Renewed Petition for Rulemaking to Amend SEC Rule Restricting Speech

Washington, DC (January 30, 2024) – Today, the Securities and Exchange Commission denied the New Civil Liberties Alliance’s long-standing petition to amend the agency’s “Gag Rule,” under which SEC forbids every American with whom it settles a regulatory enforcement case from even truthfully criticizing their cases in public. SEC had ignored the initial petition for more than five years, prompting NCLA to file a renewed petition against the Gag Rule in December 2023. NCLA will challenge SEC’s denial of the petition in court, defending Americans against the Gag Rule’s constitutional and statutory defects.

SEC’s denial letter is internally contradictory, asserting that its gag orders are negotiated terms of settlement between the parties. But the ruling itself later admits that the agency will not settle without a gag, which suggests its claim that defendants have negotiated these gags is wrong. SEC’s assertion that the agency does not try its cases through press releases is cruelly untrue. This scheme ensures that the Commission’s press releases are the final and only public word on every settled case, meaning that enforcement targets cannot defend themselves in the court of public opinion—in perpetuity. SEC well knows that such press releases are also occupational death sentences that often preclude future private employment, even outside the securities industry.

SEC’s letter implies that Congress delegated gag power to the agency. In reality, SEC enacted the 1972 Gag Rule without notice and comment after falsely framing it as an internal “housekeeping” measure that would not affect third parties. The agency never had statutory authority to implement the rule, and it bypassed Administrative Procedure Act requirements to provide notice and allow comment before promulgating a binding rule.

SEC apparently doesn’t like to be criticized. This is a wholly illegitimate interest, and a gag is the most restrictive, least tailored way to achieve it. The denial letter fails to address the problems with prior restraints—or the two federal court of appeals judges who have stated that it is “hard to imagine” a “more effective prior restraint” than “SEC’s longstanding policy that conditions settlement … on … giving up First Amendment rights.”

The Gag Rule is punishing current and former NCLA clients Christopher Novinger, Barry Romeril and Ray Lucia. NCLA represents Mr. Novinger in appealing the gag provisions in his SEC settlement before the Fifth Circuit U.S. Court of Appeals. SEC has silenced Mr. Romeril, who is over 80 years old, with a gag order for more than 20 years. Mr. Lucia settled his case in 2020 after a successful trip to the U.S. Supreme Court, yet two SEC Commissioners said the Commission had made up its rule “out of whole cloth” when targeting him.

SEC Commissioner Hester Peirce issued a stinging dissent from SEC’s decision today, powerfully arguing that “the American public, not government censors” must be the arbiters of the validity of speech. NCLA looks forward to arguing these points and vindicating our clients’ First Amendment rights before a neutral federal court.

NCLA released the following statements:

“SEC’s refusal to revisit the lifetime gag that it imposes as a non-negotiable condition of settlement demeans the agency and its professed commitment to transparency and disclosure in the financial markets. We have every confidence that a court will untie the gag for them and allow the American public, not SEC censors, to decide the validity of SEC’s suspect enforcement practices.”
— Peggy Little, Senior Litigation Counsel, NCLA

“SEC’s denial is unsurprising but still disappointing. As Commissioner Peirce’s dissent highlights, SEC’s unceremoniously adopted gag rule is ‘unnecessary,’ ‘imprudent,’ and ‘suboptimal.’ We look forward to challenging it in court.”
— Kara Rollins, Litigation Counsel, NCLA

“Today’s decision provides further evidence that SEC’s leadership is off the rails. This Nixon-era gag rule should never have been promulgated, and it needs to be relegated to the dustbin of history as soon as possible. Now that the agency has refused to back down on its own, a federal court will have to force it to do so.”
 — Mark Chenoweth, President and Chief Legal Officer, NCLA

For more information visit the petition page here.

ABOUT NCLA

NCLA is a nonpartisan, nonprofit civil rights group founded by prominent legal scholar Philip Hamburger to protect constitutional freedoms from violations by the Administrative State. NCLA’s public-interest litigation and other pro bono advocacy strive to tame the unlawful power of state and federal agencies and to foster a new civil liberties movement that will help restore Americans’ fundamental rights.

