Conservative groups on April 16 filed a lawsuit in federal court challenging the Securities and Exchange Commission's consolidated audit trail.
When fully implemented in 2024 or 2025, the consolidated audit trail, or CAT, will be a single database for all equity and options trades on U.S. exchanges. Broker-dealers were required to begin submitting data to the CAT on trades they execute on behalf of clients — including institutional investors — in 2020.
The New Civil Liberties Alliance, representing the National Center for Public Policy Research and individuals Erik Davidson and John Restivo, on April 16 filed a complaint in U.S. District Court in Waco, Texas, arguing that the SEC’s data collection under the CAT violates the First, Fourth and Fifth amendments, as well as the Administrative Procedure Act.
“While the Constitution made clear the government lacks the authority to peek into — much less seize and keep a permanent record of the content of — a person’s private papers without a warrant, SEC has now arrogated the power to demand government seizure of everyone’s private trading information without any judicial process,” the complaint argues.
The complaint, which lists the SEC, its Chair Gary Gensler, and CAT LLC — the group formed by U.S. exchanges to establish a plan to implement and manage the CAT — as defendants, argues that Congress never authorized SEC to set up such a data collection system.
“SEC’s CAT has no precedent in history,” said Peggy Little, NCLA’s senior litigation counsel, in a statement. “By seizing all financial data from all Americans who trade in the American exchanges, SEC arrogates surveillance powers and appropriates billions of dollars without a shred of Congressional authority — all while putting Americans’ savings and investments at grave and perpetual risk.”
No supporter of the CAT, Chris Iacovella, president and CEO of the American Securities Association, welcomed the legal challenge.
“For years, ASA has raised concerns about the SEC’s disregard for the Constitution,” he said in a statement. “If the administrative state can collect the personal and financial information of Americans without any evidence of wrongdoing, then the Constitution will no longer limit the power of government.”
In February, the ASA and Citadel Securities filed a brief in the 11th Circuit Court of Appeals in Atlanta challenging the CAT's new funding model.
The SEC’s Gensler said last year that market participants and the SEC have already benefited from the CAT in surveillance and enforcement work, as CAT data was beneficial to the SEC staff's GameStop report from 2021 and for its analysis of insider trading.
"Prior to CAT's creation, regulators lacked a consolidated view of the material information of all orders in NMS (National Market System) securities to trace orders from originations, modifications, cancellations, routings and executions," Gensler said in September.
