ALF Amicus Brief Supports Constitutional Challenge To SEC “Gag Rule”
For more than 50 years the Securities and Exchange Commission (SEC) has been enforcing a “Gag Rule,” 17 C.F.R. § 202.5(e), whenever a civil enforcement target enters into a judicial or administrative settlement agreement with the Commission. The Gag Rule announces the following SEC policy:
The Commission has adopted the policy that in any civil lawsuit brought by it or in any administrative proceeding of an accusatory nature pending before it, it is important to avoid creating, or permitting to be created, an impression that a decree is being entered or a sanction imposed, when the conduct alleged did not, in fact, occur. Accordingly, it hereby announces its policy not to permit a defendant or respondent to consent to a judgment or order that imposes a sanction while denying the allegations in the complaint or order for proceedings. In this regard, the Commission believes that a refusal to admit the allegations is equivalent to a denial, unless the defendant or respondent states that he neither admits nor denies the allegations.
This SEC policy is implemented by a mandatory, non-negotiable, lifetime “Gag Provision” in its settlement agreements. The Gag Provision is a prior restraint on speech. A typical consent agreement would include language like this:
Defendant: (i) will not take any action or make or permit to be made any public
statement denying, directly or indirectly, any allegation in the complaint or creating the
impression that the complaint is without factual basis; (ii) will not make or permit to be
made any public statement to the effect that Defendant does not admit the allegations of the complaint, or that this Consent contains no admission of the allegations, without also stating that Defendant does not deny the allegations; (iii) upon the filing of this Consent, Defendant hereby withdraws any papers filed in this action to the extent that they deny any allegation in the complaint.
The vast majority of SEC civil enforcement targets feel compelled to settle because they lack the resources to litigate, do not want to suffer prolonged business disruption or reputational harm, and/or do not want to risk an outcome even more onerous than the terms of SEC-dictated settlements.
In 2018 the New Civil Liberties Alliance (NCLA) filed with the SEC a petition to amend § 202.5(e) by retaining “no admit/no deny” settlement agreements but eliminating the gag policy as an unconstitutional prior restraint on speech in violation of the First Amendment. After 5 years of SEC inaction on the rulemaking petition, NCLA, joined by several “gagged” prior enforcement targets, renewed the petition to amend, which the SEC finally denied in January 2024. One SEC Commissioner dissented.
The petitioners then exercised their statutory right to challenge the denial by filing a petition for review in the U.S. Court of Appeals for the Ninth Circuit. According to the petition, the “SEC gag has silenced unknown thousands of individuals and businesses in perpetuity since the Rule was adopted over 50 years ago.” ALF has filed an amicus brief supporting the petition.
Issue Areas:
Individual Liberty, Limited Government
Case:
Powell v. United States Securities and Exchange Commission (9th Cir.) (24-1899)
Read the Amicus Brief:
Question(s) Presented:
1. Whether the Commission acted contrary to constitutional right by refusing to amend 17 C.F.R. § 202.5(e) because the rule violates First Amendment and due process rights and is against public policy.
2. Whether the Commission acted in excess of statutory authority and without observance of procedure required by law by refusing to amend 17 C.F.R. § 202.5(e), which improperly binds individuals outside of the SEC.
3. Whether the Commission acted arbitrarily and capriciously when it failed to provide a reasoned explanation for denying the petition to amend 17 C.F.R. § 202.5(e).
ALF’s Amicus Brief:
ALF’s brief explains that the SEC—one of the most aggressive independent regulatory agencies in the federal government—exercises its authority in an unjust manner by conducting much of its pre-enforcement activities in secret. The SEC not only keeps the public in the dark about its overall enforcement priorities and investigatory activities, but also often does not disclose its allegations to individual civil enforcement targets, or to the public by way of a press release, until a judicial or administrative complaint is filed.
The Gag Rule is an integral and significant part of this dearth of information. By permanently silencing enforcement targets after essentially forcing them to enter into well-publicized settlement agreements, the Gag Rule severely limits their ability to maintain or restore their business and personal reputations by shedding light, from their points of view, on the merits of the SEC’s enforcement complaints. The Gag Rule thereby undermines public trust not only by violating the constitutional right to freedom of speech, but also by making the SEC less accountable for its actions.
