By Suzanne Cosgrove
The SEC on Tuesday denied a petition filed by the New Civil Liberties Alliance (NCLA) asking the Commission to amend Rule 202.5(e), 17 C.F.R. 202.5(e) and reiterated its long-standing policy that it will not agree to a settlement of an enforcement action, including a consent judgment in federal court, if a defendant can later publicly deny the Commission’s allegations.
Known as the “no admit/no deny policy,” the rule was adopted by the Commission in 1972 and is based on the premise that the SEC will not forgo its opportunity to present evidence and prove its claims in federal court unless the defendant agrees not to publicly deny the allegations in the complaint.
The policy binds the SEC’s enforcement staff, but it does not require defendants to settle, the Commission noted in a letter denying the rulemaking request. At the same time, a defendant is free to give up settlement and litigate, the SEC said.
In a statement, SEC Chairman Gary Gensler said 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.”
Why change the rule? The New Civil Liberties Alliance initially petitioned for the rulemaking amendment in October 2018, calling it a “Gag Rule” that restricts speech. The group, which describes itself on its website as a nonprofit civil rights group founded to protect constitutional freedoms from “the administrative state,” contended the rule was ”unconstitutional, without legal authority” and ill-conceived.
Further, the filing charged that the SEC lacked authority to issue the Gag Rule, and that the rule violated the First Amendment’s right to petition, although the group acknowledged the measure was adopted “principally out of (the SEC's) concern that defendants and respondents were entering into consent decrees and then publicly denying that they had done anything wrong or violated any law or regulation.”
The NCLA asked the SEC to change the wording of Rule 202.5(c) to indicate a defendant or respondent may 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.
“By providing for admissions, denials, or no-admit-no-deny for specific allegations of the charges against defendants, the proposed amended rule allows the SEC to bargain for admissions when it has a clear-cut case of specific wrongdoing, allows defendants to specifically deny erroneous or overreaching charges against them, and leaves intact the pragmatic no-admit-no-deny approach that the Second Circuit has recognized as a useful approach from all perspectives,” the NCLA said in its filing.
The group brought up the matter again in December 2023, charging that the rule was “one of the most effective prior restraints conceived by any governmental body.” Without the benefit of notice-and-comment rulemaking procedures, the group said, the rule “has gagged countless enforcement targets in perpetuity.”
Commissioner Peirce’s dissents. “I agree with the petitioner that this issue warrants a spot on our rulemaking agenda,” commented SEC Commissioner Hester Peirce, in opposition to the SEC’s refusal to amend the rule.
“Because no-admit/no-deny settlements are the most common resolution of SEC enforcement actions, the rule at issue affects countless potential speakers,” Peirce said. “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 petitioner is correct that reconsideration of the rule is a pressing matter that belongs on the Commission’s current notice-and-comment rulemaking agenda,” Peirce concluded.