A new Securities and Exchange Commission market-tracking database is a "massive, unprecedented government surveillance system" that could cost the financial services industry billions of dollars and compromise investors' privacy, Citadel Securities told a U.S. appeals court.
Citadel Securities and the American Securities Association, a group of brokerage firms, asked the 11th U.S. Circuit Court of Appeals in October to review the SEC's approval of the funding model for the database in response to "widespread investor concerns about transparency, governance, costs and data privacy."
In a brief filed late Thursday, the trade group and the market-making firm founded by the billionaire Ken Griffin said the Atlanta-based appeals court should declare the funding plan unlawful. They argued that the plan and the database itself exceed the statutory authority granted to the SEC and were implemented without congressional consent. They warned that the tracking tool would collect the personal information of every investor who trades in U.S. securities.
'Alarm bells'
"Not surprisingly, this program's threats to privacy and civil liberties have set off alarm bells across the political spectrum, which have only grown louder as the public learns of the SEC's repeated failures to safeguard its own systems against foreign hackers," according to the brief. "Incredibly, however, the Commission created this Big Brother regime without any approval, direction or appropriation from Congress."
The SEC said it doesn't comment on active litigation. It has said the database is necessary to safeguard the market's integrity.
Under the Consolidated Audit Trail, or CAT, as the tool is known, brokers and exchanges must report all trades — including those of options, equities and over-the-counter securities — to capture the entire life cycle of each transaction. The goal is to pinpoint the causes of market turmoil, and market manipulation in particular.
For example, it took months for regulators to get at the roots of the "flash crash," the May 2010 trading frenzy that briefly wiped almost $1 trillion off U.S. stocks. The process was made more difficult by a dramatic acceleration in the pace of trading. The SEC believes the market-tracking database could speed that process up.
CAT took more than a decade to implement due to fights over who would pay the tab, concerns about investor privacy, and the pandemic. The SEC approved the funding model in September.
Under the model, the database will be funded by a fee on each market transaction depending on whether it's in stocks, options or other securities. ASA Chief Executive Officer Chris Iacovella has called the fees a "tax on American investors" and the database an unconstitutional collection of the personal and financial data of investors.
Little zinger
Citadel Securities and the ASA also argue in their brief that the CAT violates the Exchange Act, which requires the "reasonable allocation" of dues, fees and other expenses between exchange members, because broker-dealers will bear the entire cost of the database. They say the SEC relied on an outdated economic analysis to justify the funding model and made no effort to estimate how much the database will cost investors.
"Such slapdash analysis is never appropriate for a Commission action, let alone one that will foist the costs of a multibillion-dollar SEC surveillance system onto broker-dealers and American investors in perpetuity," they wrote.
Nor did they refrain from a zinger over the regulator's embarrassing social media mishap, when its account on the X platform was "compromised," leading to a spike in the price of Bitcoin.
The SEC is "out of compliance with federal cybersecurity standards, making its networks dangerously susceptible to hackers," they wrote, invoking a recent inspector-general review.
The SEC's brief is due on April 15.
- With assistance from Lydia Beyoud.
