Group Co.
The SEC’s Unconstitutional Condition
Traders Magazine Online News, January 28, 2019
As a condition of settling civil charges, the Securities and Exchange Commission (“SEC”) normally permits those it sues to say in a consent order that they neither admit nor deny the SEC’s allegations. But that’s not as big a break for some litigants as it seems, because the SEC also has a rule that bars those litigants from making any public statement, even an indirect one, which takes issue with the validity of the SEC’s charges.1
In other words, the SEC does not require you to admit wrongdoing, but you can’t deny it either. You can’t be blamed if you find this confusing, and perhaps unsatisfying. Maybe you want to know what the SEC is up to.
The regulation arose out of the SEC’s willingness in its consent orders to permit defendants to neither admit nor deny the allegations. This was desirable for defendants, who would otherwise be put at a disadvantage in a later civil action as a result of their admission of wrongdoing, and made it easier for the SEC to settle cases and ensure a steady stream of income from the settlements.
The problem, at least from the SEC’s perspective, was that by 1972, as soon as courts had signed off on the settlements, the defendants would commence public campaigns denying the SEC’s allegations and claiming that they settled simply to avoid protracted litigation with the government. The SEC’s answer was the rule barring public comment on the SEC’s allegations.2
One past target of the SEC, who has so far remained anonymous because of the regulation, wrote a book to tell his (or her) side of the story. The catch is that the author can’t publish the book for the same reason he (or she) remains anonymous -- the SEC’s rule.
The Cato Institute, a libertarian think tank, contracted with that author to publish the book, but claimed it could not do so because of what Cato called the “Gag Regulation” and what it described as a “perpetual gag order” in the author’s settlement with the SEC. That may be overstating it a bit. Nothing bars Cato from publishing the book. It is the author who is at risk.
In any event, Cato has filed suit on its own behalf asking the Court to rule that the SEC regulation is unconstitutional under the First Amendment because it restricts speech the amendment protects.3
Apart from the unusual circumstances of the case, what the SEC has asked this author to do is not unusual. According to the Cato Institute’s complaint, the SEC settles approximately 98% of the cases it institutes.4 Under those settlements, the SEC routinely prohibits litigants who enter into consent orders from claiming that the SEC’s allegations aren’t true, since all of those settlements are subject to existing SEC policy.
For more information on related topics, visit the following channels:
Comments (0)