Normally, the government cannot access that information, absent a manual process like issuing a subpoena, obtaining a search warrant, or making a formal, emailed request to a company for customer information. The Securities and Exchange Commission’s (SEC) consolidated audit trail (CAT) system threatens to change all of that by collecting data on every stock and options trade made in the United States and sensitive information of the individual who made the trade. Critically, the CAT system, if deemed lawful by courts, gives government agencies a blueprint for pervasive government surveillance:
1) require regulated companies collect and retain immense amounts of sensitive information about their customers;
2) prevent customers from opting out; and
3) demand unfettered access to the customer data on the theory that the government might need the information for future law enforcement.
Cato and the Investor Choice Advocacy Network have filed, in a federal district court case called Davidson v. Gensler, an amicus brief urging the court to deny the government’s motion to dismiss the case. The court should hear the case and reject the government’s claimed authority to create the CAT system, which implicates the Fourth and Fifth Amendment rights of American investors.
The US Supreme Court reiterated in Utility Air Regulatory Group v. EPA that in evaluating the authority of agencies, courts must “expect Congress to speak clearly if it wishes to assign to an agency decisions of vast economic and political significance.” Congress has not clearly given the SEC authority for an invasive surveillance system like the CAT system, which raises questions of “vast political significance.”
First, the CAT system may violate investors’ and brokers’ Fifth Amendment right against compelled self-incrimination. As Justice Samuel Alito wrote when he was Deputy Assistant Attorney General, “the compulsory organization, filing, and creation of documents are acts that clearly are testimonial and may be self-incriminating.” While the government can sometimes compel the production of documents that are “customarily kept,” much of the information the SEC demands for its CAT system is entirely new and, therefore, potentially testimonial. Government agencies cannot be allowed to mandate new “customs” of records collection and then use those “required customs” to violate Americans’ Fifth Amendment rights.
Second, the CAT system may violate Americans’ Fourth Amendment rights against unreasonable searches and seizures of their “papers” and “effects.” Investors and brokers may have a possessory and privacy interest in the digital financial records they produce for collection in the CAT repositories. One’s “effects” almost certainly include stock trading records as founding-era legal dictionaries, for example, specifically contemplate and define one’s financial records as one’s “effects.”
Further, the SEC, without a warrant, absent a showing of even reasonable suspicion, is acquiring and (in SEC’s own words) searching massive amounts of investors’ and brokers’ personal information and transactions stretching back years. This voluminous information is mandated by, not voluntarily conveyed to, the SEC for future warrantless searches and, therefore, appears to violate investors’ and brokers’ Fourth Amendment rights.
Because this novel financial surveillance system appears to violate the Fourth and Fifth Amendment rights of millions of Americans, the court should issue a preliminary injunction and deny the SEC’s motion to dismiss.
