SEC settlement gag rule ‘undermines regulatory integrity’ – Hester Peirce
A law that bars defendants from criticizing the agency's claims when the U.S. Securities and Exchange Commission rules on enforcement actions “undermines regulatory integrity” and harms free speech, one of the commissioners said.
In a Jan. 30 statement, SEC Commissioner Hester Pierce disagreed with the agency's denial of a petition to amend the 1972 “gag rule” — which prohibits the SEC from denying or denying allegations after defendants have settled.
“A policy of denying defendants the right to publicly criticize after a settlement is signed is unnecessary, undermines regulatory integrity and raises First Amendment concerns,” Pearce wrote.
My take on the SEC's unusual practice of not saying bad things about settlements to defendants who settle with us: https://t.co/Mej0bSECD4
— Hester Peirce (@HesterPeirce) January 30, 2024
The rule states that defendants must not make or agree to make any public statement that “directly or indirectly denies the complaint or creates the impression that the complaint is untrue.”
“A defendant looking at this language has no idea where they stand,” Pearce said. “[It] It successfully defends the commission's allegations against criticism.
The clause in which the defendants agreed not to “permit” to deny the charges is equally problematic, Pierce said, because it suggests others should refrain from saying things that cast doubt on the SEC's judgment.
This non-repudiation policy is a “mandatory, non-negotiable term” in the settlements, which are “the most common remedies for SEC enforcement actions,” according to Peirce. The SEC can take defendants back to court for violations.
The regulator's crypto-related enforcement actions reached a 10-year high in 2023, with 46 actions against crypto firms and $281 million in fines collected from settlements.
When the SEC adopted its non-denial policy in November 1972, it explained that it was intended to “prevent the appearance that an indictment or sanction is being imposed when the alleged conduct did not actually occur.”
Pearce pushed back against that claim, writing that before the policy, the SEC had “decades of experience settling cases” that allowed defendants to deny wrongdoing — which some did.
“Such denials do not appear to have weakened the Commission's enforcement program.”
She added other federal agencies, such as the Federal Trade Commission, “clearly allow defendants to dismiss charges against them.”
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Settlement is often the cheapest option to resolving SEC enforcement actions because of the difficulty, time and legal costs of fighting a government agency in court, even for the most “well-off corporate defendants,” he said.
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SEC investigations consume “tremendous amounts of financial resources” before negotiating with attorneys who need to respond to requests for subpoenas, subpoenas and other notices.
“It is surprising that almost all defendants in the commission's actions have settled.”
But when the SEC settled, Pierce said it wouldn't have to prove the claims in court, and the policy would “get an advantage it wouldn't get in litigation — the permanent silence of the defendant.”
She wrote that if the SEC is “confident in its investigative work” and analysis, it “doesn't need to demand silence to settle defendants.”
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