- within Wealth Management topic(s)
The U.S. Securities and Exchange Commission (SEC) has submitted a final rule to the White House titled “Rescission of Policy Regarding Denials in Settlement of Enforcement Actions”—a proposal on which the SEC declined to proceed in early 2024 under the Chairmanship of Gary Gensler. If finalized, the rule would mark a significant change to longstanding SEC settlement practice with implications for investigations, resolutions and post-settlement communications.
The “Gag Rule” and Proposed Rescission
Under current SEC Rule 202.5(e), sometimes called the “gag rule,” the Commission does not permit a party to consent to a judgment or order imposing an SEC sanction while denying the SEC’s allegations. The rule provides that a refusal to admit the allegations is equivalent to a denial unless the settling party states explicitly that it neither admits nor denies the allegations. In practice, SEC settlements typically prohibit settling parties from making any statements denying SEC allegations either directly or indirectly or that otherwise create an impression that the SEC’s case is without a factual basis. If the SEC concludes that a settling party has violated these terms, it can seek to withdraw the settlement and reopen the investigation.
Since Rule 202.5(e) took effect in 1972, the overwhelming majority of SEC enforcement actions have been settled on a “no-admit, no-deny” basis. While the text of the proposed Rescission of Policy Regarding Denials in Settlement of Enforcement Actions does not appear to be publicly available, it is clear from the title—and the SEC’s public statements—that it would effect a rescission of Rule 202.5(e).
Present Practice Under Rule 202.5(e)
Although the SEC does not regularly seek to reopen investigations based on post-settlement communications, the risks imposed by Rule 202.5(e) have significant, practical consequences that can be difficult to navigate. Most settling parties have legitimate and compelling needs to communicate about an SEC resolution, including in SEC filings and often with clients, investors, auditors, business partners, insurance carriers and regulators other than the SEC. Without clarification or explanation, settled orders can be difficult for non-experts to parse and create incorrect or incomplete impressions about a case or conduct. At the same time, SEC staff may interpret even truthful explanatory statements as implicit or partial denials, thus placing at risk a party’s bargained-for right to move forward without the overhang of an investigation and regulatory exposure.
Potential Impacts of Rescission
It remains to be seen how rescission would play out in future settlements, post-settlement communications and pre-settlement investigations, all of which may depend meaningfully on the constitution of Commission leadership. Eliminating the rule should provide more flexibility for settled resolutions, although rescission alone would not preclude the SEC from pursuing no-admit, no-deny settlements or seeking to reopen investigations based on perceived violations of settlement terms. Some parties under investigation may be more willing to settle to terms that provide greater control—and less risk—when dealing with post-settlement communications and collateral consequences, particularly when retaining the right to publicly defend their reputations. To the extent an acceptable settlement is available earlier in an investigation, parties may benefit from reduced defense costs as well.
On the other hand, settlement negotiations may become more difficult, or more protracted, without the limitations imposed by longstanding practice under Rule 202.5(e), and the SEC may demand more onerous terms in its resolutions, such as higher penalties or stronger undertakings, to compensate for relinquishing oversight over post-settlement communications.
Stay the Course
The proposed rule change comes against a backdrop of recent litigation challenging the SEC’s ability to restrict post-settlement communications. Last year, for example, in Powell v. SEC, the Ninth Circuit upheld Rule 202.5(e) against a facial challenge while recognizing the potential for significant First Amendment concerns in particular applications. A petition in that matter is pending before the U.S. Supreme Court.
What happens next will depend on the timing of the rulemaking process, any final action by the Commission and any intervening judicial decisions. In the meantime, settling parties should continue to treat no-deny provisions as operative and evaluate carefully any statements to the investing public or other constituencies concerning an SEC investigation, order or settlement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
[View Source]
