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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 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 their petition in Powell v. SEC, No. 24-1899, 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.
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.
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