Cracks in the CAT: Court Rules Against SEC’s Massive Surveillance Tool — SEC Roundup
Welcome to SEC Roundup, a bimonthly video series by former Securities and Exchange Commission senior trial counsels Nick Morgan and Tom Zaccaro, founders of the nonprofit advocacy group Investor Choice Advocates Network.
The SEC’s sweeping Consolidated Audit Trail (CAT) — a surveillance tool designed to track every U.S. trade down to the individual investor — just got a major reality check from the 11th Circuit Court of Appeals.
In this episode, Morgan is joined by frequent co-host Jennifer Schulp, director of financial regulation studies at the Cato Institute, and Chris Iacovella, CEO of the American Securities Association, to break down what the court’s decision really means.
Together, they discuss:
- How the CAT evolved from a post–Flash Crash idea into a sprawling surveillance regime
- Why the court struck down the SEC’s funding model as “arbitrary and capricious”
- The broader constitutional questions now looming over CAT and SEC rulemaking
- The potential implications for investor privacy, major questions doctrine, and ongoing litigation in other circuits
As challenges to SEC authority mount, this case could reshape the agency’s ability to expand its surveillance footprint — and raise the stakes for how market regulation gets made in the first place.
“Nothing changes for 60 days, but at the end of the 60 days, the funding rule will be vacated, leaving the CAT with no funding order, which was the case between 2016 and 2023,” Morgan explained.
Once the rule is vacated, the Financial Industry Regulatory Authority “will not be able to pass through 100% of its CAT costs to its member broker-dealers, which would have been permissible under the 2023 funding rule,” Morgan continued.
“As the 11th Circuit observed, once the funding rule is vacated, the CAT will be ‘without a mechanism for the equitable allocation of costs between self-regulatory organizations and the broker-dealers,'” Morgan said. “So the ball is firmly in the SEC’s court about how to address that issue.”
SEC Chairman Paul Atkins had directed the staff to study the CAT.
“Given the other litigation in the 5th Circuit challenging the CAT on much more fundamental constitutional and statutory grounds, I would expect the Commission to do something that reduces CAT costs, thus reducing the severity of any cost allocation between FINRA and the brokers,” Morgan said.
See the video above for the discussion.