SEC Suddenly Abandons Gag Rule After Decades of Silencing Respondents

The Securities and Exchange Commission (“SEC”) has rescinded its long-standing Rule 202.5(3) that requires respondents settling allegations with the agency to agree to never “publicly deny the allegations in the complaint or administrative order” or risk having their settled charges reopened.

Background

For more than 50 years, the SEC has gagged respondents as the price they must pay to escape the administrative punishment that characterized agency enforcement proceedings.  Almost a decade ago, I outlined why these “speech bans are unenforceable, violate the First Amendment, and are bad public policy because they hinder oversight.”  As I explained then, people “who have been through an agency’s enforcement process are often the most informed and in the best position to raise red flags about that process.  By ensuring that anyone who settles an enforcement action is unable to provide information that would contribute to that oversight process, the agencies insulate themselves from criticism and the public scrutiny that accountability demands.”

Thankfully, the Supreme Court has begun to ease some of the worst offenses in the realm of administrative due process by allowing respondents to have constitutional claims heard in federal court in Axon v. FTC and ensuring jury trials as protected by the Seventh Amendment in SEC v. Jarksey.

NCLA Takes Up the Fight

But throughout the reform-minded last decade of administrative law, the SEC has dug in its heels and refused to lift its demand for gag orders on respondents settling allegations.  It even went so far as to deny a 2018 petition for rulemaking from the New Civil Liberties Alliance (“NCLA”) that sought to end the practice.  SEC Commissioner Hester Peirce dissented from that denial, writing that the agency’s “prohibition on denials prevents the American public from ever hearing criticisms that might otherwise be lodged against the government, let alone assessing their credibility.  The policy of denying defendants the right to criticize publicly a settlement after it is signed is unnecessary, undermines regulatory integrity, and raises First Amendment concerns.”

NCLA has doggedly litigated this denial in Powell v. SEC and currently has a cert petition pending at the U.S. Supreme Court asking it to review a Ninth Circuit decision permitting the SEC to continue the practice.  Looming Supreme Court review may have helped focus the mind over at the SEC.  Americans for Prosperity Foundation, joined by FIRE and the Freedom of the Press Foundation, filed an amicus brief supporting NCLA’s case in the Ninth Circuit.  We will have to see how the pending cert petition is resolved now that the agency is no longer defending the rule.

What Comes Next?

The SEC’s sudden disavowal of its gag rule is a welcome resolution to a long fight over administrative process and the First Amendment.  But it leaves open questions too.  The agency stated that it “will not enforce existing no-deny provisions that have already been entered. In the event of a breach of an existing no-deny provision, the Commission will take no action to ask a district court to vacate a settlement (or to reopen an adjudicatory proceeding) in connection with the terms of the settlement agreement.” 

It remains unclear whether the agency has the power to gainsay all of its previous settlement agreements in one fell swoop or sufficiently bind future commissions.  As is well known, estoppel generally does not lie against the government, although of course there are exceptions.  It might be a hotly contested case if the agency ever decided to reopen a settlement agreement following a respondent speaking out in reliance on this rescission.  The agency maintains that even with the old rule in place, it is “not aware of any instance where the Commission has sought to reopen a district court action or administrative adjudication following a violation of a no-deny provision, and there are no reported opinions where a court has ruled upon such a motion.”  That would seem doubly hard to do now.  But it technically remains an open question.

It also bears noting that the Commodity Futures Trading Commission (“CFTC”) still maintains a similar provision in Appendix A to its Rules of Practice, where it declares that it will “not to accept any offer of settlement submitted by any respondent or defendant in an administrative or civil proceeding, if the settling respondent or defendant wishes to continue to deny the allegations of the complaint or the findings of fact or conclusions of law to be made in the settlement[.]”  It may be harder for the CFTC to justify that demand now that the SEC has abandoned the approach.

Conclusion

Congratulations to NCLA—and in particular Senior Counsel Peggy Little—for a big development in this long fight and for helping to protect American’s First Amendment rights to criticize their government.

James Valvo is chief policy counsel at Americans for Prosperity Foundation.