Amicus Brief: Powell v. SEC

In 1972, the Securities and Exchange Commission, absent notice and comment, issued its “gag rule,” which requires defendants who neither admit nor deny the allegations made by the SEC “to avoid creating, or permitting to be created, an impression that a decree is being entered or a sanction imposed, when the conduct alleged did not, in fact, occur.” The question is whether courts or agencies have the power to issue content- and viewpoint-based “no-admit-no-deny” prior restraints on truthful speech as non-negotiable conditions of settling SEC charges. Not only does the gag provision present constitutional issues, but it also violates the Administrative Procedure Act.

In 2018, the New Civil Liberties Alliance filed a petition to amend the gag rule, citing a panoply of reasons why it violates the Constitution. Hearing nothing from the SEC for over 5 years, NCLA renewed its petition to amend in 2023. One month later, the SEC denied NCLA’s petition, failing to address the constitutional red flags, over Commissioner Hester Peirce’s scathing dissent. Now freed from any procedural hurdles that previously hindered successful appeals, NCLA swiftly appealed this denial to the Ninth Circuit.

NCLA represents 9 individuals and 2 media organizations in this petition for review, some wishing to speak out against the government, some wishing to listen (also a First Amendment right), one having yet to sign the gag provision but fearing the coercive pressure of litigation. Because the SEC requires the gag provision to be included in all no-admit-no-deny settlements, these petitioners are just some of hundreds, if not thousands, of investigation targets who have been coerced into giving up their free speech rights. Perversely, the few individuals who can afford to withstand the costs of trial, financially and emotionally, are free to speak, win or lose. But given the SEC’s 98% settlement rate, that pool of free individuals is staggeringly small.

The petitioners are in good company; many federal judges have expressed their displeasure about this unconstitutional scheme. Two Fifth Circuit judges issued a concurrence that said, among other things, “A more effective prior restraint is hard to imagine.” SEC v. Novinger (5th Cir. 2022), while several judges in the federal district that covers Manhattan have expressed serious concerns about the judicial branch’s role in imposing these unconstitutional orders on settling parties. For example, Judge Ronnie Abrams discussed the “growing chorus of circuits” which understand “that the Constitution prevents courts from enforcing the waiver of First Amendment rights as a condition of settlements” in SEC v. Moraes (S.D.N.Y. 2022).

The Manhattan Institute has joined the Hamilton Lincoln Law Institute on an amicus brief supporting the petitioners before the Ninth Circuit. We argue that (1) the SEC’s use of gag orders serves no legitimate government interest; and (2) a comparison to private civil class-action settlements demonstrates the unwarranted nature of the SEC’s gag rule.

Ilya Shapiro is a senior fellow and director of Constitutional Studies at the Manhattan Institute. Follow him on Twitter here.

Tim Rosenberger is a legal fellow at the Manhattan Institute.

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