The U.S. Securities and Exchange Commission (SEC) was sued on April 16, 2024, over the implementation of the Consolidated Audit Trail (CAT), a system designed to gather complete trading data from U.S. exchanges.

This lawsuit has been filed by the New Civil Liberties Alliance (NCLA) on behalf of investors and the National Center for Public Policy Research to challenge the constitutionality of CAT, claiming violations of several constitutional amendments and federal statutes.

Disadvantages of the CAT System

The plaintiffs argue that the SEC has overstepped its regulatory authority by establishing the CAT without particular consent from Congress. This database, intended to keep a record of all the equity and options transactions in the United States, is accused of infringing the privacy rights because of the necessity to store huge volumes of personal financial data for a long time.

The complaint argues that such actions do not comply with the First, Fourth, and Fifth Amendments, ensuring freedom of speech, protection from unreasonable searches and seizures, and due process, respectively.

The complaint also claims that the SEC’s actions violate the Administrative Procedure Act (APA), which is the principle regulating the process of creating and issuing regulations by federal agencies. In addition, the CAT is considered to pose a major risk to data security, which could lead to the exposure of confidential financial data to cyber threats.

Financial and Regulatory Implications

The critics of CAT, including Hester Peirce, the SEC Commissioner, equate this system to unwarranted government surveillance, offering examples where a government could use GPS to track all consumer purchases or movements without any oversight or probable cause.

Moreover, the system tends to be seen as a violation of privacy and an illegal power in that the SEC imposes financial obligations to the regulated broker-dealers and self-regulatory organizations in funding the CAT. This litigation also highlights the possible economic consequences of the surveillance system, which will spoil investors’ trust and discourage individual and institutional participation in U.S. financial markets because of privacy issues.

SEC’s Response

In a statement regarding the filing, a representative of the SEC defended the power of the agency and the importance of the CAT in enhancing the ability of the regulator to track market activities effectively. The CAT, as stipulated by the SEC, is called to occupy an essential gap in the regulatory regime by making more efficient the tracking of market transactions that, prior to this, would have been inefficient and cumbersome.

The outcome of this lawsuit, Davidson v. Gensler, could have significant implications for how regulatory bodies collect and use personal data in the future and may set a precedent for the limits of governmental data collection practices in the financial sector. The case is currently pending in the U.S. District Court for the Western District of Texas.

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Filed under: News - @ January 1, 1970 12:00 am