The Securities and Exchange Commission has announced a policy change that will allow the commission to settle enforcement actions – including those involving municipal securities – without requiring that the targets of such actions agree not to deny the SEC's allegations publicly.
Since 1972, the SEC had maintained a
"The SEC's reversal of the 'gag rule' is a very significant change in Enforcement Division policy," said Paul Kisslinger, a partner and co-chair of the financial and regulatory litigation group at Barnes & Thornburg, a law firm that earlier this year
While they previously had to remain mum on the merits of the SEC's charges against them, settling defendants "are now free to settle early, even before the staff issues a Wells notice, to save the time and expense of litigating a drawn out federal court action—while publicly proclaiming that the SEC's case was trumped up and that they only settled for economic reasons," Kisslinger said.
"Whether such public statements will effectively rescue a defendant's reputation is uncertain, particularly given the almost guaranteed ubiquitous public denials that will now accompany every defendant's settlement," he said.
Kisslinger, whose experience with SEC enforcement actions includes having represented officers of a charter school in a muni enforcement matter, added that it's possible that the policy reversal could also spur something else.
"From the SEC's perspective, whether the elimination of 'neither admit nor deny' settlements will drive the division to be more reluctant to settle, or to raise the stakes of its settlement demands, is an unknown but possible backlash to this policy reversal," the attorney said.
Rescinding Rule 202.5 (e) aligns the SEC "with the overwhelming majority of federal agencies that do not have a similar rule" and gives the agency more flexibility when it comes to settling enforcement actions, "which conserves resources, provides certainty, and potentially expedites the return of money to injured investors," the SEC said in a May 18 press release.
The recission recognizes that the impact on the public interest from such denials may be minimal and that the policy itself may have incorrectly created the impression that the SEC is endeavoring to shield itself from criticism, the SEC's release said.
"Speech critical of the government is an important part of the American tradition," SEC Chairman Paul Atkins said in the release. "This recission ends the policy prohibiting such criticism by settling defendants."
There is no known instance of the SEC seeking to reopen an administrative or civil proceeding as a result of a respondent or defendant violating a no-deny provision to which they've agreed, the SEC's release said. Given that Rule 202.5(e) has been rescinded, the commission won't enforce existing no-deny provisions that have been entered already, the release said.
The SEC generally doesn't require settling defendants to admit to allegations, the release said, adding that Monday's recission "does not affect the commission's practice related to admissions in settlements and does not affect the commission's discretion to settle with defendants who decline to admit facts or liability or its discretion to negotiate for admissions as part of a settlement."
The American Securities Association in a statement issued Monday applauded the SEC's action.
"ASA applauds Chairman Atkins for rescinding the Gag Rule and recognizing that the government may enforce the law, but it cannot permanently extinguish the First Amendment rights of every individual that feels forced to settle rather than fight," ASA President and CEO Chris Iacovella said in the statement.
