Key Takeaways
- • The SEC has submitted a final rule to the White House to rescind Rule 202.5(e), known as the "gag rule," which has prohibited settling parties from denying SEC allegations since 1972 and governed the overwhelming majority of SEC enforcement settlements on a "no-admit, no-deny" basis.
- • Rescission would grant companies and individuals under SEC investigation greater flexibility to communicate publicly about settlements, including in SEC filings and with investors, auditors, clients, and business partners—eliminating current restrictions on post-settlement statements that could implicitly deny allegations.
- • The SEC previously declined to pursue this rescission in early 2024 under Gary Gensler's leadership, signaling a shift in regulatory posture under current Commission leadership regarding settlement transparency and defendants' First Amendment rights.
- • Rescission carries competing implications: settling parties may achieve faster resolutions with reduced legal defense costs and greater reputational control, but the SEC may demand higher penalties or stricter undertakings to offset loss of post-settlement communication oversight.
- • A pending Supreme Court petition in Powell v. SEC—which challenged Rule 202.5(e) on First Amendment grounds and was upheld by the Ninth Circuit—may influence final rulemaking outcomes and timeline.
Summary
The SEC has submitted a final rule proposal to the White House that would rescind Rule 202.5(e), the agency's 54-year-old "gag rule" governing post-settlement communications in enforcement actions. If adopted, the rescission would represent a fundamental shift in how the SEC resolves investigations and what rights settling parties retain to publicly discuss or defend their positions following settlement. The rule, in effect since 1972, has been the backbone of SEC settlement practice, with the overwhelming majority of enforcement actions resolved on a "no-admit, no-deny" basis.
Under the current rule, settling parties cannot consent to an SEC judgment while denying allegations, and they are prohibited from making any statements—direct or indirect—that create an impression the SEC's case lacks factual foundation. Any perceived violation of these post-settlement communication restrictions exposes defendants to SEC attempts to withdraw settlements and reopen investigations. While such enforcement actions have been rare, the compliance burden and reputational constraints have imposed significant practical consequences. Companies must carefully navigate communications with investors, auditors, clients, business partners, and other regulators, knowing that clarifying or explaining settlement terms risks SEC interpretation of legitimate statements as implicit denials.
The SEC's submission represents a policy reversal; the agency declined to pursue rescission in early 2024 under then-Chair Gary Gensler, suggesting current Commission leadership holds a different view on settlement transparency and defendants' expressive rights. A Ninth Circuit decision in Powell v. SEC upheld Rule 202.5(e) against a facial First Amendment challenge while acknowledging potential concerns in specific applications—a matter now pending before the U.S. Supreme Court, which could influence the rulemaking outcome.
If rescission is finalized, settling parties would gain flexibility to control post-settlement narratives, potentially accelerating settlement timelines and reducing defense costs when earlier resolution becomes acceptable. However, the SEC is likely to demand compensatory concessions—higher monetary penalties or more stringent undertakings—to retain regulatory oversight despite losing formal authority over public communications. Settlement negotiations may also become more protracted absent the current rule's structural constraints. All developments hinge on rulemaking timing, Commission action, and any intervening judicial rulings.
Under the current rule, settling parties cannot consent to an SEC judgment while denying allegations, and they are prohibited from making any statements—direct or indirect—that create an impression the SEC's case lacks factual foundation. Any perceived violation of these post-settlement communication restrictions exposes defendants to SEC attempts to withdraw settlements and reopen investigations. While such enforcement actions have been rare, the compliance burden and reputational constraints have imposed significant practical consequences. Companies must carefully navigate communications with investors, auditors, clients, business partners, and other regulators, knowing that clarifying or explaining settlement terms risks SEC interpretation of legitimate statements as implicit denials.
The SEC's submission represents a policy reversal; the agency declined to pursue rescission in early 2024 under then-Chair Gary Gensler, suggesting current Commission leadership holds a different view on settlement transparency and defendants' expressive rights. A Ninth Circuit decision in Powell v. SEC upheld Rule 202.5(e) against a facial First Amendment challenge while acknowledging potential concerns in specific applications—a matter now pending before the U.S. Supreme Court, which could influence the rulemaking outcome.
If rescission is finalized, settling parties would gain flexibility to control post-settlement narratives, potentially accelerating settlement timelines and reducing defense costs when earlier resolution becomes acceptable. However, the SEC is likely to demand compensatory concessions—higher monetary penalties or more stringent undertakings—to retain regulatory oversight despite losing formal authority over public communications. Settlement negotiations may also become more protracted absent the current rule's structural constraints. All developments hinge on rulemaking timing, Commission action, and any intervening judicial rulings.
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