A US Securities and Exchange Commission (SEC) official is concerned about a rule that forbids defendants from criticizing the agency’s claims while enforcement cases are still pending. According to the official, the rule in question violates the right to free speech and raises concerns about the integrity of the regulatory system.
Peirce Disapproves Of SEC’s Action
The SEC Commissioner Hester Peirce expressed her disapproval of the agency’s rejection of a petition proposing an amendment to the 1978 “gag rule.” Per the regulation, defendants cannot publicly refute or deny the claims put forth by the SEC if a settlement is already in place.
In her statement, Commissioner Peirce argued that restricting defendants from publicly disparaging a settlement after its execution is unwarranted and detrimental to the integrity of the regulatory system. Peirce also argued that denying defendants the opportunity to express criticism undermines the integrity and responsibility that should define regulatory procedures.
What The Rule Entails
The proviso in the rule prohibits defendants from publicly disputing the SEC’s allegation. In addition, the rule bars defendants from “making any public statement that directly or indirectly denies any allegation in the complaint or creates the impression that the complaint lacks factual basis.”
However, commissioner Peirce argued that the ambiguity in the language of this provision creates a sense of uncertainty among defendants regarding the extent of its application. She added that the regulation fosters an atmosphere where defendants could feel repressed in voicing their viewpoints.
However, Peirce noted that the no-deny policy is an essential and non-negotiable condition in SEC settlements since it is the primary means of resolving enforcement proceedings. Should this policy be violated, the SEC retains the authority to remand defendants to court.
SEC’s Enforcement Actions
The securities watchdog had a busy period last year with a notable upsurge in enforcement activities targeting the crypto industry, the highest in a decade. The regulator initiated 46 actions against crypto firms and their subsidiaries throughout this period, ultimately leading to a total settlement of $281 million in financial penalties.
The no-deny policy, implemented by the SEC in November 1972, was intended to prevent the false impression that a sanction or decree had been imposed in cases where the alleged conduct had not occurred. However, Peirce challenged this justification, noting that the SEC had a lengthy history of settling cases with provisions permitting defendants to deny wrongdoing before implementing this policy.
Peirce argued that allowing litigants to issue denials had not hurt the regulatory environment. She cited the practices of other federal agencies, such as the Federal Trade Commission, which would enable defendants to enter into settlements to refute misconduct allegations.
Settling SEC-Related Cases
Financial settlements are often the most economically viable course of action to address legal disputes in the context of the SEC’s enforcement actions. Commissioner Peirce further said that most corporate defendants (regardless of their financial status) face several obstacles when attempting to litigate against the government agency.
Such obstacles include legal complexities (including a lengthy legal process) and exorbitant legal fees. These fees involve hiring legal representation to respond to requests, subpoenas, and other notices.
She added that it is not unexpected that settlements would be the final solution to most of the SEC’s enforcement actions, considering the substantial financial resources involved. Meanwhile, Peirce clarifies that in the event of a settlement, the SEC is not obligated to present evidence in court regarding its claims.
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