Confidentiality Requirements for Suspicious Activity Reports

Last Updated: March 11, 2024

Dispute Resolution Services (DRS) is publishing this guidance to remind parties and their representatives, 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. As described in greater detail below, three categories of “SAR Information”—SARs, any information that would reveal the existence of a SAR, and any information indicating that a SAR has not been filed—may not be disclosed to another party, witness, arbitrator, or mediator in the DRS forum.

This guidance also provides arbitrators with information on steps that they can take to resolve SAR confidentiality concerns that arise during an arbitration proceeding without violating the strict prohibitions on disclosing SAR Information. Arbitrators who are presented with SAR confidentiality concerns should carefully review this guidance and immediately contact the FINRA staff member assigned to the matter.

SARs

The Bank Secrecy Act (BSA) authorizes the Department of the Treasury to require financial institutions to report any suspicious transaction relevant to a possible violation of law or regulation.1 The Financial Crimes Enforcement Network (“FinCEN”), a bureau of the Department of Treasury charged with administration of the BSA, has adopted a suspicious activity reporting rule for broker-dealers (“SAR Reporting Rule”) to require broker-dealers to report suspicious transactions by filing SARs with FinCEN.2 A financial institution is required to file a SAR if it knows, suspects, or has reason to suspect a transaction conducted or attempted by, at, or through the financial institution involves funds derived from illegal activity, or attempts to disguise funds derived from illegal activity; is designed to evade regulations promulgated under the BSA; lacks a business or apparent lawful purpose; or involves the use of the financial institution to facilitate criminal activity.3

Confidentiality of SARs

The unauthorized disclosure of SARs could compromise the essential role that SARs play in protecting the financial system and preventing and detecting financial crimes and terrorist financing.4 Thus, the SAR Reporting Rule generally prohibits the disclosure of a SAR, or any information that would reveal the existence of a SAR—and specifically prohibits disclosure of this information by a broker-dealer, or any director, officer, employee, or agent of a broker-dealer.5

If a broker-dealer, or any director, officer, employee, or agent of the broker-dealer, is subpoenaed or otherwise requested to disclose this information, they are required to decline to produce it and notify FinCEN of the request and the broker-dealer’s response to the request.6

What Information Cannot be Disclosed (SAR Information)?

  • Suspicious Activity Reports
  • Any information that would reveal the existence of a SAR
  • Any information indicating that a SAR has not been filed.7

What Information May Be Disclosed?

  • The “underlying facts, transactions, and documents upon which a SAR is based,”8 such as account statements, wire records, orders, confirmations, emails discussing the underlying activity, and account opening documents, provided that they do not reveal whether or not a SAR has been filed.

Note that SAR Information may not be disclosed to a party or witness in an arbitration or mediation because they are not among the persons to whom broker-dealers are authorized to disclose SAR Information in the SAR Reporting Rule.9 In addition, FinCEN has specifically informed FINRA that the SAR Reporting Rule prohibits the disclosure of SAR Information to the arbitrators and mediators who independently resolve parties’ disputes in the DRS forum.10

Confidentiality Requirements Applicable to FINRA

The SAR Reporting Rule also prohibits FINRA from disclosing SAR Information, other than as necessary to fulfill its self-regulatory duties in a manner consistent with the BSA and with the consent of the Securities and Exchange Commission.11 FINRA is not authorized to disclose SAR Information for use in a private legal proceeding.12 Accordingly, FINRA will not serve any arbitration order that would disclose SAR Information or require that a party or other person violate the confidentiality requirements of the SAR Reporting Rule.

Guidance for Arbitrators on Addressing SAR Confidentiality Concerns

Arbitrators could potentially encounter concerns with SAR confidentiality in several different ways during an arbitration proceeding, including:

  • A party could attempt to disclose SAR Information in a pleading or motion paper or attach a SAR as an exhibit;
  • A party could try to enter SAR Information into evidence at a hearing, including a SAR, evidence that discloses the existence of a SAR, or evidence that a SAR was not filed;
  • A party could attempt to obtain SAR Information during the discovery process, including by filing a motion to compel or by asking the Chairperson to sign a subpoena requesting that SAR Information be produced; or
  • A witness could inadvertently attempt to disclose SAR Information during testimony, even if not elicited by a party.

At the hearing, arbitrators should be alert to potential SAR confidentiality concerns. 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. In addition, arbitrators should be prepared to instruct witnesses and parties to avoid disclosing SAR Information. An appropriate way to provide this instruction would be to direct the witness or party not to disclose “any information that would reveal whether or not a SAR was filed.” Arbitrators should avoid instructions that could imply that a SAR was or was not filed.

At the discovery stage, resolving issues surrounding potential SAR Information can be challenging because the disclosure of SAR Information, including to FINRA arbitrators, is strictly prohibited. For example, a party or non-party might object to a discovery request or subpoena on the grounds that the information that has been requested would reveal SAR Information. If the requesting party then disputes whether the objection has been properly asserted, the arbitrators could consider taking the following actions:

  • Asking the party or non-party that is asserting the objection if they have notified FinCEN of the discovery request or subpoena (as required by 31 C.F.R. § 1023.320(e)(1));
  • Requesting that the parties brief the issue without revealing any SAR Information;
  • Directing the party asserting the objection to provide sufficient information to assess whether the requested information would reveal SAR Information, without revealing that SAR Information; or,
  • Where only a portion of a requested document contains SAR Information, ordering that a copy of the document with the SAR Information redacted be provided to the requesting party.

