On January 30, 2024, the Securities and Exchange Commission ("SEC") denied a Petition for Rulemaking to amend SEC Rule 202.5(e), known as the SEC's "no-admit/no-deny" rule or, more pejoratively, the "gag rule."
Adopted in 1972, the rule prohibits defendants in SEC enforcement proceedings from "consent[ing] to a judgment or order that imposes a sanction while denying the allegations in the complaint or order for proceedings." Under the rule, a settling defendant need not admit the SEC's allegations but also cannot take action to deny those allegations or to create the impression that the SEC's complaint lacks factual basis.
Filed by the New Civil Liberties Alliance ("NCLA") in October 2018, the Petition challenged the rule largely on constitutional grounds as an unlawful prior restraint of a defendant's speech. In rejecting the Petition, the SEC countered that "[t]here is a large body of precedent confirming that a defendant can waive constitutional rights as part of a civil settlement, just as a criminal defendant can waive constitutional rights as part of a plea bargain," such as the right to a jury trial. The SEC further argued that "[a]ll settlements involve undertakings and waivers of constitutional rights, and courts have held that there is no per se rule against such agreements."
Two recent appellate decisions have denied challenges to the rule's constitutionality, but on different grounds. In SEC v. Romeril, the Second Circuit rejected arguments that the rule violated the First Amendment, concluding that "parties can waive their First Amendment rights in consent decrees and other settlements of judicial proceedings." Later, the Fifth Circuit in SEC v. Novinger affirmed denial of the defendants' Rule 60(b) motions to reconsider their SEC consent judgments, agreeing that the motions were procedurally untimely. But in a sharply worded concurrence, two judges criticized the SEC's rule, stating that "[a] more effective prior restraint is hard to imagine."
The SEC's denial of the Petition is unlikely to be the final word. NCLA intends to appeal the SEC's decision and may have an ally in SEC Commissioner Hester Peirce, who forcefully dissented from the Petition's denial. Additionally, Novinger recently returned to the Fifth Circuit on a different procedural issue, which may allow that court to revisit the SEC rule. And with courts increasingly willing to question even longstanding SEC rules and practices, it may simply be a matter of time before a defendant successfully nullifies the SEC's gag rule.
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