On July 31, the U.S. Court of Appeals for the 10th Circuit affirmed the dismissal of a retail brokerage firm’s APA challenge to the SEC’s authority to enforce BSA suspicious activity report (SAR) requirements against broker-dealers through Exchange Act Rule 17a-8. The plaintiff, a registered broker-dealer, sued the SEC in the U.S. District Court for the District of Utah, arguing that the SEC violated the APA by using Rule 17a-8 to impose BSA requirements on broker-dealers without conducting its own notice-and-comment rulemaking. The plaintiff identified the SEC’s filing of an enforcement action in the SDNY against an affiliated self-clearing broker-dealer — which shared common ownership with the plaintiff and against which the SEC had alleged thousands of SAR violations and ultimately obtained a $12 million civil penalty, later affirmed by the 2nd Circuit — as the “final agency action” giving rise to its claim.

The 10th Circuit held that the SEC’s decision to file an enforcement complaint did not constitute “final agency action” reviewable under the APA. Applying the two-part test from Bennett v. Spear, the court found that filing the complaint did not satisfy the second prong because it did not determine rights or obligations or produce legal consequences; the only burden it imposed was the obligation to defend the lawsuit, which does not suffice under the U.S. Supreme Court’s holding in FTC v. Standard Oil Co. of California. The court further held that even under a more “pragmatic” approach, the plaintiff’s claimed burdens — including hiring additional compliance personnel and increasing SAR filings — did not flow from the filing of the complaint but rather from the SEC’s longstanding and well-publicized enforcement posture, which the court noted had been clear since at least 2002 when FinCEN extended SAR requirements to broker-dealers and stated the SEC would enforce them under Rule 17a-8.

The court also noted that the SEC had “contended for decades that no scienter was required for sanctions to be imposed for violations of record-keeping regulations under Section 17(a)” and had prevailed in court on that contention, further undermining the plaintiff’s claim that the enforcement complaint broke new ground. The court added that treating a court-filed complaint as reviewable final agency action would undercut orderly judicial process, contending that the plaintiff had filed the Utah suit “in the hopes of creating a circuit split” after the 2nd Circuit had ruled against the affiliated firm.