January 15, 2019

Gag Me With a Rule: SEC’s “Neither Admit Nor Deny” Unconstitutional?

I probably should preface this blog by conceding that when it comes to constitutional law, I was never anybody’s idea of SCOTUS clerk material.  In fact, about all I can remember from my Con Law class is the time that Prof. Howard called on me and began his questioning with “Mr. Jenkins, Justice Black dissents in this case. . .”  To which I responded, “Yes he does, Professor – and I pass.”

Anyway, some lawyers for The Cato Institute who obviously paid more attention in Con Law than did I have filed a federal lawsuit on behalf of the libertarian think tank challenging the constitutionality of the SEC’s Rule 202.5(e). That rule reads as follows:

The Commission has adopted 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 alleged did not, in fact, occur. Accordingly, it hereby announces 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. In this regard, the Commission believes that a refusal to admit the allegations is equivalent to a denial, unless the defendant or respondent states that he neither admits nor denies the allegations.

This rule is why every SEC settlement contains language providing that the defendant “neither admits nor denies” the SEC’s allegations. In its complaint, Cato says it wants to publish a book critical of the Division of Enforcement written by a former target of an SEC enforcement action, but alleges that the “neither admit nor deny” language in the author’s settlement effectively prevents it from doing so. Cato says that what it refers to as the SEC’s “gag rule” is a content-based restriction on speech that’s prohibited under the 1st Amendment.

Over the years, the SEC’s “neither admit nor deny” settlement policy has come in for plenty of criticism.  After the financial crisis, critics complained about the SEC’s failure to require admissions of wrongdoing in its settlements with major financial institutions.  That ultimately led the SEC to adopt a policy of requiring admissions in some instances.

This time, the SEC’s rule is facing challenges from the “Kill the Administrative State! Kill it with Fire!” side of the political spectrum – and this lawsuit is not the first time the rule has been questioned on 1st Amendment grounds. In October of last year, a rulemaking petition was filed with the SEC challenging the rule’s constitutionality & calling for its revision.

Now, this is where those caveats about my ineptitude as a constitutional scholar come into play.  Despite my complete lack of qualifications, I’m going to play the pundit & speculate that this lawsuit just might get some traction.  The federal courts are becoming less deferential to regulatory agencies – as evidenced by last summer’s SCOTUS decision invalidating the SEC’s ALJ appointment process.  My guess is that this lawsuit may get a boost from the current “Death to the Administrative State!” zeitgeist – but recent experience also suggests that proponents should be careful what they wish for.

SEC Shutdown:  “Rules? We Ain’t Publishin’ No Stinkin’ Rules!”

Meanwhile, as America nears the four week mark in its anarchy experiment, over on our ’Q&A Forum’ (#9717) people are starting to wonder what’s become of the rules the SEC adopted before the shutdown.  Here’s one member’s question:

On December 19, 2018, the SEC adopted final rules regarding the amendment of Regulation A. I’ve yet to see them published in the Federal Register (or the Govinfo site). Any insight as to why not, and any idea when we can expect this?

In his answer, Broc pointed to the shutdown as the likely culprit for the delay in publication. That’s certainly part of it, but I imagine some of the delay also may be associated with the need to press the remaining essential employees at the Gov. Printing Office into service delivering 300 Big Macs & assorted other fast food delicacies to the White House.

I guess some expected fancier fare for the Clemson Tigers, but as someone who once ate 4 Sausage McMuffins with Egg at the Angola service area on the NYS Thruway & enjoyed a “Royale with Cheese” at the Louvre, it’s all good with me.

Transcript: “GDPR’s Impact on M&A”

We have posted the transcript for the recent webcast: “GDPR’s Impact on M&A.”

John Jenkins