OPINION:
Securities and Exchange Commission Chairman Paul Atkins recently acknowledged what many already knew: The Consolidated Audit Trail, the SEC’s database for tracking trading activity in American markets, is broken.
Mr. Atkins wants the SEC to take direct control of the surveillance system, believing that more responsibility will address its budget problems and concerns about the collection of personal financial information. However, CAT is past the point of saving. Giving the government greater control over a government database does not change the fact that the system is fundamentally unconstitutional.
For years, the SEC has said it needs CAT to protect America’s financial markets, but a regulatory purpose does not give an agency unlimited power to collect Americans’ private information. CAT was created to enable regulators to reconstruct market activity, but it has since become a centralized repository capable of collecting an extraordinary amount of data on Americans’ lawful financial conduct.
Rather than federalize CAT, the SEC should recognize that the system cannot be fixed through restructuring; it must be abolished.
The most fundamental problem with CAT is not its cost, management or even security. It is that the Constitution does not delegate the power to compel the collection and retention of Americans’ financial information in the first place.
The Fourth Amendment protects Americans against unreasonable searches and seizures. CAT requires market participants to collect and transmit detailed transaction data to a centralized repository — without any individualized suspicion of wrongdoing.
The collection is built into the regulatory structure itself; the fact that financial institutions initially hold the information does not resolve the constitutional problem. In Carpenter v. United States, the Supreme Court rejected the idea that Americans automatically surrender privacy interests in sensitive information simply because a third party holds it.
The government cannot outsource collection and then claim the Constitution no longer applies.
CAT raises First Amendment concerns as well. Financial records reveal more than stock holdings. They reveal political, charitable and organizational affiliations. In NAACP v. Alabama (1958), the court recognized that compelled disclosure could burden the freedom of association.
A government system capable of aggregating financial activity at this scale raises significant concerns about the chilling effect of surveillance on lawful association.
Also, Congress never authorized CAT or directed the SEC to build such a centralized database that tracks orders, cancellations, routing and executions across the nation’s securities markets and matches them to Americans’ personally identifiable information.
The SEC created CAT through Rule 613, adopted in 2012 under its own interpretation of authority granted by the Securities Exchange Act of 1934.
Yet now the SEC is preparing to take direct control. Before expanding its grip on the system, the agency should identify the actual congressional language authorizing it to run such a system. The more consequential the power an agency claims, the clearer Congress’ authorization must be.
Congress’ silence on authorization is compounded by its silence on funding. The power of the purse is not a formality. It is one of the Constitution’s core checks on agency power, ensuring that unelected regulators cannot spend without accountability to the people’s elected representatives.
Yet CAT is funded through fees assessed on SEC-regulated exchanges and the Financial Industry Regulatory Authority, which pass their costs on to broker-dealers and, in turn, ordinary investors — all without CAT ever undergoing the ordinary congressional appropriations process.
An agency that funds a nationwide surveillance database through fee assessments rather than appropriations answers to only itself. If the SEC now seeks direct control over CAT, it should not be permitted to entrench a funding mechanism that Congress never approved and that cannot be easily unwound.
These are not abstract objections; they are currently before the courts. In Davidson v. Atkins, the plaintiffs have challenged CAT’s constitutionality on the grounds of the Fourth Amendment, the appropriations clause and the Administrative Procedure Act.
The SEC has repeatedly requested stays of the proceedings rather than defend the program on the merits.
An agency confident in its authority does not need delay. If the SEC believes that CAT can withstand constitutional scrutiny, it should welcome resolution, not seek to postpone it while simultaneously asking to expand its control over the very system being challenged.
The SEC is right that CAT is broken, but it is wrong to waste more time trying to fix what should be scrapped.
• J. Marc Wheat is general counsel at Advancing American Freedom. Connor Bolster is an intern at Advancing American Freedom.
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