Numerous prior posts (see here for the subject matter tag) have focused on the SEC’s neither admit nor deny settlement policy (the so-called “Gag Rule”).
In the FCPA’s modern era, nearly all issuer enforcement actions are resolved through SEC administrative actions most of which include the “neither admit nor deny” settlement language.
In 2018, the New Civil Liberties Alliance (“NCLA”) petitioned the SEC to amend its rule restricting speech in the aftermath of an SEC settlement.
As stated in the petition:
“The SEC Rule adopts “the policy that in any civil lawsuit brought by it or in any administrative proceeding of an accusatory nature pending before it, it is important to avoid creating, or permitting to be created, an impression that a decree is being entered or a sanction imposed, when the conduct did not, in fact, occur.” Accordingly, SEC will “not … permit a defendant or respondent to consent to a judgment or order that imposes a sanction while denying the allegations in the complaint or order for proceedings”—although at the same time the SEC provides that the defendant or respondent may state “that he neither admits nor denies the allegations.” 17 C.F.R. § 202.5(e).
Pursuant to this policy and Rule, the Commission has required persons or entities charged in judicial or administrative proceedings of an accusatory nature who enter into consents to agree in perpetuity not to take any action or to make or cause to be made any public statement denying, directly or indirectly, any allegation in the complaint or creating the impression that the complaint is without factual basis. The SEC in practice thus goes further than the rule and binds defendants to silence permanently under threat of a reopened prosecution, a penalty and enforcement power neither mentioned in nor authorized by the rule—or by any law.”
In its petition, the NCLA asserted that the “the Gag Rule on its face and as applied in perpetuity in Consent Orders fails to pass constitutional or legal muster under many doctrines.”
Among other things, the NCLA asserted:
“The Rule directly infringes upon the First Amendment rights of Americans and works to conceal the operations of agency enforcement from the American people. Congress could not lawfully pass a statute that silenced defendants about their prosecutions—such a statute would be held unconstitutional in short order. The SEC cannot accomplish through rule-making what the Constitution forbids to Congress.”
The SEC – after six years – finally got around to acting upon the petition – and not surprisingly supported its own rule.
In this statement, SEC Chair Gary Gensler stated:
“Entering into a settlement is a consequential choice for both the SEC and the defendant. The Commission, in agreeing to settle a case, is relinquishing the opportunity to present the case in court. The defendant, on the other hand, relinquishes the right to defend the case in court, in the press, and in the eyes of the public. Both parties are agreeing to a set of terms based upon this 1972 policy.
More than 50 years on, I think this policy has served the public and the Commission well. I believe that amending this policy in the manner proposed by the Petitioner would alter the impact of enforcement settlements if defendants could deny any wrongdoing in the court of public opinion and dismiss sanctions as the cost of doing business without the Commission being able to revive its ability to have its day in court.
Further, an essential component of settlements is the public recitation of the facts. It informs the market as to what conduct is violative of the securities laws. It alerts investors that the Commission seeks to deter that conduct, and it helps other market participants comply with the law. A settlement that allows the denial of wrongdoing undermines the value provided by the recitation of the facts, and it muddies the message to the public.”
However, SEC Commissioner Hester Peirce (frequently featured on this site for her candor) dissented and stated that the “Gag Rule” “undermines regulatory integrity, and raises First Amendment concerns.”
In pertinent part, Peirce stated:
“I agree with the petitioner that this issue warrants a spot on our rulemaking agenda. One thing I love about this country is that Americans can and often do criticize their government. Without fearing reprisal, a person can condemn specific government actions, broad government policies, or the officials who carry out those actions and make those policies. This freedom to speak against the government and government officials is essential in a free society committed to the preeminence of the people. Of course, some criticisms of government policies, practices, or personnel may be baseless, but the American public, not government censors, should be the arbiters of validity. Our prohibition on denials prevents the American public from ever hearing criticisms that might otherwise be lodged against the government, let alone assessing their credibility. The policy of denying defendants the right to criticize publicly a settlement after it is signed is unnecessary, undermines regulatory integrity, and raises First Amendment concerns.
When the Commission adopted the policy in 1972, it included a brief statement explaining why it needed the policy: “it is important to avoid creating, or permitting to be created, an impression that a decree is being entered or a sanction imposed, when the conduct alleged did not, in fact, occur.” This concern seems largely theoretical. Even if the concern is real, the imprudent policy adopted in November 1972 is not the right way to protect the Commission’s reputation.
