'Dystopian surveillance, suspicionless seizures': Wall Street market monitor under attack

Washington regulators have been bracing for legal challenges ever since the Supreme Court upended decades of precedent by ruling that agencies no longer have broad leeway to interpret the law.

For Wall Street’s top cop, that day has arrived.

Conservatives and financial groups are using the high court’s landmark June ruling on what’s known as Chevron deference to boost their campaign to dismantle a massive surveillance system that the Securities and Exchange Commission recently brought fully on line to closely monitor the nation's stock markets.

The system collects billions of records each day on trades and allows the agency to analyze data across the markets to spot any abuses. But critics say it violates privacy rights and is vulnerable to hacking, given the sheer amount of information — including investors' personal data — housed within it. Former Attorney General Bill Barr wrote earlier this year that the database “would take us far down the road toward an Orwellian surveillance state.”

Others like GOP megadonor Ken Griffin’s Citadel Securities have sued the SEC over who will pay for the system, which has already run up nearly $1 billion in costs. And the New Civil Liberties Alliance, a conservative legal group that has filed a constitutional challenge, says the whole apparatus was set up outside of proper channels.

“You can’t go out there and just conjure up your own program as a bureaucrat and then fund it outside of [the] appropriations process,” said Peggy Little, a senior counsel at NCLA, which was one of the architects behind the fall of Chevron. “Congress passed no statute here. This is a rogue agency.”

The new line of attack marks one of the first signs of how opponents of the so-called administrative state plan to invoke the Chevron ruling against federal agencies. The SEC has already come under pressure from the financial industry and conservatives seeking to void new rules and fend off lawsuits from the agency . But the Supreme Court’s decision on Chevron , known as Loper Bright , is a new weapon that firms and groups are looking to deploy. Critics of the system say the agency lacked the proper authority from Congress to set up the surveillance tool.

“Every plaintiff is going to bring that [decision] in when challenging SEC rulemaking,” said David Rosenfeld, a former SEC enforcement attorney who is now a law professor at Northern Illinois University. “All of these things are going to now say, ‘After Loper Bright, you need to knock this out.’”

The Chevron ruling was one of several from the court’s conservative majority aimed at federal regulators’ authority. The decisions have unsettled Washington, sending government attorneys, law firms and legal activists on both sides of the debate over agency power scrambling to unpack the potential fallout.

The SEC has expressed little panic over the death of Chevron deference. Days after the court’s decision, Chair Gary Gensler told POLITICO that the agency is prepared to “adjust” anytime a law changes or is read in a new light. But the SEC has punched back at claims by Citadel Securities and the American Securities Association, an industry trade group, that Loper Bright supports their challenge to the system’s funding. In a recent court filing, SEC attorneys argued that the Supreme Court’s decision is “irrelevant” given that the agency never relied on Chevron deference when green-lighting the database, its funding or while defending it.

The SEC’s surveillance system, known as the Consolidated Audit Trail, or CAT, was designed in the aftermath of the infamous Flash Crash of 2010 — a brief but chaotic moment that saw financial markets go haywire, for little apparent reason.

Historically, the agency lacked a complete view of trading across the market, so it had to rely on information from Wall Street firms and stock exchanges themselves after a market episode to piece together what happened. The CAT offers regulators at the SEC, stock exchanges and the brokerage industry's oversight body, the Financial Industry Regulatory Authority, a clear look into trading.

Once dubbed the “Hubble telescope for the securities markets ,” the system aggregates information on trading from across the market to piece together that picture. That data includes details on an order to buy or sell stock, such as how it was executed. The CAT also houses investor information, such as the names, addresses and birth years of those behind the trades. In turn, U.S. regulators are able to use the information to crack down on stock manipulation, insider trading and other illegal activity as well as craft new rules in certain cases.

“This tool is absolutely critical to making sure our markets are not prone to rife manipulation, and it’s absolutely critical to make sure the SEC knows what the markets are doing,” said Tyler Gellasch, a former SEC attorney who now leads the investor advocacy group Healthy Markets Association.

Still, the CAT remains a lightning rod on Wall Street. The latest fight is over who should pay for the system. The SEC last year finalized a plan to split the cost between the brokerage industry, stock exchanges and FINRA. American Securities Association CEO Chris Iacovella warns that the funding model could push most of the CAT’s costs onto brokers, traders and individual investors.

“A policy decision of that magnitude must be made by Congress,” said Iacovella, a long-time critic of the CAT. Citadel Securities declined to comment for this story.

Conservatives, meanwhile, are gunning for the entire thing. In its lawsuit, the NCLA argues that the SEC’s system risks the imposition of “dystopian surveillance, suspicionless seizures, and real or potential searches on millions of American investors.” The group, which is representing a conservative think tank and two individuals in the lawsuit, is currently seeking a preliminary injunction halting the CAT program.

The SEC says there’s nothing controversial about tracking trading across the market, arguing that the agency has done so for years, and that the CAT is simply another means of doing it in a consolidated way. The agency recently filed a motion to toss the NCLA’s case, saying that plaintiffs’ claims are “overblown” and that charges alleging the SEC lacks the authority to pursue CAT are “12 years too late.”

“In this historically regulated area, with an extensive regulatory regime where records are required to be kept and furnished, there is no expectation of privacy in data used to execute securities transactions,” the SEC wrote. The data housed in CAT has long been accessible to the agency, it added.

Gellasch said there’s little question as to whether the SEC has the authority to get the information inside CAT — before warning that, if the system were killed, the SEC could effectively become blind to Wall Street’s daily activity.

“The loss of it would be immediately a manipulator’s paradise,” he said.