11th Circuit Rules Against SEC’s CAT
The saga of the SEC’s Consolidated Audit Trail (CAT) featured a notable milestone on July 25 when the 11th Circuit Court of Appeals delivered a blow against the CAT as it currently operates. A three judge-panel unanimously held that the legal mechanism adopted in 2023 to fund the CAT violates the Administrative Procedure Act. In his decision in American Securities Association v. SEC, Judge Andrew Brasher held that the arrangement to fund the CAT ran afoul of the APA’s requirement that agency rules must not be arbitrary or capricious.
Close-watchers of the CAT saga will recall that the CAT operates by requiring broker-dealers (such as Schwab or E*Trade) to report every stock, bond, and mutual fund trade each day to a central digital repository owned and operated by a wholly owned subsidiary of a self-regulatory organization, FINRA. Those trades, tied to the individual holding accounts at each broker-dealer and contained within the central repository, may then be combed over by an unknown number of SEC employees at will. NCLA has described such an arrangement as violative of several constitutional provisions, not least of which is the Fourth Amendment’s guarantee against warrantless search and seizure. The ASA court did not address the CAT’s potential constitutional violations, which NCLA is litigating as part of its Davidson v. Atkins lawsuit ongoing in the Western District of Texas.
One problem according to the ASA court was the rationale requiring broker-dealers, not self-regulatory organizations (such as FINRA, the New York Stock Exchange, or the Chicago Mercantile Exchange), to bear the entire cost of funding the CAT constituted arbitrariness or capriciousness. “The 2023 Funding Order creates the potential for a classic free-rider problem that the Commission only acknowledges in passing,” the court noted. “Simply put, the self-regulatory organizations govern the CAT and set its budget, but the broker-dealers may be on the hook for its entire cost.”
Another problem, the court held, was that the 2023 funding order suffered from woefully outdated economic analysis. Relying on such outdated analysis contributed to making the order arbitrary or capricious. Major changes to the CAT occurred between the time of the previous analysis, 2016, and the 2023 funding order. For one, the cost to operate the CAT annually had grown five times its initial estimate to $200 million. And the estimated cost to build the CAT itself had grown by more than eight times its initial estimate. But perhaps most perniciously, the economic analysis used to justify the 2023 funding order “fail[ed] to consider the very real likelihood that CAT fees must increase to account for the rise in CAT costs,” according to the court. An open-ended requirement by broker-dealers to fund 100% of the costs that self-regulatory organizations impose, as the court says “without considering the effects of that choice,” made ASA a neat case for vacating the rule establishing the funding order.
NCLA, which filed an amicus brief before the 11th Circuit in ASA, will continue its full-scale constitutional challenge to the CAT in the district court in Texas. But this positive development in the CAT saga deserves a moment of savoring.
August 1, 2025