New SEC database violates privacy and freedom of association

The Securities and Exchange Commission is collecting personal information about the buyers and sellers of every single stock trade in the United States and is holding that information for the perusal of thousands of bureaucrats and any hacker who is able to break into the database. This database, called the Consolidated Audit Trail, collects information such as the buyer’s and seller’s address, date or year of birth, and Social Security number. This invasion of privacy affects at least 61% of people in the U.S. 

The database is a disaster for the privacy of millions of people. In terms of the amount of information collected, only the National Security Agency’s data-collection program is larger, and that database is not focused on people. What is worse, these types of databases are not secure. In 2016, hackers made off with over $4 million by trading on at least 157 nonpublic earnings releases from the SEC’s very own Electronic Data Gathering, Analysis, and Retrieval system.

A commission that cannot protect a filing system that processes 1.7 million filings every year cannot be trusted to maintain the security of what will likely become a 100 million data point database. It is only a matter of time before it is breached, leaking people’s personal information to nefarious actors. 

The database is not just a bad idea, but it is also unconstitutional, undermining the basic liberties in the Bill of Rights and the structural constraints on government instituted by the founders to help protect those liberties from government overreach. The CAT would give 3,000 SEC employees and many more employees at 23 self-regulatory organizations what they need to profile and persecute those whose stock transactions demonstrate that they hold disfavored views. The system surveils people on a mass scale, all while bypassing the Fourth Amendment’s judicial warrant requirement.

The database also usurps Congress’s power of the purse. The problem is Congress has appropriated no money for this audit trail. The SEC is forcing the entities it regulates, such as the NASDAQ and the New York Stock Exchange, to pick up the tab for CAT’s multibillion-dollar bill. Furthermore, even if Congress had attempted to authorize it, the database would still be unconstitutional because its creation would be beyond the limited powers granted to Congress in Article I of the Constitution. It is hard to imagine a less constitutional construct in the entire administrative state.

Republican members of Congress are trying to reestablish congressional authority in the area of financial privacy. Rep. Barry Loudermilk (R-GA) and Sen. John Kennedy (R-LA) have introduced the Protecting Investors’ Personally Identifiable Information Act, which would prevent the SEC from forcing financial institutions to hand over people’s information.

Similarly, Sen. Ted Cruz (R-TX) and House Majority Whip Tom Emmer’s (R-MN) CBDC Anti-Surveillance State Act, aimed at halting a centralized government financial surveillance scheme in the field of cryptocurrency, passed the House 216-192 in May. A similar coalition could be constructed to protect people’s privacy from the CAT. 

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As Advancing American Freedom argued in its amicus brief in the Western District of Texas, federal regulatory agencies are circling the cases challenging the legality of the database like jackals, watching to see if the courts will allow them to tear away at powers the Constitution reserves only to Congress or people in the U.S. If the courts side with the SEC, it will signal to every other administrative agency that the Constitution can be circumvented and the association and privacy rights of people can be violated with a little creativity.

One of those cases, Davidson v. Gensler, is currently pending before the federal district court in Waco. SEC Director Gary Gensler plans to testify remotely during oral arguments Tuesday to keep the database alive. However, the database was never authorized by law, was never appropriated by Congress, and violates the First and Fourth amendments of the Bill of Rights. Let’s hope the federal court sitting in Waco will stand up for the Constitution and put this database out with the trash. 

Marc Wheat is general counsel for Advancing American Freedom.