[…]
The requirement that defendants must either admit or at least promise not to deny the government’s allegations of wrongdoing as a condition of settlement has not been widely adopted by federal agencies. Some agencies even explicitly allow settling defendants to deny the allegations of wrongdoing.
[…]
Even apart from the scant factual basis for the Commission’s given reason for needing the no-deny policy, it should be reexamined because a regulatory policy that prevents people from speaking against government action necessarily raises First Amendment concerns. Prohibiting a person from taking “any action to make . . . any public statement that the complaint is without factual basis” is a plain prior restraint on speech. Prohibiting that same person from “permit[ting] to be made any public statement that the complaint is without factual basis” only exacerbates the problem by imposing on the defendant an obligation to restrain speech by others. Moreover, this content-specific and permanent restraint on speech effectively shields the Commission’s allegations from criticism: as long as you live, you are bound not only to say nothing that the Commission believes “directly or indirectly” denies the complaint’s allegations, but you also must never say anything that even “create[s] the impression” of a denial. Given the obvious First Amendment ramifications of the no-deny policy, it is unsurprising that a court recently characterized the Commission’s use of the no-denial provision as “at a minimum . . . inconsistent with the spirit of the First Amendment and our Nation’s time-honored tradition of protecting free expression.” The court continued by observing that:
[H]ere, the Provision is used by an agency of the federal government to shield itself from public view. This may inflict precisely the kind of societal harm the Founders adopted the First Amendment to protect against . . . . The upshot: so long as a defendant says what the SEC wants to hear (or says nothing at all), he does not violate the No-Admit-No-Deny Provision. This is quintessential viewpoint discrimination.
In its letter denying the NCLA’s rulemaking petition, the Commission sidesteps First Amendment concerns. The Commission explains that “a defendant can waive constitutional rights as part of a civil settlement.” In the Commission’s telling, “[a]s part of the settlement process, the Commission and a defendant negotiate terms,” and “if either party disagrees with terms that the other party views as necessary, [it] can decline to settle, and the Commission must bear its burdens of proof and persuasion in court.” The Commission even suggests that it is the party making a sacrifice in settling instead of litigating because it is “thereby forgoing its ability to prove its case in court.” Never mind that forgoing its day in court yields great benefits for the Commission. When it settles, the Commission does not need to prove the allegations in court—which is expensive, time-consuming, and difficult—and it gets a benefit it could never obtain through litigation—the permanent silence of the defendant.
The Commission’s questionable claim that it is the party making significant concessions is not the most concerning aspect of the Commission’s reasoning. That distinction goes to its casual assumption that defending litigation with the Commission is just like defending against any other plaintiff in a civil action. One suspects that defendants in Commission enforcement actions might view the matter differently. For most individuals, and even for many well-resourced corporate defendants, the time, expense, and difficulty of litigating against the federal government makes settling the only economically viable option to resolve Commission enforcement actions. Commission investigations preceding the settlement negotiations are themselves long and costly. Retaining counsel to respond to the Commission’s document requests and subpoenas, to represent witnesses during sworn testimony, and to prepare and submit a response to a Wells notice (which allows defendants to respond to charges the staff is planning to recommend to the Commission) consumes enormous financial resources. Add to that monetary cost, the intangible yet often even more onerous emotional, physical, and relational tolls of litigation, and it is unremarkable that nearly all defendants in Commission actions settle.
The inevitable mismatch between the Commission and most defendants in its enforcement actions carries through to the settlement process. Even when the disparities in bargaining power between the Commission and the defendant are less pronounced, the no-deny clause is a mandatory, non-negotiable term. The Commission admits as much in its denial letter: “[t]he policy binds the Enforcement staff” and the Commission “will not agree to a settlement . . . unless the defendant agrees not to publicly deny the allegations in the complaint.” As one judge recently put it, the mandatory nature of the no-deny policy presents defendants with no real choice; it demands: “If you want to settle, . . . ‘Hold your tongue, and don’t say anything truthful—ever’—or get bankrupted by having to continue litigating with the SEC.”
