SEC nixes ‘gag rule’ on enforcement action settlements

The Securities and Exchange Commission rescinded a policy Monday requiring defendants in settled enforcement actions not to publicly deny the SEC’s allegations.

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The policy has traditionally stated that when the SEC chooses to settle an enforcement action in which a sanction is imposed, it will not settle unless the defendant or respondent also agrees not to publicly deny the allegations in the complaint or administrative order. 

The SEC said Monday that rescinding the rule would align it with the overwhelming majority of federal agencies that do not have a similar rule and gives the Commission more flexibility in settling enforcement actions, which conserves resources, provides certainty and potentially expedites the return of money to injured investors. It noted that the policy may have created an incorrect impression that the SEC is trying to shield itself from criticism.

“For more than 50 years, the Commission has conditioned settlement on a defendant’s promise not to publicly deny the Commission’s allegations,” said SEC chairman Paul Atkins in a statement. “I am pleased that we are rescinding the no-deny policy today. Speech critical of the government is an important part of the American tradition. This recission ends the policy prohibiting such criticism by settling defendants.”

There is no known instance of the Commission seeking to reopen an administrative or civil proceeding as a consequence of a defendant or respondent violating a no-deny provision to which they have consented.

The SEC said that in light of the recission of Rule 202.5(e), 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.

The SEC generally doesn’t require settling defendants to admit to allegations. It said the recission doesn’t affect the SEC practice related to admissions in settlements and also doesn’t affect its discretion to settle with defendants who decline to admit facts or liability or its discretion to negotiate for admissions as part of a settlement. 

The SEC has faced lawsuits over the policy, including from the New Civil Liberties Alliance, which has called it a “gag rule.” The group recently urged the Supreme Court to hear a case, Powell, et al. v. Securities and Exchange Commission, involving the rule. The rule has been in place since 1972 and forbids people who settle a regulatory enforcement case with SEC from criticizing their cases in public for the rest of their lives.