Earlier this week, the Securities and Exchange Commission quietly repealed a self-servingly speech-suppressing policy it had maintained for more than 50 years: the so-called “no-deny” rule, which required settling defendants in civil enforcement actions to promise—as a non-negotiable condition of settlement—that they would never publicly dispute any of the SEC’s sometimes spurious allegations against them. And while the repeal of this policy is welcome, the timing suggests that it had far more to do with avoiding a smackdown from SCOTUS than any genuine solicitude for the First Amendment.
The gag rule was promulgated in 1972 and was purportedly intended to prevent the public from getting the “incorrect impression” that a sanction had been imposed for misconduct that didn’t actually occur—in other words, to protect the agency’s reputation. But its practical effect was far more corrosive: the gag order systematically silenced precisely those people with the most credible stories to tell about the SEC’s abuse of its enforcement power.
To appreciate why that matters, you have to understand what SEC enforcement looks like from the inside. The agency settles roughly 97 percent of the cases it brings, often after exhausting defendants financially through years of investigation, document demands, and administrative proceedings. A defendant who chooses to fight faces the prospect of crippling legal fees, asset freezes, and reputational damage that can last years before any adjudication—all of which frequently makes settlement, even on terms the defendant considers deeply unjust, the only rational option. Once they settle, defendants enter a legal twilight zone in which they neither admit nor deny the SEC’s allegations—but are permanently forbidden from saying publicly that those allegations were baseless, overblown, or pursued in bad faith.
The result was a highly effective system for suppressing valuable information. The SEC got to make its accusations in official legal documents and splashy press releases. The defendant, having settled, could not push back—even if the allegations were false, even if the charges were inflated to coerce settlement, even if the tactics used were abusive. The agency’s self-serving narrative became the permanent public record, insulated from contradiction by the very people best positioned to challenge it.
I became aware of this policy in 2018, when a conservative law professor introduced me to a former businessman who had been through an extraordinary ordeal—first with the SEC in a baseless civil case, and then with the Department of Justice in an even more horrific criminal prosecution. He had written a compelling memoir describing how the SEC and DOJ had fundamentally misconstrued his business model, pursued a Ponzi-scheme theory that collapsed under scrutiny, and ultimately coerced him into settling a meritless civil case and falsely pleading guilty to criminal fraud charges in order to avoid the risk of a ruinous civil judgment and the imposition of a savage, multi-decade trial penalty. I read the manuscript, found it well written, riveting, and important, and believed Cato should publish it as a book.
There was just one problem. His settlement with the SEC contained the standard no-deny provision that prohibited our would-be author from “mak[ing] or caus[ing] to be made any public statement denying, directly or indirectly, any allegation in the complaint or creating the impression that the complaint is without factual basis.” Allowing Cato to publish his memoir would breach that agreement. Thus, Cato had a publishing contract it couldn’t fulfill, an author who couldn’t speak, and a compelling story of exploitation and abuse that the public deserved to hear but that the government had effectively censored.
So we went to court. In January 2019, represented by the Institute for Justice, we filed a First Amendment challenge to the SEC’s gag-order policy in the US District Court for the District of Columbia. The complaint argued that the policy constituted a content-based restriction on speech—the most constitutionally suspect category—imposed through the government’s leverage in civil litigation in violation of the unconstitutional conditions doctrine. A strong case, we believed, and one that the SEC would do everything in its power to derail in order to avoid a ruling on the merits.
What followed was a master class in procedural gamesmanship, bad-faith litigation tactics, and sharp practice. The district court dismissed our case on standing, holding that because Cato was not itself a party to the gag order, it was not technically injured by that policy because it could simply publish the memoir—albeit in direct violation of its contract with the author and with full knowledge that he himself would thereby be in breach of the settlement agreement and therefore subject to the full retributive wrath of the SEC, which could immediately reinstate its claims against him as a result.
We appealed, and the DC Circuit affirmed in a breezy, unanimous per curiam opinion—but on a different, and, as we pointed out repeatedly, factually erroneous premise. The court ruled that even if we won on the merits, our injury wouldn’t be redressed, because the no-deny provisions were (supposedly) contained in consent decrees issued by various district courts around the country. Those decrees, the panel reasoned, could be enforced by courts sua sponte through contempt proceedings, even if the SEC itself were enjoined from seeking enforcement. Therefore, the court concluded, we lacked standing because our injury wasn’t redressable.
But as we had already made clear both in our lower-court and appellate briefing, and as we explained yet again in our petition for rehearing, there was a glaring problem with this reasoning: our complaint (which the district court and the D.C. Circuit were both obliged to read in the light most favorable to Cato) never alleged that all of the gag orders at issue had been incorporated into consent decrees. To the contrary, we specifically noted that while it was the official policy of the SEC to incorporate its settlement agreements into enforceable consent decrees, it sometimes failed to do so, including—wait for it—in the case of our would-be author. The DC Circuit panel nevertheless embraced this false factual premise (cynically supplied to them by the SEC’s lawyers), attributed it to a complaint that demonstrably said nothing of the kind, and used that fiction to dismiss the case. Our petition for rehearing called this out directly: the court had “read allegations into the Amended Complaint that are not there, that no party has ever contended were there, and that are false to boot.” The petition was denied without comment.
With the DC Circuit having disposed of our case on procedurally convenient but factually unsupported grounds, and having declined to correct the error, we had no viable path to further review. Fortunately, Cato wasn’t the only organization challenging the gag rule. In a separate proceeding, the New Civil Liberties Alliance mounted a direct regulatory challenge, petitioning the SEC to amend the rule and, when the agency refused, litigating the First Amendment question in the Ninth Circuit. The petitioners in that case—Powell v. SEC—included individuals who had settled enforcement actions and who, like the author of the memoir we had hoped to publish, wanted to speak publicly about their experiences but were legally forbidden from doing so.
The Ninth Circuit upheld the gag rule, blessing the SEC’s justification that the policy was necessary to preserve public “confidence” in its enforcement actions—a rationale so circular it practically illustrated the constitutional problem.
NCLA filed a cert petition in the Supreme Court in March of this year, and Cato filed an amicus brief in support, arguing that the gag rule should be recognized for what it was: a lifetime censorship condition imposed at the end of an enforcement process deliberately designed to make resistance economically irrational.
The Supreme Court’s docket reflected significant interest in the case. A notable sixteen amicus briefs were filed in support of the cert petition, including by the influential U.S. Chamber of Commerce—an unmistakable signal that the case was very much on the radar screens of important figures in the legal and business communities.
Which brings us back to the SEC’s suspiciously serendipitous timing in announcing that it was rescinding the “no-deny” policy. The agency’s press release noted that the change “aligns the Commission with the overwhelming majority of federal agencies” that lack similar rules, and rather disingenuously averred that “the policy itself may have created an incorrect impression that the Commission is trying to shield itself from criticism.” “Incorrect impression”? Spare me.
That’s a genuinely good outcome. The rule is gone and will no longer be enforced, even retroactively. But that must be cold comfort to countless innocent defendants who remained silent for years while the SEC slandered their reputations, safe in the knowledge that they could do nothing to set the record straight.
The SEC fought tooth-and-nail to defend this blatantly unconstitutional policy in court for nearly ten years against multiple lawsuits. So if you think the timing of the rescission, coming just two months after the filing of a cert petition supported by an array of powerful amicus briefs, was coincidental, I have a bridge—or heck, maybe some penny stocks—to sell you.
