The New Civil Liberties Alliance (NCLA) has filed a lawsuit against the U.S. Securities and Exchange Commission (SEC) on April 16, 2024, challenging the legality of the Consolidated Audit Trail (CAT) database, which collects trading data from U.S. exchanges.

The NCLA, representing investors and the National Center for Public Policy Research, is arguing that the SEC's implementation of CAT violates constitutional and privacy rights, as well as federal statutes.

Critics of the CAT System

The plaintiffs claim that the SEC has exceeded its regulatory authority by establishing the CAT without Congressional approval. The CAT is designed to record all equity and options transactions in the United States, raising privacy concerns due to the need to store large amounts of personal financial data for extended periods.

The lawsuit argues that the SEC's actions violate the First, Fourth, and Fifth Amendments, which guarantee freedom of speech, protection from unreasonable searches and seizures, and due process, respectively.

The SEC's actions are also said to violate the Administrative Procedure Act (APA), which governs the process of creating and issuing regulations by federal agencies. Additionally, the CAT is considered a significant risk to data security, potentially exposing confidential financial data to cyber threats.

Financial and Regulatory Implications

Opponents of the CAT, including Hester Peirce, an SEC Commissioner, argue that the system is akin to unwarranted government surveillance, citing examples where the government could use GPS to track all consumer purchases or movements without oversight or probable cause.

The CAT is also seen as a violation of privacy and an illegal power, with the SEC imposing financial obligations on regulated broker-dealers and self-regulatory organizations to fund the CAT. This litigation highlights the potential economic consequences of the surveillance system, which could damage investors' trust and discourage participation in U.S. financial markets due to privacy concerns.

SEC's Response

The SEC has defended the importance of the CAT in enhancing the agency's ability to track market activities effectively. The CAT is intended to fill a critical gap in the regulatory regime by making it easier to track market transactions that were previously 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.