Hester Pierce Faults SEC’s Settlement Gag Rule for ‘Denting Regulatory Principles’

Hester Pierce notes that the SEC often uses settlements to resolve enforcement actions. However, this prevents defendants from expressing themselves.

According to a commissioner, a regulation by the U.S. Securities and Exchange Commission (SEC) barring defendants from slamming its claims when settling enforcement interventions ‘dents regulatory integrity.’

Gag Rule Conflicting with Regulatory Principles

Hester Peirce, an SEC commissioner, released a statement on January 30 arguing against the agency’s refusal of a petition to revise its 1972 ‘gag rule.’ This regulation bans defendants from denying or failing to acknowledge the regulator’s accusations after a settlement.

Pierce wrote that the rule to deny defendants the right to slam a settlement after its signing is needless evokes First Amendment worries, and challenges regulatory authority. According to the regulation, defendants should agree not to create or allow to be made public announcements denying accusations in the complaint. Additionally, they should develop the impression that the complaint lacks factual basis.’

Pierce said that defendants looking at this language will lack ideas concerning where it ends. Besides, it successfully safeguards the SEC’s accusations from reproach.

According to Pierce, the section indicating that defendants should not agree to ‘allow’ denials of the accusations is also challenging. In this case, the clause shows that other people should be prevented from revealing things that might dispute the Commission’s judgment.

No-Deny Rule Cautions Defendants Against Repeat Offense

Pierce said that the no-deny rule is a ‘compulsory and nonnegotiable term’ in its settlement, and these are the ‘most prevalent resolution of the regulator’s enforcement interventions.’ Additionally, the Commission can drag defendants back to court in case of violation.

The SEC’s crypto-linked implementation interventions attained a 10-year high last year. Forty-six actions against crypto companies, as well as penalties amounting to $281M, were accumulated from settlements.

When adopting the no-deny policy in November 1972, the Securities and Exchange Commission revealed it sought to desist from ‘developing a sense that a sanction is being forced or a declaration is being entered, when the supposed conduct did not happen.’

Pierce repulsed this assertion by writing that before this policy, the Securities and Exchange Commission had ‘several years of experience solving cases’ with settlements permitting offenders to deny offences. These kinds of denials do not appear to have weakened the enforcement program.

Pierce also said that other federal agencies, for instance, the Federal Trade Commission (FTC), ‘clearly permit resolving defendants to refute the wrongdoing accusations.’

Big Money to Combat SEC Charges

According to Pierce, setting a case is mostly the least expensive alternative to address the Securities and Exchange Commission enforcement interventions. This is because of the time, struggle, and legal costs linked to combating the regulator in court, which also affects the ‘significantly resourced corporate defendants.’

Pierce added that in the regulator’s investigations before discussing settlements, the attorneys are required to address requests, subpoenas, and other notices involving ‘a significant amount of finances.’ It is routine that almost all defendants in Commission actions settle.

Despite the SEC’s settlements, Pierce said the regulator can no longer demonstrate its claims in court. Besides, its policy shows it ‘acquires a benefit it could never acquire via litigation, the defendant’s lasting silence.’

Pierce wrote that in case the SEC is ‘assured in its fact-finding job’ and assessment, ‘compelling silence on the part of settling defendants’ is unwarranted.

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