SEC Commissioner Hester Peirce has voiced strong opposition to a longstanding rule of the U.S. Securities and Exchange Commission (SEC) that restricts defendants from publicly criticizing the agency’s allegations after reaching a settlement. In a statement on January 30, Peirce expressed her disagreement with the SEC’s decision to uphold its 1972 “gag rule.”
Peirce argues that this policy, which prohibits defendants from denying SEC allegations post-settlement, not only undermines regulatory integrity but also raises significant First Amendment concerns. She highlights the rule’s stipulation that defendants cannot make any public statement denying the SEC’s allegations, nor suggest that the complaint lacks factual basis. According to Peirce, this broad language effectively shields the SEC’s allegations from public scrutiny and criticism.
The commissioner points out the problematic nature of the clause that prevents defendants from allowing others to deny the allegations on their behalf. This aspect of the policy, she argues, implies an obligation for defendants to control third-party statements, casting doubt on the SEC’s judgments. Peirce emphasizes that this no-deny policy is a mandatory and non-negotiable part of SEC settlements, which are the most common resolution in SEC enforcement actions.
The SEC’s enforcement actions, particularly in the crypto sector, reached a decade high in 2023, with significant penalties collected from settlements. The SEC originally justified the no-deny policy in 1972 as a means to prevent the impression that sanctions are being imposed for conduct that did not occur. However, Peirce counters this rationale by noting that prior to the policy, the SEC had experience with settlements that allowed defendants to deny wrongdoing.
Peirce acknowledges that settling lawsuits is often the most feasible option for defendants facing SEC enforcement actions, given the challenges and costs of legal battles against the agency. She points out that the extensive financial resources consumed by SEC investigations and legal responses make settlements a common outcome.
In her critique, Peirce notes that when the SEC settles, it no longer needs to prove its claims in court. The gag rule, she argues, grants the SEC a benefit it could not achieve through litigation: the permanent silence of the defendant. She concludes by suggesting that if the SEC is confident in its investigative work, it should not need to demand silence from settling defendants.
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