The US Court of Appeals for the Ninth Circuit on Wednesday upheld a Securities and Exchange Commission (SEC) policy prohibiting settlement defendants from publicly denying enforcement allegations.

The court found that the SEC rule is constitutionally permissible despite free speech concerns. The court applied the "voluntary waiver" framework established in the 1987 Supreme Court ruling, Town of Newton v. Rumery. Judges held that the defendants had voluntarily agreed to limited speech restrictions in exchange for settlement benefits, with violations only allowing the SEC to seek court-approved reopening of proceedings, rather than automatic penalties.

The court determined that there was a "sufficient nexus" between the government's interest in proving allegations and defendants waiving their right to deny those same allegations, while emphasizing that the rule doesn't prevent broader criticism of the SEC or its enforcement practices.

The court also rejected the APA challenge, finding that the SEC possessed adequate statutory authority under its enforcement powers in 15 U.S.C. § 78u(d)(1). Judges determined that the SEC rule qualified as a policy or procedural statement exempt from "notice-and-comment" requirements under 5 U.S.C. § 553(b)(A), ultimately holding that the SEC had complied with all applicable administrative law requirements.

The longtime SEC policy often referred to as the "gag rule" dates back to 1972. Under 17 C.F.R. § 202.5(e), the SEC states:

The Commission... announces its policy not to permit a defendant or respondent to consent to a judgment or order that imposes a sanction while denying the allegations in the complaint or order for proceedings. In this regard, the Commission believes that a refusal to admit the allegations is equivalent to a denial, unless the defendant or respondent states that he neither admits nor denies the allegations.

This means that defendants who settle with the SEC cannot publicly deny the allegations levied against them. Defendants can say they "neither admit nor deny" the allegations, but cannot outright deny them. If defendants later violate this provision, the SEC can ask courts to reopen the enforcement case.

The rule was initially challenged in 2018 through a lawsuit led by the New Civil Liberties Alliance (NCLA), a legal advocacy group that challenges government overreach. The NCLA has argued that the SEC rule violates the First Amendment as it unjustly restricts speech. Further, it has argued that the SEC lacked proper authority to institute this policy and failed to follow proper rule making procedures under the Administrative Procedure Act (APA).