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Limits on SEC enforcement and the power of state AGs to avoid arbitration

This week we highlight cert petitions that ask the Supreme Court to consider, among other things, the limits of the Security and Exchange Commission’s independent authority to enforce a statute that it was not explicitly empowered by Congress to enforce, and the power of a state attorney general to sue a lender for state law violations that otherwise would be covered by an arbitration agreement if brought by the individual borrowers.

Last year, the Supreme Court limited an SEC practice of seeking disgorgement awards without deducting legitimate expenses. In Alpine Securities Corp. v. Securities and Exchange Commission, the justices are again asked to rein in the power of the SEC, in what the petitioners claim is a “power grab” to exercise authority that Congress did not grant to the agency.

When Congress enacted the Bank Secrecy Act, it entrusted administration and enforcement of the act to the Treasury Department. Under the act, the Treasury Department helps law enforcement investigate money laundering and other illicit activities by requiring financial institutions and broker-dealers to file suspicious-activity reports. The Treasury Department tasked its Financial Crimes Enforcement Network with administering and enforcing the BSA by bringing suspicious-activity-report enforcement actions.

Although Congress empowered only the Treasury Department with the authority to enforce the BSA, the SEC also began enforcing regulations of the act, albeit without the express consent of the Treasury Department or Congress. Instead, the SEC relies on a books-and-records provision of the Securities Exchange Act of 1934 (15 U.S.C. § 78q(a)(1)) to assert its independent authority. Further, the SEC applies legal standards that differ from those in the BSA and are less favorable to defendants.

The SEC independently brought a civil enforcement action against Alpine, a registered broker-dealer, for failure to file certain suspicious-activity reports. Alpine argued that the SEC lacked authority to enforce violations of the BSA, but the U.S. Court of Appeals for the 2nd Circuit held that the SEC may enforce the act under its books-and-records powers. Alpine maintains that Congress purposefully granted enforcement powers solely to the Treasury Department, as a politically accountable executive branch agency, and asks for the justices’ review to limit the SEC’s authority to enforce violations of the BSA.

Next, NC Financial Solutions of Utah, LLC v. Virginia concerns the power of a state attorney general to bring lawsuits on behalf of private parties who would otherwise be subject to an arbitration agreement. The case involves a lender, NCFS, who between 2012 and 2018 provided loans to over 47,000 people in Virginia with interest rates that ranged from 34% to 155%. The loan agreements contained broad arbitration provisions requiring individual arbitration. Further, the arbitration provisions encompassed all claims arising directly or indirectly from the loan agreements and included claims brought by another person on the borrower’s behalf.

Virginia’s state attorney general sued the lender anyway, alleging unlawful lending practices in violation of the Virginia Consumer Protection Act and seeking restitution for the individual consumers who had agreed to the arbitration provisions. The lender argued that the attorney general is barred by the Federal Arbitration Act and state-law contract principles from suing on behalf of the individual borrowers. But the Virginia Supreme Court rejected this argument and held that the attorney general could not be bound by the arbitration agreements because he was not a signatory to the loan agreements. The lender argues that neither the attorney general nor the borrowers should be allowed to “circumvent” the arbitration agreements and asks for the court’s review to specify the limits of the FAA and determine whether a state attorney general can sue for individualized damages that otherwise could only be obtained by each borrower through individual arbitration actions.

These and other petitions of the week are below:

Janis v. United States
Issues: (1) Whether Standard Condition 12 of the U.S. Sentencing Guidelines, codified in U.S.S.G. § 5D1.3(c)(12), unconstitutionally delegates authority to the probation officer; and (2) whether Standard Condition 12 is unconstitutionally vague.

Alpine Securities Corp. v. Securities and Exchange Commission
Issue: Whether the Security and Exchange Commission’s assertion of independent authority to interpret and enforce the Bank Secrecy Act contravenes Congress’s decision to entrust enforcement of the Bank Secrecy Act’s comprehensive anti-money-laundering regime to the Treasury Department, a politically accountable executive agency.

California State Lands Commission v. Davis
Issues: (1) Whether the States’ consent to suit in the bankruptcy courts, found to exist in Central Virginia Community College v. Katz, reaches a suit brought against a State, after the effective date of a debtor’s plan of liquidation, seeking money damages from a State treasury on a claim that does not arise under federal bankruptcy law, insolvency law, or a claim that was historically brought “as a core aspect of the administration of bankruptcy estates”; and (2) whether the Supreme Court should reconsider Central Virginia Community College v. Katz.

NC Financial Solutions of Utah, LLC v. Virginia
Issue: Whether a state attorney general who is not a signatory to an arbitration agreement may bring claims that are covered by the agreement and seek individualized relief on those claims on behalf of persons who are signatories to the agreement and thus would be required to arbitrate if they brought those claims themselves.

Recommended Citation: Mitchell Jagodinski, Limits on SEC enforcement and the power of state AGs to avoid arbitration, SCOTUSblog (Aug. 6, 2021, 5:09 PM),