Supreme Court Justice Oliver Wendell Holmes observed that anyone “who respects the spirit as well as the letter of the Fourth Amendment would be loath to believe that Congress intended to authorize one of its subordinate agencies to sweep all our traditions into the fire to direct fishing expeditions into private papers on the possibility that they may disclose evidence of crime.” A century after Justice Holmes delivered that warning, the U.S. Securities and Exchange Commission is doing just that. This agency is methodically sweeping all our traditions into the fire to direct fishing expeditions that treat every investor as a criminal suspect. The good news is that the constitutionality of the SEC’s program is on trial in a case now before a federal judge in Waco, Texas. Here’s the background: Historically, when the SEC has suspected someone of insider trading, it had to issue an investigative subpoena. Then in 2010, the market suffered the “flash crash” – a trillion-dollar decline caused by technical glitches that lasted for 36 minutes. The SEC responded to this technical glitch by proposing Rule 613, which established the Consolidated Audit Trail (CAT), a database that collects not just investors’ trades, but also their privately identifiable information. This “solution” had nothing to do with the crash, but it perfectly illustrates former Chicago Mayor Rahm Emmanuel’s dictum that “you never want a serious crisis to go to waste.” Rule 613 requires self-regulatory organizations, like private stock exchanges, to collect every detail about trades in securities on a U.S. exchange. It also includes confidential data on more than 100 million private investors, making it the largest database outside of the National Security Agency. This database includes investors’ names, dates of birth, taxpayer identification numbers, Social Security numbers, and more. Now two Texas investors, in affiliation with the National Center for Public Policy Research, are suing the SEC for this massive violation of privacy. Their lawsuit, represented by the New Civil Liberties Alliance, could be required reading for law students seeking to understand the application of our constitutional rights, beginning with the Fourth Amendment. This lawsuit makes the case:
The lawsuit makes a convincing case that the U.S. Supreme Court’s 2018 Carpenter decision – which held that the government violates the Fourth Amendment whenever it seeks a suspect’s cellphone location history without a warrant – should make this case against CAT a slam-dunk. After all, the plaintiffs assert that unlike the issue in Carpenter, “with Rule 613 SEC does not need an investigative predicate, much less a court order, to obtain and analyze private information, nor is the information limited to any particular person or time frame.” Even if a federal judge declares CAT to be unconstitutional, however, it will only strike down one of many intrusive violations of Americans’ financial privacy by federal agencies. These include a new requirement of all business owners to file “beneficial ownership” forms, for which any American business owner can face two years in prison for a clerical mistake, and the U.S. Treasury’s Financial Crimes Enforcement Networks snooping into Americans’ financial transactions with the coerced cooperation of 650 private financial institutions. Once the election is over, Congress should pass the “Protecting Investors' Personally Identifiable Information Act,” introduced by Sen. John Kennedy, (R-LA), and Rep. Barry Loudermilk, (R-Ga.), which would allow the SEC to obtain personally identifiable information only by requesting it on a case-by-case basis. As the risks of the SEC’s reckless program become clearer, more Members of Congress should embrace another Holmes dictum: “State interference is an evil, where it cannot be shown to be a good.” Comments are closed.
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