SEC Commissioner Hester Peirce Challenges Gag Rule in Public Dissent

On January 30, 2024, Securities and Exchange Commission (SEC) Commissioner Hester Peirce voiced her disagreement with the SEC’s decision to deny a petition from the New Civil Liberties Alliance (NCLA) seeking to amend the 1972 gag rule. This rule forbids defendants from publicly denying or criticizing the SEC’s allegations following a settlement, a policy Peirce argues undermines regulatory integrity and raises First Amendment concerns.

The gag rule, formally known as Rule 202.5(e), has been a long-standing subject of contention. The NCLA’s petition, aiming to defend Americans’ rights to free speech, was initially ignored by the SEC for over five years, leading to a renewed push in December 2023. Peirce’s dissent highlights a fundamental disagreement within the SEC about the necessity and fairness of this rule.

The rule’s impact is far-reaching, affecting not only the defendants but also the perception of the SEC’s enforcement actions. Peirce noted that the SEC’s no-deny policy is a mandatory, non-negotiable term in its settlements, which are the most common resolution of SEC enforcement actions. This policy means the SEC effectively gets a benefit it could never obtain through litigation — the permanent silence of the defendant.

In her critique, Peirce emphasized the importance of allowing defendants the right to criticize a settlement after it is signed, arguing that such an ability is rooted in the fundamental principles of free speech. She pointed out that the SEC’s policy effectively shields the Commission’s allegations from criticism, a stance that is not aligned with the principles of a transparent and accountable regulatory body.

Furthermore, Peirce contrasted the SEC’s approach with that of other federal agencies, such as the Federal Trade Commission, which allow settling defendants to deny allegations of wrongdoing. She expressed concern over the ambiguity of the rule and its potential implications for defendants who might inadvertently breach it.

The SEC’s gag rule has faced criticism not only for its impact on individual freedom of speech but also for its effect on the broader discourse around SEC enforcement actions, particularly in the crypto sector. The Commission’s approach to crypto regulation and enforcement has been a topic of debate, with some high-profile cases against crypto companies drawing attention to the SEC’s strategies and policies.

Peirce’s dissent is a significant development in the ongoing discussion about the balance between regulatory enforcement and individual rights. It underscores the tension between the need for effective regulation and the protection of constitutional freedoms. The debate over the SEC’s gag rule is set to continue, with potential legal challenges and further scrutiny of the Commission’s enforcement practices.