FINRA Emphasizes the Responsibility of All Dispute Resolution Participants to Avoid Disclosure of Suspicious Activity Reports

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The Financial Industry Regulatory Authority (FINRA) published guidance* to remind parties, attorneys, arbitrators, and mediators that the unauthorized disclosure of a Suspicious Activity Report (SAR) is a violation of federal law that may be punishable by civil and criminal penalties, including fines and imprisonment. The rules governing the confidential treatment of SARs are strict, and the penalties for violating those rules can be significant. On March 11, 2024, FINRA cautioned that these restrictions and penalties continue to apply while disputes are litigated.

What is a SAR?

A SAR is a tool made available by the Bank Secrecy Act of 1970. It is a report that financial institutions are required to file with the Financial Crimes Enforcement Network, or FinCEN, when there is a reason to suspect that a transaction is relevant to a possible violation of law or regulation.

What Information May Not Be Disclosed?

FinCEN generally prohibits the disclosure of SAR information. There are three categories that may not be disclosed: (1) SARs themselves, (2) any information that would reveal the existence of a SAR, and (3) any information indicating that a SAR has not been filed. Other regulatory authorities have similarly issued rules prohibiting the disclosure of SARs to anyone other than the appropriate law enforcement agency or regulatory authority.

However, the rules do not prevent the disclosure of the “underlying facts, transactions, and documents upon which a SAR is based,” provided that the disclosure of such facts does not reveal whether or not a SAR has been filed. This can create concern for litigation participants, including parties and their representatives, as well as arbitrators and mediators.

SARs Information in Litigation and/or Arbitration

Generally, parties in litigation may not compel the production of a SAR or even the recognition that a SAR exists. Courts regularly uphold the nondisclosure rules and regulations as reasonable interpretations of the relevant statutes.

These nondisclosure requirements extend to nonpublic arbitration forums, such as FINRA’s Dispute Resolution program. FINRA’s recent guidance cautioned that if a broker-dealer or any employee or agent of a broker-dealer (including an attorney) is subpoenaed or otherwise requested to disclose SAR information, that entity or person is required to object to producing such information and to notify FinCEN of the request and response.

FINRA’s guidance also specifically cautions arbitrators about addressing SAR concerns during arbitration proceedings and directed that arbitrators should not:

• Order the production of SAR information in discovery.
• Allow SAR information to be introduced in evidence or otherwise disclosed.
• Request that documents containing SAR information be provided to the arbitrators for in camera review to determine whether they contain SAR information.

Additional guidelines for addressing related matters during the course of an arbitration hearing were also provided:

• Any questioning about transactional or account activity reflected in underlying documents should never be allowed to expand into questioning about the reporting of such activity on a SAR.
• Arbitrators should be prepared to instruct witnesses and parties to avoid disclosing SAR information, such as by directing the witness or party not to disclose “any information that would reveal whether or not a SAR was filed.”

While arbitrations are generally confidential and parties may enter into confidentiality agreements specifically addressing proprietary or other sensitive information, SARs remain confidential. In fact, FINRA notes that it is not authorized to disclose SAR information in private legal proceedings and directs arbitrators who are presented with SAR confidentiality concerns to immediately contact the FINRA staff member assigned to the matter.

Steptoe & Johnson’s Securities Litigation, Enforcement, and Compliance Team advises on the Bank Secrecy Act and Anti-Money Laundering statutes, including Suspicious Activity Reporting and handles FINRA related matters across the country. If you have any questions related to this alert, please contact the authors of this alert or a member of the Securities Litigation, Enforcement, and Compliance Team.

Notes
*FINRA Rules & Case Resources, “Confidentiality Requirements for Suspicious Activity Reports” (March 11, 2024).