicial Guidance on SAR Filing Requirements
On December 11, 2018, the Securities and Exchange Commission (SEC) obtained a victory in its enforcement action against Alpine Securities Corporation, a broker that cleared transactions for microcap securities that were allegedly used in manipulative schemes to harm investors. Judge Cote of the U.S. District Court for the Southern District of New York issued a 100-page opinion partially granting the SEC’s motion for summary judgment and finding Alpine liable for thousands of violations of its obligation to file Suspicious Activity Reports (SARs).
Because most SAR-related enforcement actions are resolved without litigation, this decision is a rare instance of a court’s detailed examination of SAR filing requirements. The decision began by rejecting—for a second time—Alpine’s argument that the SEC lacks authority to pursue SAR violations. The court then engaged in a number of line-drawing exercises, finding that various pieces of information, as a matter of law, triggered Alpine’s SAR filing obligations and should have been included in the SAR narratives. This mode of analysis, which applies the SAR rules under the traditional summary judgment standard, may appear to contrast with regulatory guidance recognizing that SARs involve subjective, discretionary judgments.
Although the decision has particular relevance in the microcap context, all broker-dealers—and potentially other entities subject to SAR filing requirements—may wish to review the court’s reasoning for insight on a number of SAR issues, including the adequacy of SAR narratives and the inclusion of “red flag” information. Among other cautions, the decision illustrates the dangers of relying on SAR “template narratives” that lack adequate detail.
More broadly, the SEC’s action against Alpine is another indicator of heightened federal interest in ensuring broker-dealer compliance with Bank Secrecy Act (BSA) requirements. For example, last month the U.S. Attorney for the Southern District of New York brought the first-ever criminal BSA charge against a broker-dealer, noting that this charge “makes clear that all actors governed by the Bank Secrecy Act—not only banks—must uphold their obligations.” Continue reading