The SEC should listen to Sen. Cotton

On Tuesday Sen. Tom Cotton (R-Ark.) asked tough questions to the chairman of the Securities and Exchange Commission (SEC), Jay Clayton, during a banking committee hearing about an opaque form of regulation which has silenced Americans for far too long. 

The SEC lawlessly enacted the pernicious “gag rule” in 1972 without going through notice-and-comment rule-making. The U.S. Commodity Futures Trading Commission quietly slipped a similar rule into place some years later. The rule requires that anyone who settles with the agency must remain silent about his or her prosecution — for life. 

If they suggest that they might deny some or all the charges brought against them or create the impression that the prosecution was wrongheaded, the agency can reopen the prosecution. Think about that for a moment.

{mosads}The gag rule violates many legal doctrines. As Sen. Cotton charged, it is a prior restraint and a content-based restriction on speech. Because it suppresses truth about regulatory and/or company failures as well as over-prosecution, it not only serves no compelling government interest, it serves no legitimate interest at all. The fact that the rule also lifts the speech ban for testimonial obligations means that the SEC knows that it suppresses truthful speech, a point scored by Sen. Cotton to which Chairman Clayton had no good response. 

Because it silences the very people best-situated to level criticism of how the government works through the SEC, the gag rule impairs the First Amendment’s right to petition for regulatory reform and the concomitant right of the public to know what is going on in federal agencies.

Sen. Cotton understands the problem. “I think the SEC should probably reconsider it. It was passed at a time in 1972 when First Amendment precedent was much different and … more favorable to the government than frankly, it should have been,” said Cotton.

The senator also homed in on the vital public policies at stake, noting that the gag rule allows a company and an agency that have both failed in some way to conceal their failure from the public. As noted by S.D.N.Y. Judge Jed Rakoff, whose tart observations about the hypocrisy, confusion and over-breadth of the rule opened the proceedings, the gag rule also allows the agency to hide a record of weak cases or dubious prosecutions, whose victims are forever silenced from exposing the treatment they received. Another problem is that settlements stemming from SEC’s overly broad readings of the statutes or regulations it is enforcing can embolden new prosecutions that test — and too often exceed — the boundaries of what the law actually prohibits.

To his credit, Chairman Jay Clayton did not mount a vigorous defense of the gag rule, even conceding that, “it’s not the right approach in every matter.” But that last statement would come as a surprise to the thousands of Americans forced to sign a gag order for nearly 50 years because the SEC routinely insists upon it by citing the Rule. And Chairman Clayton’s defense of the portion that allows “no-admit-no-deny” is off base. That compromise position is not being challenged and has specifically been upheld by the courts. It is the lifetime gag and prior restraint on future speech that is under scrutiny.

Cotton called for the SEC’s prompt reconsideration of the rule and he closed the proceedings with the observation that the rule as implemented by the SEC is “quite over-broad,” “not at all narrowly tailored” and that it “undermines other legitimate public interests.”

Let’s hope the SEC listens.

Peggy Little is a senior litigation counsel for the New Civil Liberties Alliance, which filed a Petition for Rulemaking asking the SEC to amend its “gag rule,” 202.5e.