SEC’s Gag Rule Undermines Free Speech and Regulatory Integrity, says Commissioner

SEC Commissioner Hester Peirce Criticizes Agency's Gag Rule Restricting Defendants' Ability to Speak Out After Settlements

The gag rule imposed by the SEC’s settlement undermines regulatory integrity, warns Hester Peirce.

In a recent statement, SEC Commissioner Hester Peirce criticized her agency’s denial of a petition to amend the decades-old “gag rule.” This rule prevents defendants from denying or refusing to admit the SEC’s allegations following a settlement. Peirce argues that this policy not only undermines regulatory integrity but also raises concerns about free speech.

The controversial rule states that defendants must agree not to make any public statement denying the allegations or creating the impression that the complaint lacks factual basis. According to Peirce, this language leaves defendants uncertain about the extent of their limitations and effectively shields the SEC’s allegations from criticism. Additionally, the clause that requires defendants to prevent others from casting doubt on the SEC’s judgment further compounds the problem.

Peirce highlights that this no-deny policy is a mandatory term in SEC settlements, which are the most common resolution of enforcement actions. Violation of the policy can result in defendants being hauled back into court.

The SEC’s crypto-related enforcement actions reached a 10-year high in 2023, with 46 actions against crypto firms and $281 million in collected penalties from settlements. While the SEC’s intention for implementing the no-deny policy in 1972 was to avoid creating false impressions, Peirce argues that previous settlements, which allowed defendants to deny wrongdoing, did not undermine the Commission’s enforcement program.

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Interestingly, Peirce points out that other federal agencies, such as the Federal Trade Commission, explicitly allow settling defendants to deny allegations of wrongdoing.

Q&A Content

Q: Why is the SEC’s gag rule an issue?

A: The SEC’s gag rule prevents defendants from publicly denying the agency’s allegations, stifling free speech and undermining regulatory integrity. It limits defendants’ ability to criticize settlements and effectively shields the SEC’s claims from scrutiny.

Q: Are there any alternatives to the no-deny policy?

A: Yes, other federal agencies, such as the Federal Trade Commission, allow settling defendants to deny allegations of wrongdoing. This allows for a more balanced approach that preserves both free speech and regulatory interests.

Q: Do defendants have any recourse if they violate the no-deny policy?

A: Violation of the no-deny policy can result in defendants being summoned back to court. This puts additional pressure on defendants to comply with the SEC’s terms.

Q: How does the SEC’s no-deny policy affect settlements?

A: Settling a lawsuit is often the most cost-effective option for defendants due to the time, effort, and legal costs involved in fighting the SEC in court. The no-deny policy allows the SEC to avoid proving its claims in court, gaining a benefit it could never obtain through litigation: the permanent silence of the defendant.

Front up or Shut Up: The Financial Burden of Fighting SEC Claims

According to Commissioner Hester Peirce, settling a lawsuit is frequently the preferred choice for most defendants facing SEC enforcement actions. Even for well-resourced corporate defendants, fighting the SEC in court can be prohibitively costly and time-consuming. Responding to SEC investigations, dealing with requests, subpoenas, and other legal processes drain enormous financial resources. Therefore, settling becomes an unremarkable and logical decision for the majority of defendants.

However, Peirce highlights that when the SEC settles a case, it no longer needs to prove its claims in court. The agency’s no-deny policy allows it to enjoy a benefit that litigation cannot provide: the permanent silence of the defendant. Peirce argues that if the SEC is confident in its investigative work and analysis, it should not feel the need to demand defendants’ silence.

In conclusion, the SEC’s gag rule poses concerns about free speech and regulatory integrity. It restricts defendants’ ability to criticize settlements and shields the SEC’s allegations from public scrutiny. While settling may seem like the most practical choice for defendants, the SEC’s policy allows the agency to bypass the need to prove its claims in court. There is a need for a balanced approach that respects free speech while ensuring regulatory integrity.

References:

1. Gary Gensler’s Statement: Bitcoin ETF Approvals
2. SEC Denial of Petition
3. SEC’s Crypto-Related Enforcement Actions at a 10-Year High
4. Fake Bitcoin ETF Announcement – Proving SEC Approval
5. Does SEC Chair Gary Gensler have the Final Say on Crypto Regulation?

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