SEC’s settlement gag rule ‘undermines regulatory integrity’ — Hester Peirce

A United States Securities and Exchange Commission (SEC) rule forbidding defendants from criticizing the agency’s claims when settling enforcement actions “undermines regulatory integrity” and free speech, says one of its commissioners.

In a Jan. 30 statement, SEC commissioner Hester Peirce disagreed with her agency’s denial of a petition to amend its 1972 “gag rule,” which forbids defendants from denying or refusing to admit to the SEC’s allegations following a settlement.

“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,” Peirce wrote.

The rule states defendants must agree they will not “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.”

“A defendant looking at this language is not going to have any idea where it ends,” Peirce claimed. “[It] effectively shields the Commission’s allegations from criticism.”

The clause where defendants agree not to “permit” denials of the allegations is equally problematic, Peirce said, as it suggests they must stop others from saying things that could cast doubt on the SEC’s judgment.

This no-deny policy is a “mandatory, non-negotiable term” in its settlements, which are the “most common resolution of SEC enforcement actions,” according to Peirce. The SEC can also haul defendants back into court if breached.

The regulator’s crypto-related enforcement actions reached a 10-year high in 2023, with 46 actions against crypto firms and $281 million in penalties collected from settlements.

The SEC explained when it adopted the no-deny policy in November 1972, it aimed to avoid “creating an impression that a decree is being entered or a sanction imposed, when the conduct alleged did not, in fact, occur.”

Peirce pushed back on this claim and wrote that before the policy, the SEC had “decades of experience settling cases” with settlements allowing defendants to deny wrongdoing — which some did.

“Such denials do not seem to have undermined the Commission’s enforcement program.”

She added other federal agencies, such as the Federal Trade Commission, “explicitly allow settling defendants to deny the allegations of wrongdoing.”

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Settling a lawsuit is often the cheapest option to solve SEC enforcement actions due to the difficulty, time, and legal costs of fighting the government agency in court, even for the most “well-resourced corporate defendants,” Peirce said.

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SEC investigations before negotiating settlements, along with the lawyers needed to respond to requests, subpoenas and other notices, consume “enormous financial resources,” she added.

“It is unremarkable that nearly all defendants in Commission actions settle.”

When the SEC does settle, however, Peirce noted it no longer needs to prove its claims in court, and its policy means it “gets a benefit it could never obtain through litigation — the permanent silence of the defendant.”

She wrote that if the SEC is “confident in its investigative work” and analysis, it doesn’t need to “demand silence on the part of settling defendants.”

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