Victory for liberty: 11th Circuit vacates SEC’s unjust CAT funding rule

In a decisive blow to regulatory overreach, the 11th Circuit Court of Appeals last week vacated a Securities and Exchange Commission (SEC) rule that would have forced America’s broker-dealers to pay the full cost of one of the most intrusive surveillance programs in the financial sector: the Consolidated Audit Trail (CAT). The Competitive Enterprise Institute (CEI), which filed an amicus brief in the case, celebrates this ruling as a win for constitutional governance, economic liberty, and the rule of law.

The CAT is a centralized database created at the SEC’s command to collect detailed information about every securities trade in the United States—tracking every quote, order, route, or trade execution, and ultimately, every investor. It is, in the SEC’s own words, a tool to aid enforcement and surveillance, not merely market transparency. CEI has long warned that the CAT program raises fundamental legal and constitutional concerns, beginning with its funding.

The SEC’s most recent funding order allowed stock exchanges to pass 100 percent of CAT’s costs—billions of dollars—onto broker-dealers. That move gave broker-dealers a direct financial injury, finally opening the door to a legal challenge not just to the funding order, but also to the underlying CAT regime.

While the 11th Circuit avoided the broader statutory and constitutional questions, it did find the funding order to be fatally flawed. The court concluded that the rule was “arbitrary and capricious,” pointing to contradictions between the SEC’s past statements and its final rule. The agency had long insisted that CAT costs would be shared between exchanges and broker-dealers. However, the recent order quietly shifted the burden entirely to broker-dealers without providing a reasoned explanation.

Worse, the SEC failed to consider how this shift would undermine cost discipline. When exchanges bear some of the expense, they have an incentive to control it. But when they can offload every dollar to broker-dealers, those incentives vanish, inviting waste and excess.

In our amicus brief, CEI focused on the deeper legal defect: Congress never authorized the SEC to compel private parties to fund the development of a government enforcement tool. The Exchange Act gives the SEC regulatory authority under the Commerce Clause, not taxing power. It authorizes limited fees, but those are meant to offset congressional appropriations, not to create new, off-budget funding mechanisms for surveillance programs.

We also warned the court that allowing such power would set a dangerous precedent. If the SEC can force broker-dealers to fund CAT, what’s to stop it from making them pay for SEC salaries, new buildings, or other enforcement projects? The Constitution gives Congress—and only Congress—the power of the purse. CEI warned that this approach amounts to a de facto tax and sidesteps congressional appropriations—a move that, if unchecked, risks eroding constitutional safeguards.

Although the court did not reach CEI’s constitutional arguments, its ruling underscores the importance of requiring agencies to act with transparency and within the bounds of their statutory authority.

This case is a textbook example of the dangers posed by the modern administrative state, where surveillance is mandated, costs are socialized, and accountability is evaded. CEI will continue to fight against this kind of executive overreach, in the courts and in the policy arena, to protect free markets, limited government, and constitutional order.