The Consolidated Audit Trail Has a Long Memory
By Thomas J. Powell, Chairman, Brehon Group
The Consolidated Audit Trail, or CAT, seems like a story out of Orwell’s 1984, with the government recording most every order, modification, cancellation, and execution by tens of millions of investors. The U.S. Securities and Exchange Commission requires these records so regulators can search trading activity and reconstruct it long after a trade occurred. The records are collected before there is probable cause, reasonable suspicion, or even an allegation of wrongdoing. Lawful activity is gathered first and searched later. Even the SEC acknowledges that CAT raises civil-liberty, privacy, confidentiality, and cybersecurity concerns.
CAT has a problem that privacy adjustments cannot fix. It collects a standing record of lawful trades before the government has reason to suspect an investor of anything. Congress did not authorize the SEC to create this system or appropriate money to run it. The agency instead required brokers and exchanges to build and pay for it, with costs that can reach investors. That is a tax in all but name, imposed without the vote and appropriation the Constitution requires. And even Congress cannot authorize a search the Fourth Amendment forbids.
A trading record also cannot explain why someone made a trade. An investor might sell shares shortly before bad news breaks because of a view of the broader market, without knowing anything about the company’s announcement. Years later, that trade could be put beside an email or a phone call and made to look like evidence of a connection that never existed. The record shows what happened. It does not show what the investor knew.
The SEC has reduced some privacy risks, recently approving changes that eliminate requirements to report customer names, addresses, and birth years and require the deletion or inaccessibility of previously collected identifying information to regulators. But identifiers still link trading activity to customers, enabling regulators to obtain the identity through brokers. Removing names does not erase that history.
Removing names does not remove the cost. Brokerage firms still must maintain systems to report to CAT, reconcile records, and correct errors. Firms can absorb those expenses or pass them along through higher prices or fewer services.
For smaller firms, absorbing the expense can be harder. A reporting system and the staff to run it do not cost proportionately less just because a firm has fewer clients. A large brokerage can spread those costs across a broad business. A boutique helping young companies raise capital has less room to do so.
That expense can affect which offerings reach investors. A small offering may no longer be worth pursuing once another compliance cost is added. When a firm walks away, an entrepreneur loses a path to public capital and investors lose a chance to participate. The SEC can narrow access to the market without prohibiting a single offering. An agency charged with facilitating capital formation should account for those lost opportunities as carefully as it counts the enforcement benefits it claims.
The SEC is asking American citizens to place their trust in it regarding their trading records, while at the same time making them pay for the system used to collect those records. Its actions deserve to be examined. The Supreme Court rejected the agency’s position in Cochran and Jarkesy. Even on CAT, a federal appeals court threw out its funding order because the SEC failed to justify it. The SEC responded with a temporary plan that still charges brokers, exchanges, and FINRA for CAT.
The SEC can change course when its own power is at stake. I saw that in Powell v. SEC. For more than 50 years, it required defendants who accepted settlements with sanctions to agree never to publicly deny its allegations. Thousands of Americans were bound by that restriction. I was one of them. We challenged the policy, and the commission withdrew it while our petition for Supreme Court review was pending.
Why did it take that long? The policy had stood since 1972. Americans should not have to spend years fighting an agency to get it to question the limits of its own power. Investors challenging CAT should not have to go through the same ordeal.
Chairman Atkins should shut CAT down. Changing who runs it, who pays for it, or which names are stored does not cure the underlying problem. The SEC cannot fix a lack of authority by rearranging the program, and Congress cannot make an unconstitutional search lawful by funding it.
Thomas J. Powell is chairman of the Brehon Group, holds a doctorate in law and policy, and was lead petitioner in Powell v. Securities and Exchange Commission.
Conflict Disclosure: The New Civil Liberties Alliance, which represented the author in Powell v. SEC, also represents plaintiffs challenging CAT.
AI Disclosure: This is the author’s original work, developed from his ideas, arguments, and personal experience, with assistance from large language model tools in researching facts and proofreading software in checking grammar and spelling.
The views and opinions expressed in the preceding article are those of the author and do not necessarily reflect the views of AltsWire.
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