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The SEC’s Unconstitutional Condition

Traders Magazine Online News, January 28, 2019

Crow and Cushing

As a condition of settling civil charges, the Securities and Exchange Commission (ďSECĒ) normally permits those it sues to say in a consent order that they neither admit nor deny the SECís allegations. But thatís not as big a break for some litigants as it seems, because the SEC also has a rule that bars those litigants from making any public statement, even an indirect one, which takes issue with the validity of the SECís charges.1

In other words, the SEC does not require you to admit wrongdoing, but you canít deny it either. You canít be blamed if you find this confusing, and perhaps unsatisfying. Maybe you want to know what the SEC is up to.

The regulation arose out of the SECís willingness in its consent orders to permit defendants to neither admit nor deny the allegations. This was desirable for defendants, who would otherwise be put at a disadvantage in a later civil action as a result of their admission of wrongdoing, and made it easier for the SEC to settle cases and ensure a steady stream of income from the settlements.

The problem, at least from the SECís perspective, was that by 1972, as soon as courts had signed off on the settlements, the defendants would commence public campaigns denying the SECís allegations and claiming that they settled simply to avoid protracted litigation with the government. The SECís answer was the rule barring public comment on the SECís allegations.2

One past target of the SEC, who has so far remained anonymous because of the regulation, wrote a book to tell his (or her) side of the story. The catch is that the author canít publish the book for the same reason he (or she) remains anonymous -- the SECís rule.

The Cato Institute, a libertarian think tank, contracted with that author to publish the book, but claimed it could not do so because of what Cato called the ďGag RegulationĒ and what it described as a ďperpetual gag orderĒ in the authorís settlement with the SEC. That may be overstating it a bit. Nothing bars Cato from publishing the book. It is the author who is at risk.

In any event, Cato has filed suit on its own behalf asking the Court to rule that the SEC regulation is unconstitutional under the First Amendment because it restricts speech the amendment protects.3

Apart from the unusual circumstances of the case, what the SEC has asked this author to do is not unusual. According to the Cato Instituteís complaint, the SEC settles approximately 98% of the cases it institutes.4 Under those settlements, the SEC routinely prohibits litigants who enter into consent orders from claiming that the SECís allegations arenít true, since all of those settlements are subject to existing SEC policy.

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