Supreme Court Should End the SEC's "Gag Rule"

For over 50 years, the Securities and Exchange Commission’s Gag Rule has required defendants who settle enforcement actions to commit to a lifetime prohibition on denying or criticizing—or even permitting others to criticize—the agency’s allegations. In the SEC’s view, this prior restraint on speech is necessary to avoid the incorrect “impression” that “the conduct alleged did not, in fact, occur.” But in reality, the SEC’s Gag Rule systematically deprives individuals of the right to criticize their government.

A group of individuals and entities directly impacted by the Gag Rule urged the SEC to amend the rule to permit agency defendants to freely share their views. They noted that the Gag Rule muzzles those individuals who are best positioned to criticize the SEC’s enforcement practices. Over Commissioner Hester Peirce’s dissent, the agency denied the petition on the ground that the Gag Rule is necessary to preserve the public’s “confidence” in SEC enforcement actions. On review, the Ninth Circuit accepted the agency’s rationale and approved the rule. 

Now the rule’s challengers are asking the Supreme Court to take the case, and Cato has filed an amicus brief supporting their petition (with thanks to Aram Gavoor and the George Washington University Law School Administrative Law, Issues, and Appeals Clinic for drafting our brief).

In our brief, we explain why the Ninth Circuit was wrong to treat the Gag Rule as a “voluntary” waiver of First Amendment rights. The coercive nature of SEC enforcement proceedings makes the waiver far from voluntary. The Commission can open an investigation on a low threshold, compel sweeping document production and testimony, and keep the target under pressure for months or years. All this while legal fees mount, reputations deteriorate, management is diverted, and business opportunities disappear. By the time the SEC offers to settle, the target is choosing between continued attrition and an off-ramp. A waiver extracted through such leverage is not the kind of ordinary, voluntary bargain on which the surrender of constitutional rights ordinarily depends.

As our brief also notes, the burdens incurred by an entity are prolonged by the challenges of getting into court and the unavailability of meaningful remedies. Courts rarely hear pre-enforcement challenges before entities have exhausted review in administrative adjudications, effectively foreclosing targeted entities’ ability to vindicate their rights. Even if they are able to get into a federal district court, the targeted entities’ access to relief is hindered by legal uncertainty, immense deference to the agency, and the prerequisite that there be final agency enforcement action. Even if the targeted agency succeeds in bringing an action in court and proving its case, the court may still decide not to grant relief. That context explains why targeted entities are nearly always forced to settle, even when they did not break the law.

Finally, our brief urges the Supreme Court to intervene now, not later. In the speech context, the Supreme Court has long relaxed ordinary limits on the timing and the sweep of judicial relief. That is because when it comes to coercive systems like the SEC’s, the injury lies not only in punishment after the fact but also in the chilling of speech before it occurs. The SEC’s Gag Rule has silenced enforcement targets for decades, including the very speakers best positioned to expose agency error, overreach, and abuse. And this petition is likely the only realistic vehicle for review. As-applied challenges have proven unavailable, while delay only multiplies the number of speakers chilled into silence. 

Because the SEC’s enforcement machinery turns settlement into compulsion and compulsion into censorship, the Court should grant the petition and hold the Gag Rule to be unconstitutional.