SEC “Gag Rule” Violates the First Amendment: The Liberty Justice Center Files Amicus Brief in Powell v. U.S. Securities and Exchange Commission

June 26, 2024

The Liberty Justice Center has filed an amicus brief in the U.S. Court of Appeals for the Ninth Circuit arguing that the Securities and Exchange Commission’s “gag rule”—which forces people to agree not to criticize the SEC to avoid being investigated—violates the First Amendment and should be struck down.

In 1972, the United States Securities and Exchange Commission (SEC) passed a rule that requires every American who settles a regulatory enforcement case with the SEC to thereafter remain silent about the case in public—preventing the targeted person from exercising their right to free speech.

The gag rule mandates that anyone who settles a case with the SEC can never “make or permit to be made any public statement denying, directly or indirectly, any allegation in the [SEC] complaint or creating the impression that the [SEC] complaint is without factual basis.” If the target of an investigation enters an agreement and the SEC ever decides that the person has given the impression that the case might not have been entirely well-founded, the agency will reopen the closed case.

The SEC quietly passed the gag rule in 1972 without public notice or the opportunity for external comments—in violation of the Administrative Procedure Act—by styling the rule as an internal housekeeping measure that would not affect third parties.

In October 2018, the New Civil Liberties Alliance (NCLA) petitioned the SEC to review and amend its rule, arguing that the speech ban violates the First Amendment, exceeds the SEC’s limited statutory authority, and harms the nation’s democratic processes. The SEC ignored the petition until it was renewed in December 2023, then issued a denial. One commissioner of the SEC issued a strongly worded dissent from the denial, stating that the SEC should either revise the gag rule or “drop [it] in the same unceremonious way we adopted it.”

In March 2024, the NCLA petitioned the U.S. Court of Appeals for the Ninth Circuit to review the matter and strike down the gag rule.

The Liberty Justice Center filed an amicus brief supporting the NCLA’s petition in the Court of Appeals on June 24. The brief argues that, through this gag rule, the SEC has spent decades violating the First Amendment rights of people whom the agency targets, whether rightly or wrongly—for no reason but to prevent the public from getting the impression that the SEC could abuse its power and discretion.

“The SEC demands that anyone who doesn’t want to spend years of their life and millions of dollars disputing accusations must agree to hand over their constitutional rights and censor themselves. That is a basic violation of the First Amendment,” said Reilly Stephens, Counsel at the Liberty Justice Center. “In a free society, the state must always be subject to potential criticism. The Court should apply that principle to find that the SEC’s attempt to insulate itself from criticism cannot survive First Amendment scrutiny.”

The Liberty Justice Center’s amicus brief in Powell v. U.S. Securities and Exchange Commission is available here.


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