Since 1972, the U.S. Securities and Exchange Commission (SEC) has enforced an informal yet impactful provision, Rule 202.5(e) (17 § C.F.R. 202.5(e)), commonly referred to as the “No Admit No Deny” or just “No Deny” policy or, by its critics, as the “Gag Rule.” This rule prohibits settling defendants from publicly sharing, in any form, their version of events once they have agreed to settle with SEC Division of Enforcement staff — indefinitely.
Debates over the constitutionality of Rule 202.5(e) have drawn significant attention over the years. In 2018, the New Civil Liberties Alliance (NCLA) filed a petition to amend the rule. The SEC did not formally respond until this year when it denied the NCLA’s renewed motion. In March 2024, the NCLA escalated the issue to federal court, where the case is currently in the briefing stages.
In 2021, the Second Circuit Court of Appeals weighed in on the rule, rejecting arguments it violated the First Amendment and due process. The court held that “parties can waive their First Amendment rights in consent decrees and other settlements of judicial proceedings.” SEC v. Romeril, 15 F.4th 166, 173 (2d Cir. 2021), cert. denied sub nom. Romeril v. SEC (2022). However, the Romeril decision was not without its critics.
A concurring opinion in SEC v. Novinger, 40 F. 4th 297, 308 (5th Cir. 2022) (Jones, J., concurring), decried:
I write to note that nothing in the opinion (or in the district court opinion, for that matter) approves of or acquiesces in the SEC’s longstanding policy that conditions settlement of any enforcement action on parties’ giving up First Amendment rights. 17 C.F.R. § 202.5(e). If you want to settle, SEC’s policy says, ‘Hold your tongue, and don’t say anything truthful–ever’—or get bankrupted by having to continue litigating with the SEC. A more effective prior restraint is hard to imagine.
In SEC v. Moraes, Judge Ronnie Abrams of the U.S. District Court of the Southern District of New York wrote that “the non-negotiable inclusion” or the “do admit no deny” language in SEC settlements “by an arm of the federal government is as rare as it is severe.” No. 22-CV-8343, 2022 WL 15774011, at *1 (S.D.N.Y. Oct. 28, 2022). He continued:
…the SEC stands nearly alone in its requirement, as a matter of agency policy, that defendants agree to the Provision in order for an enforcement action to be dismissed. And because nearly every one of the hundreds of cases brought by the SEC each year is settled, the Commission relies on the [rule] with alarming frequency.
Despite courts upholding the Romeril decision, many scholars believe that recent criticisms of Rule 202.5(e), combined with the NCLA’s court petition in response to the SEC’s denial of its effort to amend the rule, could pave the way for the Supreme Court to address the rule’s validity. Or the incoming Administration—and its majority of Republican or conservative-minded Commissioners of the SEC—may choose one of its own to scrub or revise the rule.
As we approach what could be a transformative federal administration, the attorneys of Mincey Bell Milnor, an affiliate of Cranfill Sumner LLP, are eager to discuss what these developments might mean for individuals bound by this nonnegotiable and often personally damaging provision.
