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 consent judgment (i.e., 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 consent judgments. The Gag Provision, which permanently prohibits an SEC enforcement target from criticizing the basis for the SEC’s enforcement action, is a prior restraint on speech. A typical consent judgment 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 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. The court of appeals upheld the Gag Rule, asserting in its opinion that entering into an SEC consent judgment is a voluntary take-it-or-leave-it choice. The petitioners now are seeking Supreme Court review.
ALF has filed an amicus brief arguing that regardless of whether entering into an SEC consent judgment is “voluntary,” the Gag Rule is barred by the “unconstitutional conditions doctrine.” Under this doctrine, which the Supreme Court has applied in many contexts, the government cannot compel a company or individual to relinquish constitutional rights in return for receiving a governmental benefit. Here, the governmental benefit is a consent judgment, which enables an SEC enforcement target to avoid the substantial burdens, costs, risks, and reputational harm of litigating against the SEC. The brief explains that enforcement targets cannot be compelled to forgo their unalienable, First Amendment right to freedom of speech in order to receive the significant governmental benefit of entering into a consent judgment.
Issue Areas:
Free Enterprise, Individual Liberty, Limited Government
Whether the SEC’s “Gag Rule,” 17 C.F.R. § 202.5(e), violates the First Amendment.
ALF’s Amicus Brief:
ALF has filed an amicus brief arguing that the Supreme Court should grant review and hold that the Gag Rule violates the First Amendment.
Regardless of whether entering into an SEC consent judgment is “voluntary,” the Gag Rule is barred by the “unconstitutional conditions doctrine.” Under this doctrine, which the Supreme Court has applied in many contexts, the government cannot compel a company or individual to relinquish constitutional rights in return for receiving a governmental benefit.
Here, the governmental benefit is a consent judgment, which enables an SEC enforcement target to avoid the substantial burdens, costs, risks, and reputational harm of litigating against the SEC. The brief explains that enforcement targets cannot be compelled to forgo their unalienable, First Amendment right to freedom of speech in order to receive the significant governmental benefit of entering into a consent judgment.
Contact:
Email ALF Executive Vice President & General Counsel Lawrence Ebner.
