How the SEC Silences Criticism

One of the strongest rules in free-speech law is that the government may not engage in “prior restraint” of speech except in extreme circumstances. Yet the Securities and Exchange Commission does so routinely. Under a rule adopted in 1972, the SEC demands that parties entering into settlements with the commission be silenced about the prosecution forever. If they question the merits of the case against them, the SEC reserves the authority to reopen it.

“The result is a stew of confusion and hypocrisy,” Judge Jed Rakoff observed in a 2011 ruling. “The defendant is free to proclaim that he has never remotely admitted the terrible wrongs alleged by the S.E.C.; but, by gosh, he had better be careful not to deny them either. . . . An agency of the United States is saying, in effect, ‘Although we claim that these defendants have done terrible things, they refuse to admit it and we do not propose to prove it, but will simply resort to gagging their right to deny it.’ ”

After the 2008 economic crisis, the rule faced blistering criticism from judges and scholars, who noted that it violates the First Amendment and permits potentially collusive settlements that bilk shareholders and taxpayers and shields a powerful agency’s practices from public scrutiny.

The gag rule violates a hornbook’s worth of legal doctrine: It is a prior restraint and a content-based restriction on speech. It serves no compelling government interest while employing the most restrictive means to accomplish its ends. It prohibits truthful speech, compels government-scripted speech, violates due process, impairs the First Amendment rights to petition government, and infringes the right of the public to hear criticisms of the government.

It could not withstand the most cursory judicial scrutiny—and the SEC knows it. In fact, it has tucked away a caveat at the end of the rule that lifts the gag when a defendant testifies under oath, as long as the SEC is not a party. That suggests the SEC knows full well that its rule could silence truthful speech or even suborn perjury. What a clever device to avoid judicial scrutiny.

The SEC’s gag rule is a symptom of a broader problem: Administrative agency power tends to expand beyond its lawful scope. This is why the Founders were so obsessively concerned that the three branches of government operate publicly subject to carefully constructed checks and balances.

November 14, 2018

---

Originally Published in Wall Street Journal