A member of the United States Securities and Exchange Commission (SEC) is saying that a rule forbidding defendants from criticizing the agency’s allegations when resolving enforcement actions damages regulatory integrity and freedom of expression. This issue has especially caught the attention of many officials in recent times with the crypto cases handled by the SEC.
Noteworthy Statements from an SEC Official
SEC Commissioner Hester Peirce expressed her opposition on January 30 to the rejection of a petition to change the agency’s 1972 gag rule. This rule prohibits defendants from denying or not admitting the SEC’s allegations after a settlement. Peirce shared the following statement:
“The policy of denying defendants the right to publicly criticize a settlement after signing it is unnecessary; it weakens regulatory integrity and raises First Amendment concerns.”
The rule requires defendants to agree that they will not make any public statements that directly or indirectly deny any allegation in the complaint or create an impression that the complaint is not based on facts:
“A defendant looking at this statement would have no idea where the statement ends. It effectively shields the Commission’s allegations from criticism.”
Peirce also said that the clause requiring defendants to agree not to deny the allegations is equally problematic because it prevents others from saying things that could cast doubt on the SEC’s judgment. According to Peirce, this no-denial policy is a mandatory, non-negotiable condition in settlements, which are the most common resolution for SEC enforcement actions. The SEC can bring defendants back to court if they violate this condition.
Crypto Market and the SEC
The regulatory agency’s enforcement actions against the crypto industry reached a 10-year high in 2023, with 46 actions against crypto firms and $281 million in fines from settlements. The SEC, when adopting the no-denial policy in November 1972, explained that it aimed to avoid creating the impression that the alleged behavior did not actually occur, or that a decree was entered or a sanction applied.
Peirce opposed this claim and wrote that before this policy, the SEC had decades of experience resolving cases and made settlements that allowed defendants to deny wrongdoing:
“Such denials do not appear to weaken the Commission’s enforcement program. Other federal agencies like the Federal Trade Commission explicitly allow defendants who reach a settlement to deny allegations of misconduct.”
