The End of the SEC Gag Rule

S ince 1972, the Securities and Exchange Commission has imposed a gag order as a condition of civil settlements, sometimes referred to as a “no admit/no deny policy.” Under that approach, the SEC files charges accusing a defendant of some misconduct; the defendant settles the case without admitting it; but the SEC then gets to trumpet the accusation publicly without having proven it in court, and the defendant is barred from publicly contesting or denying the SEC’s account.

On Monday, the SEC rescinded the policy and announced as well that it would no longer seek to enforce it as a condition of prior settlements. This is a good move by the commission (all three of whose current members are Trump appointees) and a victory for legal challengers to the rule, led by the New Civil Liberties Alliance. NCLA has been pursuing free speech challenges to the policy since 2018, building on the work of critics of the gag-order policy going back decades.

As Chairman Paul Atkins observed, “Speech critical of the government is an important part of the American tradition. This rescission ends the policy prohibiting such criticism by settling defendants.” Commissioner Hester Peirce, a vocal critic of the policy, added: “Settlements shrouded in forced silence by the non-governmental party do not serve either the markets or the Commission’s investor-protection mission. To the contrary, people’s freedom to speak against the government contributes to its ability to govern well.” As Pierce argued in 2024 when arguing to end the policy then:

The requirement that defendants must either admit or at least promise not to deny the government’s allegations of wrongdoing as a condition of settlement has not been widely adopted by federal agencies. Some agencies even explicitly allow settling defendants to deny the allegations of wrongdoing. As the Federal Trade Commission noted when approving one such settlement in 2012, it was confident in the work of its staff . . . “it is the evidentiary record developed by FTC staff during the course of its investigation, not any ensuing settlement agreement, that forms the basis for the action by Commission.”

The SEC gag order policy was set out in its Rule 202.5(e) (codified at 17 CFR § 202. 5(e)), which is now rescinded:

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.

The ostensible theory of the policy was to prevent miscreants from settling charges — which are usually linked in some way to taking advantage of investors — and then turning around and reassuring their customers or shareholders that they did nothing wrong. When the SEC has been feeling bolder, it has argued as well that the policy promotes public confidence in the enforcement process — which is really just another way of saying that it insulates the commission from public criticism.

The no admit/no deny policy has a more complicated relationship with private damages lawsuits. The inability to publicly contest liability complicates the defense of such suits (which often tout settlements in the allegations of a complaint), but it doesn’t apply to bar legal filings or testimony denying liability. The plaintiffs’ bar, for its part, has long been frustrated that the SEC, unlike criminal prosecutors, typically doesn’t extract sworn admissions of guilt from settling defendants that can be used against them in court.

Unlike barring later out-of-court speech, there’s no free-speech issue in demanding allocutions of guilt under oath as a condition of either a guilty plea or a civil settlement. In some civil contexts, such as defamation cases, a public apology or retraction by the defendant is often just as important as the money. Indeed, outside of the rarer case of so-called Alford pleas, where defendants agree to plead guilty without confessing guilt, sentencing judges in criminal cases generally see a verbal allocution of guilt as necessary to protect the integrity of the process and to assess the defendant’s remorse for sentencing purposes.

By contrast, no admit/no deny greases the skids for settlements in cases where either the SEC doesn’t have a very strong case but can force a settlement on regulated parties who don’t want a fight and will accept a nuisance settlement (perhaps because they’re in the middle of a merger, public offering, or some other event requiring regulatory approval), or the opposite is true: The SEC, which has many irons in the fire, lacks the resources for a protracted battle with a deep-pocketed corporation or Wall Street firm over a single case. The gag order helped preserve the fiction that these settlements were all about the merits rather than the business reasons why settlements often happen.

In any of these situations, the government’s asserted interest in permanently restricting denials is hard to square with the burden on free speech. The SEC admitted, when retracting the rule, “We are not aware of any instance where the Commission has sought to reopen a district court action or administrative adjudication following a violation of a no-deny provision, and there are no reported opinions where a court has ruled upon such a motion.” That doesn’t mean that the policy had no effect; indeed, it shows how regularly it has stifled speech. But it also reflects the SEC’s lack of confidence that its policy would stand up in court if put to a strict test. That is, frankly, the commission’s modus operandi going back decades: It frequently prefers to test expansive legal theories in settlements, or against poorly funded bad actors, and it often loses in court when it actually has to defend its positions against good lawyers.

NCLA’s challenges have been an uphill battle. The Second and Ninth Circuits have upheld the policy under the First Amendment, but the Ninth Circuit warned that surviving a facial challenge might not mean that the policy would stand against a challenge as applied, and at least two Fifth Circuit judges have warned that it could fall. The SEC had until Tuesday, May 26, to file a response in the Supreme Court to an NCLA cert petition in Powell v. SEC, so rescinding the policy likely enables the commission to avoid a final reckoning on the issue. Given the current Supreme Court’s robust free-speech rulings in recent years, many of which have been unanimous, that was a real risk. Nothing in the rescission of the policy prevents a new Democratic administration from appointing commissioners who press to bring it back, but it will be harder to justify that than to simply rely on the inertia of a longstanding policy.

Of course, as the defense bar has warned, this isn’t all necessarily good news for defendants: The SEC staff may feel compelled to work harder to make their case in charging documents, and companies that could just blandly tell the press that they were legally barred from discussing a settlement won’t be able to do that anymore. But forcing the agency to defend its work is a good thing. And insulating the commission from criticism that it has settled cases for reasons other than their merits is a bad thing. That’s apt to be particularly important when the SEC is locking horns, as it has in the past, with outspoken tycoons such as Mark Cuban and Elon Musk. For an agency whose entire existence is supposed to be justified by the theory that markets require transparency above all, the last thing it ought to have been doing is restricting speech.