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Since 1972, the SEC has had a policy that defendants that settle civil claims with the Commission can’t go out afterwards and deny the allegations – which is not-so-affectionately known as the “gag rule.” Earlier this week, the Commission swatted down the latest attack on that rule – by denying a rulemaking petition from the “New Civil Liberties Alliance.” Those are the very same folks who are leading the charge against the Chevron defense in Relentless v. Dept. of Commerce – and who have engineered the SEC v. Cochran challenges to the SEC’s administrative law judge system.

SEC Chair Gary Gensler took the opportunity to make a statement about the benefits of the settlement policy. Here’s an excerpt:

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. Both parties are agreeing to a set of terms based upon this 1972 policy.

More than 50 years on, I think this policy has served the public and the Commission well. I believe that amending this policy in the manner proposed by the Petitioner would alter the impact of enforcement settlements if defendants could deny any wrongdoing in the court of public opinion and dismiss sanctions as the cost of doing business without the Commission being able to revive its ability to have its day in court.

He also implies that the settlement orders are “required reading” for anyone else who wants to stay out of trouble:

Further, an essential component of settlements is the public recitation of the facts. It informs the market as to what conduct is violative of the securities laws. It alerts investors that the Commission seeks to deter that conduct, and it helps other market participants comply with the law. A settlement that allows the denial of wrongdoing undermines the value provided by the recitation of the facts, and it muddies the message to the public.

As you can imagine, the “neither admit nor deny” policy is not roundly supported by companies and other defendants. It’s also drawn harsh criticism – on 1st Amendment grounds – from a federal court. You know who else isn’t a fan? SEC Commissioner Hester Peirce. Here’s an excerpt from her lengthy dissent from this week’s decision to deny the NCLA rulemaking petition:

The demand by the government that a defendant waive a fundamental constitutional right as a condition of settlement ought to be supported by a compelling rationale. Yet, as discussed above, the Commission’s rationale of record—that the no-deny policy is necessary 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”—lacks firm footing. It would look bad if the SEC’s settlements were shown to be baseless, unfairly negotiated, or legally flawed. The most logical solution to that concern, however, is to make sure that settlements are rooted in fact, are fairly negotiated, and are legally sound. Employing superior bargaining power to extract an agreement that defendants agree not to denigrate the settlement is a suboptimal solution.

In the end, far from shoring up the Commission’s integrity, the reliance on these no-denial conditions undermines it. More than a decade ago, a court aptly explained the problematic perceptions that flow from the Commission’s practice of settling without admissions and prohibiting denials:

[H]ere an agency of the United States is saying, in effect, “Although we claim that these defendants have done terrible things, they refuse to admit it and we do not propose to prove it, but will simply resort to gagging their right to deny it.”

Keep in mind that when it comes to the “neither admit nor deny” policy, things could be worse! I don’t know the extent to which this materialized, but a couple years ago, Enforcement Director Gurbir Grewal indicated that the Staff and Commission might get more aggressive in requiring admissions as a condition to settlement, meaning that defendants would end up with a one-sided condition of “no deny.” My guess is that this is little consolation to the NCLA. Given their recent track record in court, perhaps there will be more to come…

– Liz Dunshee