On May 18, the United States Securities and Exchange Commission (SEC) announced that it was rescinding its so-called “gag rule,” which has for several decades prohibited parties who settled with SEC from denying the agency’s allegations against them. This significant change will undoubtedly impact how various individuals and entities—e.g., corporations, officers and directors—assess the costs and benefits of settling with SEC as well as the public framing of such resolutions. Additionally, the change may affect how SEC generally, and the Division of Enforcement in particular, makes decisions concerning the initiation and resolution of SEC enforcement actions. 

The Gag Rule

For more than 50 years, SEC’s Rule of Procedure 202.5(e) expressed a policy that, in the agency’s lawsuits and administrative proceedings, it was “important 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.” Thus, SEC would not “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.” Indeed, as recently as May 14 of this year, the agency required settling defendants to agree in court filings not to “take any action or make or permit any public statement denying, directly or indirectly, any allegation in the complaint or creating the impression that the complaint is without factual basis” and even to “withdraw[] any papers filed… to the extent that they deny any allegation in the complaint.” 

The gag rule was a subject of frequent criticism. Some scholars characterized it as a prior restraint of speech in violation of the First Amendment. A federal district court expressed concern that the rule allowed “an agency of the federal government to shield itself from public view,” which was “precisely the kind of societal harm the Founders adopted the First Amendment to protect against.” Even an SEC commissioner expressed skepticism, noting that other federal agencies did not have similar policies and, in fact, some “even explicitly allow settling defendants to deny the allegations of wrongdoing.” Still, the gag rule survived constitutional challenges, with the U.S. Court of Appeals for the Second Circuit concluding in 2020 that it did not violate due process and the U.S. Court of Appeals for the Ninth Circuit in 2025 rejecting a First Amendment challenge. 

SEC’s Change of Course

In announcing its rescission of the gag rule, SEC stated that the move “aligns the commission with the overwhelming majority of federal agencies that do not have a similar rule and gives the commission more flexibility in settling enforcement actions, which conserves resources, provides certainty, and potentially expedites the return of money to injured investors.” It reasoned that “the effect on the public interest from” defendants publicly denying allegations “may be minimal” and the gag rule “may have created an incorrect impression that the Commission is trying to shield itself from criticism.” SEC Chairman Paul Atkins added that “speech critical of the government is an important part of the American tradition.” And along with rescinding the rule, SEC stated that it would not enforce existing no-deny provisions that have already been entered.

At the same time, SEC was clear that the rescission of the policy would not completely bar the agency from requiring admissions in settlements. Indeed, SEC—along with various other federal agencies—can require settling individuals and entities to agree to mechanisms such a “Statement of Agreed Upon Facts,” wherein certain facts associated with the alleged violation(s) at issue are acknowledged as true. Under the new policy, SEC will retain its discretion to negotiate for admissions as part of a settlement but also have the discretion to settle with defendants who decline to admit facts or liability.

Implications

It is undoubtedly helpful for corporations that settle with SEC to retain the ability to deny the agency’s allegations. Just as in other types of enforcement actions, an entity may wish to settle as a matter of cost-benefit analysis without agreeing with SEC’s view of the facts in whole or even in part. Additionally, the ability to settle with SEC while denying the agency’s allegations gives corporations the opportunity to mitigate some of the “stigma” that may arise from publicly settling securities claims, many of which are explicitly styled as “anti-fraud” provisions. The rescission of the gag rule makes it possible for such settling parties to obtain the benefits of settlement while reserving the right to publicly explain why they believe their conduct was appropriate and/or lawful. 

At the same time, settling parties should keep in mind that there are risks to public denials beyond those posed by the gag rule. Such denials could be viewed as public releases containing untrue statements of material facts in connection with the purchase or sale of securities that would themselves violate Rule 10b-5. Perceived violations could bring scrutiny not just from SEC, but also state regulators and private securities plaintiffs. Additionally, even with the ability to deny allegations, it will remain enormously important for settling parties to negotiate the language of those allegations carefully when they have the opportunity, since the allegations will be public and have the weight of SEC behind them. Horse trading to convince the agency to forego especially sensitive or inflammatory allegations will always be preferable to simply denying the truth of those allegations once publicized.

As the new policy seasons over time, it will be interesting to see what impact it has—if any—on SEC’s assessment as to whether a settlement or enforcement proceeding is preferable. The pendulum may swing back in the other direction. SEC is a public agency and operates under the scrutiny of policy makers, the media and the public, all of which have some expectation that SEC will hold bad actors accountable. Should it become routine for high profile cases (involving alleged securities violations that are particularly impactful) to be resolved by settlements that are then followed by public statements from settling companies wherein: (1) SEC’s underlying allegations are vigorously denied; and (2) the settlements are characterized as a “costs of doing business”—or worse—SEC may face competing pressures from the other direction. 

Conclusion

SEC’s abandonment of the gag rule is a positive development for public companies that may find themselves in the agency’s crosshairs, as it promises greater flexibility in negotiating settlements and discussing them publicly. At the same time, this move will not eliminate the need for companies and their counsel to negotiate settlement-related language carefully and proceed cautiously in messaging the results.