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Washington, DC (December 20, 2023) – For over five decades, the Securities and Exchange Commission has violated the First Amendment by gagging every American with whom it settles a regulatory enforcement case, forbidding them from uttering even truthful criticism of their cases in public. More than five years ago, the New Civil Liberties Alliance petitioned SEC to abolish or amend its “Gag Rule,” but the agency has ignored that petition and continued its unconstitutional practice. Today, NCLA, its client Christopher Novinger, and former clients Barry Romeril and Ray Lucia filed a renewed petition demanding an end to this lifetime gag rule and posing the same question U.S. District Judge Ronnie Abrams asked last year: “What is SEC so afraid of?”

SEC enacted the 1972 Gag Rule without notice and comment after falsely framing it as an internal “housekeeping” measure that would not affect third parties. The agency never had statutory authority to implement such a substantive rule, and it bypassed Administrative Procedure Act (APA) requirements to publish, provide notice and allow comment before promulgating a rule binding on third parties. Speech bans must be narrowly tailored, serve a compelling government interest, and adopt the least restrictive means to protect that interest. SEC has never provided a legitimate nor compelling reason for silencing for life all enforcement targets who wish to settle.

By refusing to consider NCLA’s petition for more than five years, SEC has prevented NCLA from challenging the Gag Rule in court, a right enshrined under the APA. The agency thus has effectively nullified the constitutional right to petition the government, which has no meaning if government can simply fail to respond to petitions. NCLA renews this petition so that SEC can no longer elude a Gag Rule challenge via inaction. The longer SEC ignores NCLA’s petition, the more it infringes on the rights of Americans bound by its gag orders, some of whom are currently in their 70s and 80s and hope to finally speak out about the enforcement proceedings they endured.

The Gag Rule is punishing current and former NCLA clients Christopher Novinger, Barry Romeril and Ray Lucia in perpetuity. NCLA represents Mr. Novinger in appealing the gag provisions in his SEC enforcement settlement before the Fifth U.S. Circuit Court of Appeals. SEC has silenced Mr. Romeril with a gag order for more than 20 years. Mr. Lucia settled his case with the agency in 2020 after a successful trip to the U.S. Supreme Court.

SEC’s Gag Rule has drawn prominent judicial criticism. In their 2022 Novinger v. SEC opinion, Fifth Circuit Judges Edith Jones and Kyle Duncan said of the gag policy: “A more effective prior restraint is hard to imagine.” In her 2022 SEC v. Moraes ruling, District Judge Abrams similarly observed that the policy “raises the specter of violating the unconstitutional conditions doctrine[;]” (2) “has all the hallmarks of a prior restraint on speech[;]” and (3) “is a textbook content or viewpoint-based prohibition on speech.”

The Gag Rule also conceals vital information about SEC enforcement policies. Does SEC strong-arm enforcement targets? Does it over plead complaints to force settling? Has SEC overreached its statutory authority? Are SEC’s theories of violation and threatened penalties sound? Maybe having to answer such questions is exactly why SEC wants to keep enforcement targets silenced, but that’s no reason to allow it to continue violating the Constitution.

NCLA released the following statements:

“The First Amendment’s core function is to protect freedom of expression about government power. SEC’s unlawful arrogation of power to silence criticism by the 98% of enforcement targets who must settle their cases shields virtually all its operations from public scrutiny. NCLA will not rest until this dangerous and anomalous rule is declared unconstitutional.”
— Peggy Little, Senior Litigation Counsel, NCLA

“SEC has allowed NCLA’s petition to languish for over five years. During that time, it has systematically and unapologetically silenced hundreds, if not thousands of individuals. SEC should either grant our petition and reject its unconstitutional Gag Rule or deny our petition and allow a real court to review the rule on the merits.”
— Kara Rollins, Litigation Counsel, NCLA

“SEC can run, but it cannot hide forever. The Commission will have to defend its Gag Rule to a real court soon, which will find—ineluctably—that the rule violates the First Amendment and likely the APA too.”
— Mark Chenoweth, President and General Counsel, NCLA

For more information read the petition here.

ABOUT NCLA

NCLA is a nonpartisan, nonprofit civil rights group founded by prominent legal scholar Philip Hamburger to protect constitutional freedoms from violations by the Administrative State. NCLA’s public-interest litigation and other pro bono advocacy strive to tame the unlawful power of state and federal agencies and to foster a new civil liberties movement that will help restore Americans’ fundamental rights.

Download the full document