SEC 'Gag Rule' Undermines Integrity and Free Speech, Highlights Commissioner Peirce
Summary:
Hester Peirce, commissioner of the U.S. Securities and Exchange Commission (SEC), criticizes the SEC’s 1972 “gag rule” which silences defendants from denying or criticizing the SEC's allegations after settlements, arguing that it compromises regulatory integrity and threatens First Amendment rights. The rule, part of every settlement, protects SEC's allegations from public criticism. Defending the necessity of the rule in 1972, the SEC insisted it prevents false impressions about sanctions for misconduct that did not occur. Peirce counters that other federal bodies allow defendants to deny wrongdoing and that if the SEC is confident in its investigations, it shouldn't demand the silence of settling defendants.
An existing regulation maintained by the U.S. Securities and Exchange Commission (SEC) which limits defendants from publicly questioning the commission's assertions after settling enforcement actions endanger both regulatory transparency and freedom of speech, according to SEC commissioner Hester Peirce. Peirce expressed her disapproval on January 30th in response to the SEC’s refusal to revise its existing rule from 1972, popularly known as the “gag rule”. This rule effectively prevents defendants from either denying SEC’s charges or declining to acknowledge them after a settlement has been reached. Peirce argued that such a restriction on public criticism of a finalized settlement degrades regulatory integrity and threatens First Amendment rights.
The existing rule requires defendants to commit not to dispute, directly or indirectly, any claim made in the complaint, or give an impression that the complaint lacks substantial basis. According to Peirce, this vaguely phrased obligation might be confusing for defendants, leaving them uncertain about its exact implications. She believes this clause effectively screens the SEC's complaints from public scrutiny. Peirce also highlighted another problematic aspect: the part where defendants agree not to allow the denial of allegations. This part, she argues, implies that defendants must prevent third parties from expressing doubts over the SEC’s decisions.
Settlements, which, according to Peirce, always include this non-negotiable clause, are the most frequent outcome of SEC enforcement actions. If this term is violated, the SEC has the authority to summon defendants back into court. The SEC initiated a record number of cryptocurrency-related enforcement actions in 2023, reaching a ten-year high of 46 actions against crypto entities, resulting in a total of $281 million harvested through settlements.
In 1972, when the SEC established the no-deny policy, its objective was to prevent the possibility of a false impression being created that a ruling has been enforced or a penalty imposed when the charged behavioral misconduct did not actually happen. However, Peirce is unconvinced and countered that before the policy was enacted, the SEC functioned for many years, settling cases wherein defendants were granted the right to dispute their guilt, and several did. Peirce noted that these denials did not seem to have compromised the SEC’s authority and effectiveness. She further pointed out that other federal authorities, like the Federal Trade Commission, allow settling defendants the rights to dispute charges of wrongdoing.
Peirce explained that opting for settlement is often less expensive and more efficient compared to challenging the SEC's enforcement actions in court, due to high legal costs and the time-consuming nature of the process, even for well-funded corporate defendants. Typically, the extensive financial resources required to respond to documents, subpoenas and other official notifications during SEC inquiries before negotiating settlements, lead most defendants to eventually settle.
However, when settlements occur, the SEC is no longer obliged to validate its claims in court and benefits from its enforced policy of ensuring the defendants’ permanent silence, a privilege that it would not be entitled to through litigation. Peirce asserted that if the SEC is confident of the accuracy of its probes and assessments, there would be no need for it to insist on settling defendants keeping their silence.
Published At
1/31/2024 8:58:14 AM
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