CEI opposes SEC’s gag rule


The Securities and Exchange Commission does not like to be criticized. That’s not unusual. What is unusual is that the SEC includes a prohibition of criticism in its settlement agreements. CEI has filed an amicus brief in a case challenging this violation of the First Amendment.

In 1972, the SEC adopted a rule announcing “its policy not to 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.” Ever since, the SEC has implemented this policy in a remarkable way. It has included in every settlement agreement with a defendant against whom it has brought charges a gag agreement forbidding the defendant from ever denying the charges. If the gag order is disobeyed, the SEC will go to court to refile the case.

The New Civil Liberties Alliance, taking a dim view of silencing criticism of the government, petitioned the SEC to give defendants more options when they agree to settle. It proposed that the rule be amended to allow a defendant to “consent to a judgment or order in which he admits, denies, or states that he neither admits nor denies the allegations in the complaint or order for proceedings.” The SEC issued an order denying the petition and declining to amend the rule. The Alliance appealed the order to the Ninth Circuit Court of Appeals and asked CEI to file an amicus brief in support of its appeal.

CEI’s amicus brief argued that the Supreme Court’s decision in Town of Newton v. Rumery, a case the SEC relied on, actually leads to the conclusion that the SEC’s gag agreements are unenforceable. The case teaches that an agreement to waive a right is contrary to public policy and therefore unenforceable if a public policy underlying the right being waived outweighs the interest in enforcing the waiver. Here, the public policy underlying the First Amendment favors the discussion of public matters and the dissemination of information and opinion—all things that the waiver seeks to prevent.

The SEC’s interest in enforcing the waiver, at least according to the SEC’s rule, is to avoid “an impression that a decree is being entered or a sanction imposed, when the conduct alleged did not, in fact, occur.” Even assuming there is a legitimate reason to avoid that impression, the gag agreements go far beyond what would be needed to prevent a situation in which a decree is entered when the defendant simultaneously denies the conduct alleged. The gag agreements that the SEC requires prohibit defendants from ever questioning the charges made against them for the rest of their lives or else the SEC will go to court and ask for the case to be reinstated.

The SEC’s order denying the petition came up with an improbable rationale for the permanent gag agreement. The order said that a denial made when the SEC can longer put on its case could create the incorrect impression that there was no basis for the SEC’s enforcement action, which would undermine confidence in its enforcement program.

The closest parallel in the law to the SEC’s anxiety about its reputation would be ancient English law that centuries ago protected the king from writings or anything else that would lessen him in the esteem of his subjects. An agency of the United States government has no reputational interest like the king’s, and certainly none that outweighs the policies of the First Amendment.

CEI’s brief also pointed out that the gag agreement is an unconstitutional condition. The government cannot make the surrender of a constitutional right a condition for a benefit unless there is a close nexus between that right and the interest the government seeks to advance. In the case of a settlement, anything that a party might have won in the litigation has a sufficient nexus, as does a remedy for a harm the defendant caused.

The gag agreement has no such nexus to the underlying conduct. It is an unreasonable and coercive demand: avoiding decades of jail time by giving up First Amendment rights is an offer a defendant cannot refuse.