The Securities and Exchange Commission withdrew a half-century-old rule that barred settling respondents from criticizing the agency, ending a policy one federal judge called "a prior restraint on speech."
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SEC rescinds 50-year gag rule after Supreme Court challenge
The Securities and Exchange Commission this spring rescinded a 50-year-old gag rule that barred settling respondents from disputing the agency's allegations, after a constitutional challenge reached the Supreme Court and drew 16 friend-of-the-court briefs urging the justices to hear it.
"The rule had all the hallmarks of a prior restraint on speech," Judge Ronnie Abrams of the U.S. District Court for the Southern District of New York said in October 2022, finding the SEC's policy constitutionally suspect.
The rule, enforced since the early 1970s, allowed the SEC to publish untested allegations against those it accused of violating securities regulations while compelling settling parties to stay silent. The commission withdrew the policy rather than defend it before the Supreme Court in Powell v. SEC. Weeks later, the court denied review without comment, leaving no binding precedent to prevent a future administration from reinstating the rule.
The gag order's removal increases transparency in SEC enforcement, potentially emboldening more individuals and companies to contest allegations rather than settle. But because the rule was withdrawn administratively rather than struck down, the agency could reimpose it at any time — creating regulatory uncertainty for the roughly 7,000 registered broker-dealers and 15,000 investment advisers the SEC oversees.
The Powell Case
Thomas J. Powell, chairman of the Brehon Group and lead petitioner in the challenge, settled an SEC proceeding in 2021 involving a firm he led. The commission never proved the allegations underlying its findings, drafting the order without a hearing inside the agency's own forum, where the SEC served as accuser and judge. The settlement rested on a "neither admit nor deny" basis, with Powell admitting only jurisdiction.
The SEC labeled Powell an unregistered broker, yet after 12 subpoenas and roughly 300,000 pages of document production, it ordered him to return nothing. When the agency later pursued the salespeople in the same matter under the same provision, it ordered them to hand back the commissions they had earned. Powell paid a $75,000 penalty to settle, but the absence of any disgorgement after so extensive an investigation, he said, contradicted the broker label.
In SEC v. Jarkesy (2024), the Supreme Court held that people facing civil penalties in government enforcement actions are entitled to a jury trial in a court of law — a protection that didn't exist when Powell was accused. Had the SEC been required to prove its claims in court, Powell said he was confident he would have prevailed.
What Comes Next
The rule's withdrawal leaves a regulatory vacuum. No court ruling binds the next administration, meaning the SEC could reimpose the gag order tomorrow. Many who could now speak about their own cases remain silent, unwilling to test a freedom the government might revoke at will, Powell wrote in the Wall Street Journal.
The policy's demise follows a broader shift in how courts view the SEC's enforcement powers. The Jarkesy decision, which limited the agency's use of in-house tribunals for civil penalty cases, showed that the Supreme Court is scrutinizing the SEC's procedural framework more closely. The last time the court weighed in on SEC enforcement structure was in 2018, when it upheld the constitutionality of administrative law judges in Lucia v. SEC — a ruling the Jarkesy decision effectively narrowed. The gag rule's withdrawal, while a win for transparency advocates, leaves the underlying constitutional question unresolved, a question that could return to the courts if a future administration reinstates the policy.
This article is for informational purposes only and does not constitute investment advice.
