Suit challenges SEC market surveillance tool as unconstitutional

Suit challenges SEC market surveillance tool as unconstitutional
The Texas lawsuit accuses the SEC of acting without authority to create the Consolidated Audit Trail, a database that would collect virtually all US trading data.
APR 17, 2024
By  Bloomberg

The Securities and Exchange Commission was sued by a conservative think tank and a pair of individual investors who claim the regulator’s new market surveillance tool violates their constitutional privacy rights.

Filed Tuesday in federal court in Waco, Texas, the suit led by the National Center for Public Policy Research accuses the SEC of acting without authority to create the Consolidated Audit Trail, a database intended to collect virtually all US trading data. 

According to the suit, the CAT will “impose dystopian surveillance, suspicionless seizures, and real or potential searches on millions of American investors.”

The Texas suit, which is asking to have the CAT declared void and its databases expunged, follows a legal challenge to the project filed in October by Citadel Securities and the American Securities Association. That suit is focused more on the SEC’s funding model for the CAT — charging potentially billions of dollars in fees to broker-dealers — but also highlights privacy concerns that have increasingly animated conservatives.

Asked for comment on Tuesday’s suit, SEC spokesperson Stephanie Claire Allen said, “The Commission undertakes its regulatory responsibilities consistent with its authorities.” 

The new suit comes the day after the agency filed its response to Citadel Securities. In a Monday brief, the SEC called the market making firm’s challenge “meritless,” defended the CAT as a natural progression of its oversight powers and stressed that there were limits on the CAT’s access to and use of personal data. The regulator decried the “caricature“ of the database being used “to snoop on Americans’ personal financial decisions.”

That’s precisely the specter raised by the Texas suit, which says the CAT “enables SEC to review private citizens’ investment choices and, in many cases, to see their entire portfolios.” That will allow the government “to review citizens’ trading strategies and thereby evaluate the core values and moral convictions that motivate Americans’ investment decisions.”

The suit says the CAT violates the constitutional protections for free speech and against warrantless searches and seizures.

First proposed in 2010 after that year’s “flash crash” briefly wiped almost $1 trillion off US stocks, the CAT is designed to give the SEC a live window across markets in near real-time, with an eye toward detecting unusual activity and misconduct. 

In its Monday brief, the SEC said the previously “cumbersome, time-consuming and frequently unsuccessful” process of tracking orders from origination to execution had become obsolete in today’s faster and more automated markets.

The case is Davidson v. Gensler, 24-cv-00197, US District Court, Western District of Texas (Waco).

AI ‘super-cycle’ will power Dow above 100K in 10 years, says Main Street Research CIO

Latest News

SEC bars ex-broker who sold clients phony private equity fund
SEC bars ex-broker who sold clients phony private equity fund

Rajesh Markan earlier this year pleaded guilty to one count of criminal fraud related to his sale of fake investments to 10 clients totaling $2.9 million.

The key to attracting and retaining the next generation of advisors? Client-focused training
The key to attracting and retaining the next generation of advisors? Client-focused training

From building trust to steering through emotions and responding to client challenges, new advisors need human skills to shape the future of the advice industry.

Chuck Roberts, ex-star at Stifel, barred from the securities industry
Chuck Roberts, ex-star at Stifel, barred from the securities industry

"The outcome is correct, but it's disappointing that FINRA had ample opportunity to investigate the merits of clients' allegations in these claims, including the testimony in the three investor arbitrations with hearings," Jeff Erez, a plaintiff's attorney representing a large portion of the Stifel clients, said.

SEC to weigh ‘innovation exception’ tied to crypto, Atkins says
SEC to weigh ‘innovation exception’ tied to crypto, Atkins says

Chair also praised the passage of stablecoin legislation this week.

Brooklyn-based Maridea snaps up former LPL affiliate to expand in the Midwest
Brooklyn-based Maridea snaps up former LPL affiliate to expand in the Midwest

Maridea Wealth Management's deal in Chicago, Illinois is its first after securing a strategic investment in April.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.