The SEC’s Gag Rule Is Merely in Storage

For more than half a century, the Securities and Exchange Commission offered people accused of violating securities laws a coercive choice: Fight the federal government at enormous expense, or settle and surrender the right to tell your side of the story.

That practice finally ended in May, when the SEC rescinded Rule 202.5(e), commonly known as its “gag rule.” Make no mistake – withdrawing the gag rule is a victory for the First Amendment. But unless the courts or Congress act, another SEC majority could easily reinstate this rule.

How the Gag Order Worked

Since 1972, the SEC had refused to settle an enforcement action imposing a sanction unless the defendant agreed to never contest the agency’s allegations publicly. Defendants were usually permitted to say that they “neither admit nor deny” the accusations. But they could not claim innocence, dispute the SEC’s account, or even create the impression that the agency’s allegations lacked a factual basis.

The restriction was permanent. As Thomas J. Powell, the lead petitioner in a constitutional challenge to the rule, writes in The Wall Street Journal:

“In 2021 the SEC settled a proceeding involving a firm I led. The commission never proved the allegations underlying its findings. Its lawyers drafted the order without a hearing and without contested adjudication, inside the agency’s own forum, where the SEC served as accuser and judge …”

“While the SEC remained free to publish allegations against those it accused of violating securities regulations, even when no court had tested those allegations, the rule compelled settling respondents to stay silent about their own cases.”

The rule also required settling defendants to withdraw court filings to the extent those filings denied the SEC’s allegations. If a defendant later violated the gag order, the agency reserved the right to ask a court to vacate the settlement and return the case to active litigation.

Chairman Paul Atkins’ Course Correction

Calling such an agreement “voluntary” ignored the realities of federal enforcement. Individuals and businesses often settle not because they accept the government’s account, but because they cannot afford years of litigation against an agency backed by federal resources. The government should not be allowed to use that imbalance to extract a lifetime waiver of First Amendment rights.

Facing Powell’s Supreme Court petition and 16 supporting friend-of-the-court briefs, the SEC abruptly rescinded the rule. Protect The 1st commends Chairman Paul Atkins, who correctly declared that “speech critical of the government is an important part of the American tradition.” The SEC also promised not to enforce gag provisions contained in earlier settlements.

The Power to Gag Has Been Shelved, Not Repealed

Any celebration should, however, come with a caution. The Supreme Court subsequently declined to hear Powell v. SEC, never ruling on whether the gag rule violated the First Amendment. And because the SEC repealed the rule administratively, a future commission could restore it administratively.
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Chairman Atkins and the SEC deserve credit for ending an indefensible policy. But constitutional rights should not depend on who happens to chair a federal agency. Congress should prohibit the SEC – and every federal agency – from conditioning settlement on a promise never to criticize the government or dispute unproven allegations.

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