For more than 50 years, the U.S. Securities and Exchange Commission (SEC) has maintained a policy that requires all defendants in enforcement matters to agree not to deny the SEC’s allegations or do anything that would give the impression that the case was without merit as a condition to settlement. The vast majority of those targeted by the SEC ultimately agree to settle their cases, often factoring in the enormous amount of time and expense required to fully litigate a case against the government to conclusion. Those wishing to settle SEC enforcement actions — meritorious or not — are presented with no choice but to agree to the SEC’s “gag rule” and relinquish their First Amendment rights to speak out against the SEC and its actions.
Two targets of an SEC enforcement action who settled under the SEC’s take-it-or-leave-it terms are now challenging the constitutionality and continued viability of the gag rule in a case that the U.S. Court of Appeals for the Fifth Circuit is set to hear on February 8.
The Gag Rule
In 1972, the SEC 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, the SEC codified in the Code of Federal Regulations the so-called 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.”
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