In a significant decision by the US Court of Appeals for the Ninth Circuit, the so-called SEC “gag rule” has been upheld, which prohibits settlement defendants from publicly denying enforcement allegations. This ruling raises pivotal questions about the balance between regulatory powers and free speech in the financial world. The court found the SEC’s policy constitutionally permissible, though concerns were raised regarding free speech. Applying the “voluntary waiver” framework from the 1987 Supreme Court ruling in Town of Newton v. Rumery, the court concluded that defendants had voluntarily agreed to limit their speech in exchange for settlement benefits.
The court highlighted a “sufficient nexus” between the government’s interest in substantiating allegations and the defendants’ waiver of their right to deny those allegations. Emphasizing that the rule doesn’t prevent broader criticism of the SEC or its practices, the judges noted that violations only allow the SEC to request a reopening of proceedings rather than impose automatic penalties. This perspective was echoed by the Second Circuit in its 2021 ruling in SEC v. Romeril, aligning the view across different jurisdictions.
Additionally, the challenge under the Administrative Procedure Act (APA) was rejected. The court found that the SEC had adequate statutory authority under 15 U.S.C. § 78u(d)(1) and had complied with administrative requirements, classifying the SEC rule as a procedural statement exempt from “notice-and-comment” under 5 U.S.C. § 553(b)(A). The rule has been enforced since 1972 and allows defendants who settle with the SEC to neither admit nor deny allegations but prohibits outright denial. Violators risk having enforcement cases reopened by the SEC, a provision aimed at maintaining the integrity of the settlement process.
In the 2018 lawsuit initiated by the New Civil Liberties Alliance, a legal advocacy group challenging government overreach, the rule was argued to infringe on First Amendment rights. Despite the court’s current ruling, it preserved opportunities for future “as-applied” constitutional challenges. This allows for continued litigation in individual cases where regulatory power and First Amendment rights need careful balancing. The Ninth Circuit’s decision aligns closely with existing rulings while ensuring ongoing scrutiny of each unique settlement scenario. For further insights, a detailed report is provided by JURIST.