The Securities and Exchange Commission has dismantled a five-decade-old policy that barred defendants from publicly proclaiming their innocence after settling charges, a landmark victory for critics who called the rule an unconstitutional speech restraint.
The U.S. Securities and Exchange Commission on Monday rescinded its 50-year-old "gag rule," a contentious policy that prohibited defendants from publicly denying allegations when settling enforcement actions, altering a core tenet of the agency's enforcement strategy.
"Speech critical of the government is an important part of the American tradition," Trump-appointee Paul Atkins said in the announcement. "This rescission ends the policy prohibiting such criticism by settling defendants."
The policy, in place for over 50 years, was challenged by figures like Elon Musk and legal groups such as the New Civil Liberties Alliance, which petitioned for its removal in 2023. The change means the SEC will no longer enforce gag clauses in new or existing settlement agreements, a move that could impact hundreds of past deals.
The reversal may reshape the dynamic of SEC enforcement, potentially leading to more protracted and expensive litigation as the incentive for companies to settle is altered. For investors, it could introduce more public-relations volatility around companies facing investigation but also provide greater transparency into disputes with the regulator.
For more than five decades, the SEC maintained that settling defendants must agree not to publicly deny the agency's allegations. The commission argued this was necessary for the efficient policing of markets. However, critics have long contended the rule violates the First Amendment, unlawfully insulates the agency from public criticism, and coerces defendants into silence. Fighting the agency in court is an expensive and lengthy process, leading many to settle even when they believed they had done no wrong.
The decision to scrap the rule was announced by Commissioner Atkins, an appointee of former President Donald Trump. His move stands in contrast to the position of current SEC Chair Gary Gensler, who had previously declined to remove the speech restraint. The New Civil Liberties Alliance, which had formally petitioned the agency in 2023 to rescind the policy, hailed the move as a major victory for free speech.
The immediate impact on markets is uncertain, but the policy shift introduces new calculations for companies under SEC investigation. Firms may now be more willing to fight allegations publicly and in court, potentially leading to higher litigation costs and longer periods of uncertainty for companies such as Tesla Inc., whose CEO Elon Musk has been a vocal critic of the gag rule. While this could create more headline risk for firms, it may also result in a more transparent and adversarial process, allowing investors to hear both sides of a dispute.
This article is for informational purposes only and does not constitute investment advice.
