Ninth Circuit Rejects Free Speech Challenge to SEC “No Admit, No Deny” Rule but Warns Against Unconstitutional Restraint of Speech

For more than five decades, the Securities and Exchange Commission’s (SEC) “no admit, no deny” (NAND) settlement policy has been a cornerstone of its enforcement program. Rule 202.5(e) of the SEC’s Rules of Practice permits defendants and respondents in federal court and administrative proceedings to consent to a judgment without admitting the allegations, provided they likewise do not deny those allegations. In a recent narrow decision in Powell v. SEC, the Ninth Circuit Court of Appeals rejected a challenge to the SEC’s denial of a petition to amend Rule 202.5(e), which sought to eliminate the rule’s “no deny” requirement.

The Challenge to Rule 202.5(e)

On October 30, 2018, petitioner New Civil Liberties Alliance (NCLA) filed with the SEC a rulemaking petition to amend Rule 202.5(e) because it, among other things, allegedly amounted to an unconstitutional prior restraint on free speech. The NCLA’s petition languished for more than five years without any action by the SEC. In the interim, the NCLA filed a renewed petition that asked the SEC to “repeal its unconstitutional Gag Rule once and for all.”

On January 30, 2024, the SEC denied the NCLA’s petition and Chairman Gary Gensler released a statement that said “amending this policy in the manner proposed by the Petitioner would alter the impact of enforcement settlements if defendants could deny any wrongdoing in the court of public opinion and dismiss sanctions as the cost of doing business.” (Commissioner Hester Peirce also issued a statement explaining the reasons she dissented from the SEC’s decision. She said, in part, “I agree with the petitioner that this issue warrants a spot on our rulemaking agenda.”) Following the SEC’s denial, the NCLA filed a petition for review along with 11 other petitioners (eight of whom were subject to the “Gag Rule”) in the Ninth Circuit.

The appeal broadly contended that Rule 202.5(e) was facially unconstitutional because it prohibits a defendant from publicly denying the allegations of an SEC settled complaint. The Ninth Circuit observed, however, that the SEC’s remedy in connection with a defendant’s breach of a NAND consent judgment did not include restraint on speech: “And, critically, the consequence for violating the Rule is not speech suppression or the automatic undoing of the settlement agreement, but only that the SEC may seek to reopen the civil enforcement proceedings.”

At the outset, the court noted that it was neither its “role to second-guess the SEC’s policy decisions or enforcement priorities” nor within its “authority to decide what rules would most promote public confidence in the SEC.” The court did state, however, that “[d]eciding whether an agency action violates the First Amendment is, of course, very much within our authority.” The court continued that the “petition does not seek relief as to any one civil enforcement defendant based on his or her facts and circumstances” but rather “maintains that Rule 202.5(e) is per se unconstitutional” and therefore the court concluded that the petition was “properly analyzed as a facial challenge.”

The court then set forth the analytical framework for “facial challenges in the First Amendment context” and explained that “we ask whether a substantial number of the Rule’s applications are unconstitutional, judged in relation to the Rule’s plainly legitimate sweep.” The court recognized that substantial First Amendment concerns would likely exist if the “SEC utilized Rule 202.5(e) to prevent criticism of the agency, its officers, or its enforcement programs” but nonetheless determined that was not the type of challenge before it. Specifically, the court found that the petitioners challenge was a “more discrete and stylized challenge, namely, that it assertedly violates the First Amendment for civil enforcement defendants to agree on a voluntary basis not to deny the allegations against them in return for the SEC agreeing to settle its securities law charges.” The court swiftly rejected this challenge, however, finding that the “law has long regarded voluntary relinquishment of constitutional rights as permissible” and concluded that Rule 202.5(e) is not facially invalid.

Implications of the Powell Decision

The Ninth Circuit’s upholding of the SEC’s long-standing settlement policy arguably has benefits that accrue to both the SEC and defendants facing enforcement actions. First, the SEC continues to have access to a tool that allows it to efficiently manage its docket and frees up scarce resources that otherwise might be consumed by protracted litigation. Without Rule 202.5(e), the SEC may well confront (in some cases) the difficult choice of either allowing a defendant to agree to a consent judgment or go to trial. For example, it is conceivable that the SEC may not want a notorious fraudster to settle a case and then publicly proclaim that the SEC’s allegations were meritless or fabricated. If the SEC were dissatisfied with the possibility of this outcome, then it would be forced to take more cases to trial and potentially diminish the depth and scope of its enforcement program. Second, this decision preserves an option for defendants to resolve enforcement actions without making admissions. Admissions by defendants in SEC enforcement cases are potentially problematic because of collateral consequences in related civil securities suits or parallel criminal actions. In addition, NAND settlements also provide defendants with a path to avoid costly and distracting litigation.

The court did “caution, however, that further restrictions on defendants’ speech would require a different analysis.” That said, no such particularized challenge was before the Ninth Circuit and the SEC represented in its brief that “‘[d]efendants who enter into settlements with the Commission remain free to speak about the Commission, enforcement actions, and a host of other topics so long as they do not publicly deny the Commission’s allegations.’”