|
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 requires settling enforcement targets to agree that they will not publicly deny any allegation in the SEC's complaint or create the impression that the complaint is without factual basis.
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 and reputational harm, and 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. 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'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. ALF's 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.
| 
