SEC’s Gag Rule Faces Criticism: Commissioner Hester Peirce Calls for Reform

SEC Commissioner Hester Peirce publicly disagreed with the agency’s refusal to change the 1972 remarks rule, which raised concerns about its impact on free speech and regulatory integrity. The rule barring defendants from criticizing the SEC’s post-settlement claims has been challenged for its constitutional implications.

On January 30, 2024, Securities and Exchange Commission (SEC) Commissioner Hester Peirce expressed her disagreement with the SEC’s decision to reject a petition by the New Civil Liberties Alliance (NCLA) seeking to change the gag rule of 1972. That rule prohibits defendants from publicly denying or criticizing the SEC’s claims after a settlement, a policy that Perce argues that it undermines regulatory integrity and raises First Amendment concerns.

The gag rule, officially known as Rule 202.5(e), has long been the subject of controversy. NCLA’s petition, intended to protect Americans’ free speech rights, was initially ignored by the SEC for more than five years, leading to renewed pressure in December 2023. Pierce’s dissent underscores a fundamental disagreement within the SEC about the need and the fairness of that rule.

The rule’s impact is far-reaching, affecting not only defendants but also the perception of SEC enforcement actions. Peirce noted that the SEC’s non-repudiation policy is a mandatory non-negotiable in its settlements, which are the SEC’s most common enforcement action settlement. This policy means that the SEC effectively receives a benefit that it could never obtain through litigation – the continued silence of the defendant.

In his critique, Peirce emphasized the importance of giving defendants the right to criticize an agreement after it is signed, arguing that this ability is rooted in fundamental principles of free speech. She pointed out that the SEC’s policy effectively shielded the Commission’s claims from criticism, a position inconsistent with the principles of a transparent and accountable regulatory body.

Pierce also contrasted the SEC’s approach with that of other federal agencies, such as the Federal Trade Commission, which allow defendants to dismiss allegations of wrongdoing. She expressed concern about the rule’s vagueness and its potential consequences for defendants who might unwittingly violate it.

The SEC gag rule has faced criticism not only for its impact on individual free speech, but also for its effect on the broader discourse surrounding 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 debate about the balance between regulatory enforcement and individual rights. It highlights the tension between the need for effective regulation and the protection of constitutional freedoms. The debate over the SEC’s gag rule will continue with potential legal challenges and further scrutiny of the Commission’s enforcement practices.

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