Given the strict limitations on the disclosure of SAR Information, FINRA arbitrators should not:

  • Order that SAR Information be produced in discovery;
  • Allow SAR Information to be introduced into evidence or otherwise disclosed; or
  • Request that documents that contain SAR Information be provided to the arbitrators to conduct an in camera review to determine whether they contain SAR Information.

Reminder: The restrictions on disclosures addressed in this guidance are limited to SAR Information—which as defined above include Suspicious Activity Reports, any information that would reveal the existence of a SAR, and any information indicating that a SAR has not been filed. Accordingly, this guidance does not limit an arbitrator’s ability to conduct an in camera review of documents that do not contain SAR Information.

FINRA arbitrators and mediators should also follow any written instruction that they receive from FinCEN regarding SAR Information. FinCEN, as administrator of the BSA, is responsible for safeguarding this information. If any issue related to SAR Information arises in an arbitration or mediation proceeding, the arbitrator or mediator should also immediately contact the FINRA staff member assigned to the matter.

Civil and Criminal Penalties for Unauthorized Disclosure

Due to the importance of maintaining the confidentiality of SARs, the unauthorized disclosure of a SAR, or any information that would reveal the existence of a SAR, is a violation of federal law and may be punishable by civil and criminal penalties. Violations may be enforced through civil penalties of up to $100,000 for each violation and criminal penalties of up to $250,000 and/or imprisonment not to exceed five years.13

FINRA Complaint and Referral Processes

If a party believes that a member firm or associated person has violated FINRA rules or the federal securities laws by falsely objecting to the production of SAR Information, the party could choose to file a complaint with FINRA. FINRA is authorized to obtain SAR Information in connection with its investigations.14 Through its Complaint Program, FINRA investigates complaints and is empowered to take disciplinary action against members firms and their associated persons.

Arbitrators may also make referrals to FINRA if they believe there was an inappropriate objection on the basis of SAR confidentiality that meets the standards in FINRA Rules 12104 and 13104.

Resources

Endnotes

1 31 U.S.C. § 5318(g)(1). The purposes of the BSA include, among others, requiring financial institutions to make records or reports that are highly useful in (i) criminal, tax, or regulatory investigations, risk assessments, or proceedings; or (ii) intelligence or counterintelligence activities to protect against terrorism. 31 U.S.C. § 5311.

2 31 C.F.R. § 1023.320; Requirement that Brokers or Dealers in Securities Report Suspicious Transactions, 67 Fed. Reg. 44048 (July 1, 2002); Confidentiality of Suspicious Activity Reports, 75 Fed. Reg. 75593 (Dec. 3, 2010).

3 31 C.F.R. § 1023.320(a)(2).

4 FinCEN Advisory: SAR Confidentiality Reminder for Internal and External Counsel of Financial Institutions, FIN-2012-A002 (March 2, 2012), https://www.fincen.gov/sites/default/files/advisory/FIN-2012-A002.pdf.

5 31 C.F.R. § 1023.320(e); 31 U.S.C. § 5318(g). Other Treasury regulations prohibit the disclosure of SARs, and information that would reveal the existence of a SAR, by other types of financial institutions. See, e.g., 31 C.F.R. § 21.11(k) (prohibiting the disclosure of SARs, and any information that would reveal the existence of a SAR, by national banks); 31 C.F.R. § 1023.320(e) (futures commissions merchants and introducing brokers in commodities); 31 C.F.R. § 1022.320(d) (money services businesses).

6 31 C.F.R. § 1023.320(e)(1)(i). 

7 75 Fed. Reg. 75,593, 75,595 (Dec. 3, 2010) (explaining how if FinCEN were to allow disclosure of information when a SAR is not filed, institutions would implicitly reveal the existence of a SAR any time they were unable to produce records because a SAR was filed), https://www.govinfo.gov/content/pkg/FR-2010-12-03/pdf/2010-29869.pdf.

8 31 C.F.R. § 1023.320(e)(1)(ii)(A)(2).

9 31 C.F.R. § 1023.320(e).

10 Compare also 31 C.F.R. § 1023.320(e)(1)(ii)(A)(1) (allowing a broker-dealer to disclose a SAR to a self-regulatory organization such as FINRA that examines the broker-dealer for compliance with the BSA) with 31 C.F.R. § 1023.320(e)(3) (authorizing self-regulatory organizations to disclose SARs only to the extent necessary to fulfill their self-regulatory duties, and not for use in a private legal proceeding).

11 31 C.F.R. § 1023.320(e)(3).

12 Id.

13 31 U.S.C. §§ 5318(g)(2), 5321, 5322.

14 31 C.F.R. § 1023.320(e).