Professor Moglen

Law in the Internet Society

2 November 2024

The SEC’s Private Communications Rules One of the most publicly notorious actions by the Securities and Exchange Commission in recent years has been an increase in enforcement actions against market participants and regulated entities for their use of private communication channels, in violation of SEC rules that require that business-related communications occur be recorded and preserved, even outside of an active or potential investigation of a possible securities law violation. The SEC purportedly implemented these rules and undertakes these enforcement actions to promote transparency and prevent fraudulent activities in securities markets. However, these enforcement actions are gross violations of the right to privacy and freedom of association. They also harm individual autonomy by market participants and contribute to the expansion of the surveillance state, by essentially forcing market participants to utilize channels of communication which maintain records of their conversations and identities and relegate privacy and anonymity to the dustbin. In all, the SEC’s actions represent a total disregard of valuable principles of privacy and individual liberty in our markets and are a reflection of a concerning trend towards ever-increasing government surveillance of private communications.

The SEC’s stated objectives – itjavascript:submitEditForm('save', 'checkpoint')’s “mandate” – is to protect investors, maintain fair markets, and facilitate capital formation. To achieve these goals, the agency is authorized by statute – the 1933 and 1934 Securities Acts – to make binding rules that regulate financial institutions and their employees. According to the Commission, its mandate allows it to force market participants to adhere to strict record-keeping regulations – including those that go beyond requiring the retention of records in anticipation of or in the course of litigation. According to the SEC, its mandate legally authorizes it to force market participants to keep a permanent record of all their business-related communications, and prohibits the use of communications services that do not maintain a permanent record of such communications. These rules essentially mandate that all business-related communications be recorded, archived, and made available for their regulatory review whenever the agency sees fit, with no federal court approval or any other such protection. Along with the widespread use of private messaging apps and encrypted communication apps, including Signal or private web browsers or chat apps, the SEC has extended its enforcement to include these channels, arguing that they can be used to circumvent the already illegitimate compliance obligations.

The enforcement of monitoring private communications encroaches upon individual’s right to privacy, which is a fundamental human right that is recognized by a whole range of legal frameworks, including the Fourth Amendment of the U.S. Constitution, which categorically prohibits unreasonable searches and seizures and has a long history of being strongly protected in our jurisprudence. By compelling market participants to maintain their private messages for potential governmental scrutiny, the SEC blurs the line between legitimate regulatory oversight and what amounts to intrusive surveillance. Moreover, the required retention of all communications through platforms that have no respect for privacy opens the door to third-party actors, or even foreign governmental actors, to view the private conversations of American citizens. This practice not only exposes sensitive personal information unrelated to business matters but also sets a precedent for diminishing privacy expectations in other areas of our citizens’ lives and allows other government agencies a precedent for further eroding away at privacy.

Freedom of association is a cornerstone of a democratic society that enables individuals to collaborate and organize and come together without undue interference from government. The SEC’s illegal and unconstitutional actions threaten this freedom by creating a measurable chilling effect on open communication among market participants. If individuals are constantly fearing that their private discussions might be watched by the government or a third party and used against them, they will be less likely to engage with each other freely. This inhibition has real bad effects on our society and our economy – it prevents innovation, stifles free expression, and undermines the communication that essential for dynamic financial markets, accurate price discovery, etc. Also, the value of individual autonomy is predicated on the ability to make personal decisions without external coercion or surveillance. There is no sense in arguing that people who “have nothing to hide” are somehow protected by this rule. The knowledge that a citizen’s private communications are potentially subject to SEC scrutiny can lead to intentional or unintentional self-censorship or altered behavior, eroding trust between participants and making it difficult to do business.