SEC Plan to Track Americans’ Stock Investments Sparks Legal Fight
SEC Plan to Track Americans’ Stock Investments Sparks Legal Fight

By Kevin Stocklin

All stock trades conducted on U.S. exchanges will soon be surveilled by the government, according to a newly implemented plan by the Securities and Exchange Commission (SEC).

The SEC’s “Consolidated Audit Trail” (CAT) mandate would “allow regulators to efficiently and accurately track all activity throughout the U.S. markets,” the SEC stated.

In announcing the launch of this plan, SEC Chairman Gary Gensler stated in September 2023 that “prior to CAT’s creation, regulators lacked a consolidated view of the material information of all orders in exchange-traded securities.”

The CAT plan was originally proposed under the Obama administration in 2012 but remained dormant under the Trump administration. It is currently being resurrected under the Biden administration.

This plan ran into some resistance last week, however, from a group of lawyers and retired judges who see it as a historic violation of Americans’ civil rights.

A complaint filed on April 16 by the New Civil Liberties Alliance (NCLA), as a prelude to a lawsuit, called the CAT mandate “an unprecedented scheme by an administrative agency … to unilaterally set in motion one of the greatest government-mandated mass collections of personal financial data in United States history.”

According to the NCLA and others who have joined the legal action, the plan expands a trend of already extensive government surveillance, exceeds the SEC’s authority, and infringes on Americans’ Fourth Amendment protections against warrantless government searches.

“The SEC has no statutory authority to do this at all,” Peggy Little, senior litigation counsel with the NCLA, told The Epoch Times, calling the plan “a surveillance system.”

“We think it’s vital to strangle this new illegal power grab,” Scott Shepard, director of the Free Enterprise Project, who has signed on to the complaint, told The Epoch Times.

“The idea that this SEC can be relied on not to abuse this vast cache of financial information for which it has no legitimate use is laughable,” Mr. Shepard stated.

The SEC, however, insisted that it had the necessary authority to enact the CAT system.

“The Commission undertakes its regulatory responsibilities consistent with its authorities,” an SEC spokesperson told The Epoch Times.

The SEC argues that the CAT program is necessary to protect investors, prevent financial crimes, and investigate events such as the 2010 “Flash Crash,” which caused markets worldwide to tumble, temporarily wiping out $1 trillion in market value in one day.

‘Mass Surveillance’ of Americans’ Financial Data

The plan’s critics, however, argue that these laudable goals must be weighed against the extensive infringement on Americans’ right to privacy.

Calling it “the single largest government database targeting the private activities of American citizens,” former Attorney General William Barr wrote in an April 15 Wall Street Journal op-ed: “That a few bad apples might engage in misconduct doesn’t justify mass surveillance of everyone’s private affairs.”

This database would reportedly allow more than 3,000 government employees in more than 20 agencies to monitor the personal investment activities of tens of millions of Americans in real time, he wrote.

“If our society accepts the SEC’s rationale for CAT, there is no reason to confine the government to databases on investment activities,” Mr. Barr stated. “Digital records on a range of personal activity can help crack criminal cases.

“Phone companies have data from our smartphones, automakers have data from our cars, and so forth,” he wrote. “Why not maximize the efficiency of all law enforcement by pumping this information into government databases, so investigators have it in real time?”

The CAT plan also has its critics in Congress.

In a November op-ed, Sen. John Kennedy (R-La.) wrote: “The Securities and Exchange Commission is supposed to protect investors, not stalk them.”

By implementing the CAT program, “the SEC has paved the way for the federal agency to follow an investor’s every move,” Mr. Kennedy stated. “Here’s just a bit of the information the SEC is forcing brokers to fork over: their customers’ full names, birth years, addresses, which stocks they bought, which stocks they sold, and when those transactions occurred.”

Google and Amazon are reportedly among the competitors for contracts to create “the biggest database in U.S. history,” in order to comply with the SEC directive.

The extensive cost of setting up and running the CAT program will be paid by brokerage firms, but critics say those costs will simply be passed on to everyday Americans.

“Those costs will run into the billions of dollars and will represent an enormous deadweight tax on American investors,” Ms. Little said.

Critics also worry that collecting Americans’ private financial information in government databases could leave it vulnerable to hackers.

“The SEC itself has been hacked on several occasions,” Ms. Little said. “It is shocking to me that they would take all of this data and expose it to hacking and to theft.”

Attempting to assuage these concerns, however, Sen. Sherrod Brown (D-Ohio) stated at a 2019 Senate Banking Committee hearing: “Some take issue with the SEC, or any government agency, having this much data and call the system a target for hackers. I refuse to accept that we can’t both protect people’s personal information and go after criminals who take advantage of our markets.

“Just last week, the SEC filed charges against 18 people, most of them in China, who engaged in a six-year market manipulation scheme using dozens of accounts, across many brokerage firms, that resulted in 31 million dollars of illicit profits,” Mr. Brown stated. “While we’ll never know if the new system would have made it easier to uncover those crimes, it is that kind of activity that the SEC should have the technology to uncover.”

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