SEC Ends the "No-Deny" Requirement for Enforcement Settlements
Commentary by Kevin Harnisch
The SEC rescinded informal procedures that barred the agency from settling enforcement actions where the defendant or respondent publicly denied the allegations.
In its final rule, the SEC explained that Rule 202.5(e) ("Enforcement Procedures,") - in place since 1972 - implemented an informal "no-deny" policy under which the SEC would not accept a settlement on a "neither admit nor deny" basis unless the defendant also agreed not to publicly deny the allegations in the complaint or administrative order. The standard no-deny language barred public statements denying allegations or creating an impression that the complaint was without factual basis, but did not affect testimonial obligations or positions taken in litigation to which the SEC was not a party.
The SEC said the policy's benefits of the rule had proven limited. The only remedy for a breach was to ask a court to vacate the settlement or to reopen the administrative proceeding, a remedy the agency had never invoked. The release said technological changes - particularly the rise of social media, where the line between public and private statements is not always clear - had also made the policy harder to administer. The rescission of the rule aligns the SEC with most federal agencies, including the Department of Justice, which do not have a similar no-deny policy, and the SEC said it allows more flexibility in negotiating settlements that may speed recovery for injured investors.
The SEC noted that the rescission does not affect the agency's discretion to seek admissions in settlements, or the practice of addressing admissions and denials in settlement agreements that run parallel to criminal proceedings where the defendant has pleaded guilty or been convicted. The SEC said it will not enforce "no-deny" provisions in settlements already entered.
Commissioner Hester M. Peirce stated the policy had required settling defendants to curtail their right to speak and that forced silence by the non-governmental party did not serve the Commission's investor-protection mission. She argued that allowing both parties in an enforcement action to speak freely contributes to transparency. She also stated that staff's investigative work stands on its own ground regardless of any defendant's protestations of innocence.
Commentary
Rescinding the gag rule eliminates an inherently unfair treatment of what the SEC and settling defendants could say about the SEC’s allegations, which are often missing important context. The SEC would routinely tout its allegations as if they were beyond doubt, while defendants would have to remain silent in the face of pointed questions, including from investors, the press, and business partners. Shackling defendants’ ability to say anything suggesting there was another side to the story was dubious policy decision. If the SEC does not distort the facts surrounding its allegations, and its officials are measured in how they describe the matters, there should not be any concerns about what defendants say regarding the settlement.