The Securities and Exchange Commission announced that it is rescinding a long-standing policy of prohibiting settling parties from publicly denying the SEC’s allegations.
The policy, codified in Rule 202.5(e) of the SEC’s informal rules of procedures, stated that when the commission chooses to settle an enforcement action in which a sanction is imposed, it will not settle unless the defendant or respondent also agrees not to publicly deny the allegations in the complaint or administrative order.
The rule, in place since 1972, was commonly known as the “no-deny” element of the SEC’s “no-admit, no-deny” settlement framework, and was known among critics as the “gag rule.”
The SEC stated that eliminating the rule would give it more flexibility in settling enforcement actions, which conserves resources, provides certainty, and potentially expedites the return of money to injured investors.
The commission said it recognizes that the effect on the public interest from the denials by defendants may be minimal and that the policy itself may have created an incorrect impression that the SEC is trying to shield itself from criticism.
“For more than 50 years, the Commission has conditioned settlement on a defendant’s promise not to publicly deny the Commission’s allegations. I am pleased that we are rescinding the no-deny policy today,” said SEC Chairman Paul S. Atkins. “Speech critical of the government is an important part of the American tradition. This rescission ends the policy prohibiting such criticism by settling defendants.”
The SEC said that rescinding Rule 202.5(e) aligns the commission with the overwhelming majority of federal agencies that do not have a similar rule. Critics have said that the rule silences defendants and is a restriction of their First Amendment rights.
In light of the rule being rescinded, the SEC said it will not enforce existing no-deny provisions that have already been entered. In the event of a breach of an existing no-deny provision, the commission will take no action to ask a district court to vacate a settlement (or to reopen an adjudicatory proceeding) in connection with the terms of the settlement agreement.
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