The SEC’s Market Surveillance System Implicates the Fourth and Fifth Amendment Rights of Investors

Brent Skorup, Anastasia P. Boden, and Jennifer J. Schulp

In this “smart” and digitized world, nearly everything we do could be captured, stored, and made accessible to the government. The time we wake up (using our phone’s alarm), the places we go (using our car’s built‐​in GPS), the news stories we read, the snacks we purchase for our kids, the route of our daily run, and even the temperature at which we prefer to keep our homes is routinely collected and stored by commercial companies. 

Normally, the government cannot access that information, absent a manual process such as 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 both collecting data on every stock and options trade made in the United States and personally identifying information of the individual who made the trade. The CAT system gives government agencies a blueprint for pervasive and constant government surveillance:

1) it requires regulated parties to collect data daily and retain immense amounts of sensitive information about their customers; 

2) it offers no chance to opt out; and 

3) it demands unfettered access to customers’ data on the theory that the government might need the information for future law enforcement. 

Cato and the Investor Choice Advocates Network have filed, in an 11th Circuit Court of Appeals case called American Securities Association v. SEC, an amicus brief urging the court to set aside the 2023 SEC order funding the CAT system, which implicates the Fourth and Fifth Amendment rights of American investors.

The Supreme Court reiterated in Utility Air Regulatory Group v. Environmental Protection Agency 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 financial 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 the SEC’s own words) searching massive amounts of investors’ and brokers’ personal information and transactions stretching back years. This 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 Congress has not spoken clearly about the agency’s authority to create this type of surveillance system, the order funding the CAT system should be set aside.