A federal appeals court on Wednesday upheld the US Securities and Exchange Commission’s so-called “gag rule,” rejecting a claim it illegally silences defendants who want to criticise the regulator after settling civil enforcement cases.
In a 3-0 decision, the 9th US Circuit Court of Appeals said the rule was not unconstitutional on its face, but could violate the First Amendment depending on how it is applied.
The rule, reflecting SEC policy dating to 1972, often requires settling defendants to say at least that they neither admit nor deny the regulator’s allegations.
Twelve petitioners had been appealing the SEC’s decision in January 2024 not to amend the rule, including eight people whose SEC settlements triggered it.
One petitioner, former Xerox chief financial officer Barry Romeril, took a similar case to the US Supreme Court in 2022 in an appeal backed by billionaire and longtime SEC critic Elon Musk, but that court refused to consider it.
In Wednesday’s decision, Circuit Judge Daniel Bress said that while some defendants find the rule coercive, they remained free not to settle, and instead to speak out against the SEC.
He also said the SEC had an interest in deciding how to try its own cases, including by giving defendants different options, knowing that scrapping the rule could lead to fewer settlements.
“Provided that any limitation on speech remains within proper bounds, and given the background ability to waive First Amendment rights at least to some extent, the SEC has an interest in giving defendants the option to agree to a speech restriction as part of a broader settlement agreement,” Bress wrote.
Bress said challenges to applying the rule could still be brought before the SEC brings enforcement cases, while judges consider settlements, or when the SEC reopens settled cases because of alleged breaches.
The petitioners included the New Civil Liberties Alliance, which challenges perceived administrative law excesses.
NCLA senior litigation counsel Peggy Little said in a statement the nonprofit was disappointed. “Past practice does not excuse unconstitutional government action,” she said.
The SEC had no immediate comment.
SEC Commissioner Hester Peirce dissented from the regulator’s decision not to amend the rule.
She found “scant factual basis” for the rule, and said prohibiting denials of wrongdoing “prevents the American public from ever hearing criticisms that might otherwise be lodged against the government, let alone assessing their credibility.”
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