The demand by the government that a defendant waive a fundamental constitutional right as a condition of settlement ought to be supported by a compelling rationale. Yet, as discussed above, the Commission’s rationale of record—that the no-deny policy is necessary to “avoid creating, or permitting to be created, an impression that a decree is being entered or a sanction imposed, when the conduct alleged did not, in fact occur”—lacks firm footing. It would look bad if the SEC’s settlements were shown to be baseless, unfairly negotiated, or legally flawed. The most logical solution to that concern, however, is to make sure that settlements are rooted in fact, are fairly negotiated, and are legally sound. Employing superior bargaining power to extract an agreement that defendants agree not to denigrate the settlement is a suboptimal solution.
In the end, far from shoring up the Commission’s integrity, the reliance on these no-denial conditions undermines it. More than a decade ago, a court aptly explained the problematic perceptions that flow from the Commission’s practice of settling without admissions and prohibiting denials:
[H]ere an agency of the United States is saying, in effect, “Although we claim that these defendants have done terrible things, they refuse to admit it and we do not propose to prove it, but will simply resort to gagging their right to deny it. ”
Why should the public put much weight on allegations so flimsy that they need the protection of a contractual obligation not to deny them? Stated differently, “What is the SEC so afraid of? Any criticism, apparently—or, rather, anything that may even ‘create the impression’ of criticism—of that government agency. The public cannot be sure what to believe if the government actively seeks to squelch contrary voices. As the FTC has observed, a government regulator that is confident in its investigative work, procedural practices, and legal analysis does not need to demand silence on the part of settling defendants. Other commentators have pointed out that “[d]efendants who have been through an agency’s enforcement process are often the most informed and in the best position to raise red flags about that process,” so, by silencing them, “the agencies insulate themselves from criticism and the public scrutiny that accountability demands.” Allowing people to talk freely about their experiences with the Commission would aid us in carrying out our mission.
Because no-admit/no-deny settlements are the most common resolution of SEC enforcement actions, the rule at issue affects countless potential speakers. Given that all of these silenced speakers have been on the wrong end of an enforcement action, we can assume that some might have negative things—whether accurate or not—to say about the government. The gravity of silencing this subset of people weighs heavily on me.
Defenders of our policy might take comfort in the scope of the policy—after all, you can say bad things about the agency, just not about your settlement. To the contrary, the Commission’s mandatory language is so ambiguous as to only aggravate my concerns. Defendants must agree that they will not “indirectly” deny “any allegation in the complaint.” What is an “indirect” denial? Defendants must also agree not to “take any action” that “create[s] the impression that the complaint is without factual basis.” What is an action that “create[s] the impression” that the complaint lacks a factual basis? A defendant looking at this language is not going to have any idea where it ends. Could she say that “The Commission’s enforcement process is a joke. Nobody should trust it to produce just results.”? What if she stands outside the Commission’s headquarters with a pile of salt, a copy of the complaint, and a sign that states “Take these together.” What if she places on a billboard the message “SEC = Seriously Erroneous Complaints”? In either case, has she “create[d] the impression that the complaint is without factual basis”? Can a defendant tell a post-settlement joke: “How many SEC Commissioners does it take to screw in a lightbulb? Zero, because they prefer to let the truth languish in the dark.”? What if she publishes a book with additional facts that were not included in the complaint, and those facts cast the entire case in an entirely different light? Has she then “create[d] the impression” that the complaint lacked a factual basis?
The Commission’s requirement that a defendant agree not to “permit” denials of the allegations in the complaint is equally problematic. This language suggests that defendants have an affirmative obligation to stop other people from saying things that might cast doubt on the complaint’s allegations. Must a settling defendant stop her husband from posting on social media his disagreement with the charges in his wife’s settlement with the Commission? Must a defendant require subsequent employers to link to the settlement in the otherwise flattering profiles they post on their websites? Probably not, but the mandatory language nevertheless is troublingly nebulous. To obtain Commission authorization to file an enforcement action in district court, the Division of Enforcement is required to submit to the Commission an action memorandum that “provides a comprehensive explanation of the . . . factual and legal foundation” for the recommended civil action. The Enforcement Manual, however, does not require that the Division include with the action memorandum a copy of the district court complaint.
The petitioner is correct that reconsideration of the rule is a pressing matter that belongs on the Commission’s current notice-and-comment rulemaking agenda. Or, if my colleagues have concluded that our agenda is too packed with other projects, perhaps we can just drop the no-deny rule in the same unceremonious way we adopted it.”
See here for the NCLA press release in which it states: “NCLA will challenge SEC’s denial of the petition in court, defending Americans against the Gag Rule’s constitutional and statutory defects.”
