Last week, the SEC had this pop up on OIRA’s regulatory dashboard: “Rescission of Policy Regarding Denials in Settlements of Enforcement Actions.” It’s listed there as a “final rule” and not a “proposal” – so it looks like the SEC will be changing its “neither admit nor deny” settlement policy.
Here are four things to know:
- The “Gag Rule” Is Longstanding and Controversial – This 54-year old policy – it started in 1972! – permits parties to settle enforcement actions without admitting allegations, while simultaneously barring them from publicly denying those allegations. Settling parties can emphasize cooperation, remediation and closure – but they can’t directly challenge the SEC’s allegations without risking the settlement itself.
So the government’s side of the story essentially is the only side of the story that the public ever gets to hear. This policy has long been controversial – with some questioning its constitutional validity under the First Amendment and the “unconstitutional conditions doctrine” – and others doubt its value with a wide range of attacks, from the policy is too lenient to it’s difficult to know if the government’s allegations were true under the policy.
There is a long history of unsuccessful attempts to eliminate the policy as most other federal agencies don’t have this type of enforcement policy. - If the SEC’s Policy Changes, the Entire Settlement Communications Playbook Changes – This would be a huge change as companies may suddenly have the ability to argue publicly that the SEC’s version of events was incorrect, exaggerated, misleading or not fully complete.
Companies could potentially settle an SEC enforcement action while continuing to openly dispute the agency’s account of what occurred. That shift could dramatically affect communication strategies. - But Greater Freedom to Deny Also Creates Greater Risk — Being aggressive after a settlement could wind up in being a situation that’s volatile and difficult to control. Even if public denials are permissible, some might still demand answers: Why was money paid? What facts are accepted or disputed? What was fixed? And should the SEC’s findings still carry weight?
In other words, there could far more conflict in the public realm once settlements are announced under the new framework. An SEC order could be the beginning of a protracted battle that plays out in the media – rather than the final word it is today. - SEC Might Still Be Able to Negotiate for “Neither Admit Nor Deny” On Case-by-Case Basis — We don’t know yet what new policy the SEC plans on adopting – and it certainly is possible that the new framework still allows for Enforcement to negotiate a “neither admit nor deny” component for settlements on a case-by-case basis. So we might not be fully done with the gag rule….
Authored by
Broc Romanek