SEC Rescinds No-Admit/No-Deny Rule, Will Not Enforce Existing Gag Provisions
The U.S. Securities and Exchange Commission has rescinded its longstanding policy requiring defendants who settle enforcement actions to refrain from publicly denying the agency’s allegations, ending a rule that has been in place since 1972 and committing not to enforce gag provisions in existing settlement agreements.
The SEC’s final action, signed May 18 by Secretary Vanessa A. Countryman, repeals Rule 202.5(e) of the SEC’s rules of informal procedure and takes effect upon publication in the Federal Register. The SEC bypassed notice-and-comment rulemaking and the customary 30-day waiting period before a rule becomes effective, invoking Administrative Procedure Act exemptions for rules of agency procedure and a good-cause finding.
The rescission moved faster than the typical federal rulemaking path. The SEC’s proposal reached the White House Office of Management and Budget for review earlier this month, beginning what is normally a multi-step process involving a proposed rule, public comment period, and final action that can take months to more than a year. Instead, the commission concluded the rescission qualified as a “general statement of policy” and a rule of “agency organization, procedure, or practice,” categories the APA exempts from notice and comment.
The SEC separately said delaying the effective date “could create a period of time in which parties have an incentive to delay settlement until the rescission is in effect,” and found that a delay would be “contrary to the public interest.”
Under the rescinded policy, defendants who settled SEC enforcement actions without admitting or denying the allegations were also required to agree not to publicly deny them. A defendant who later breached that agreement risked having the SEC ask a court to vacate the settlement and return the case to active litigation.
In the final release, the commission acknowledged that the practical remedy supporting the rule has been more theoretical than real. The SEC said it is not aware of any instance since 1972 in which it has asked a court to vacate a settlement following a public denial, nor any instance in which it sought to reopen an administrative proceeding on those grounds. The commission cited that limited use, alongside changes in how social media blurs the line between public and private speech, and the fact that most federal agencies — including the Department of Justice — have never adopted a comparable rule.
The commission also said it will not enforce existing no-deny provisions in settlements that have already been entered. The SEC said that if a defendant who previously agreed to a no-deny provision breaches that provision, the agency “will take no action to ask a district court to vacate the settlement, or to reopen an adjudicatory proceeding.”
That commitment extends the practical effect of the rescission backward across more than 50 years of SEC settlements, potentially affecting registered investment advisers, broker-dealers, fund sponsors, executives, and other regulated parties who resolved enforcement matters on a no-admit basis and remain bound by gag provisions in their consent agreements.
The rescission does not affect the SEC’s discretion to negotiate for admissions of fact or liability as part of a settlement. The commission also said it may continue to address admissions and denials in cases involving parallel criminal proceedings, where a defendant has pleaded or is expected to plead guilty, to maintain consistency between the SEC settlement and the criminal resolution.
The action arrives with a constitutional challenge to the rule pending at the U.S. Supreme Court. Petitioners in Powell et al. v. SEC, represented by the New Civil Liberties Alliance, filed a petition for a writ of certiorari after the U.S. Court of Appeals for the Ninth Circuit upheld the policy. The NCLA has fought the rule for eight years.
For the alternatives industry, the change permits future defendants who settle SEC enforcement matters to speak publicly about the agency’s allegations without risking the settlement, and removes the lingering speech restrictions on parties who settled in prior years.
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