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SEC's 'Gag Rule' Faces Court Challenge

When the government brings an enforcement action, the fight for any image-conscious defendant never ends in a courtroom or some conference room in the bowels of a federal agency. There is always, after all, the court of public opinion.

But for decades, critics argue, the U.S. Securities and Exchange Commission has stood out among federal regulators for a policy that prevents defendants from making their case to the public. Indeed, since 1972, the SEC has maintained a policy of not allowing defendants to settle charges while still denying misconduct. The policy is reflected in boilerplate settlement language stating that defendants “neither admit nor deny” the charges levied against them.”

More than four decades after its adoption, that so-called “gag regulation” is coming under mounting scrutiny—most recently from a lawsuit in Washington challenging the policy on First Amendment grounds.

“In effect, the government uses its extraordinary leverage in civil litigation to extract from settling defendants a promise to never tell their side of the story, no matter how outrageous the government's conduct may have been and no matter how strong the public's interest may be in knowing how the government conducts itself in high-stakes civil litigation,” the Cato Institute, represented by the Institute for Justice, recently argued in court papers.

The SEC has not yet responded in the U.S. District Court for the District of Columbia. But the lawsuit raises the question: What would the SEC's enforcement regime look like without gag orders in settlements? Would it more aggressively push for admissions of guilt?

Ropes & Gray partner Jeremiah Williams doesn't think so. But his vision for a post-”gag regulation” world wasn't entirely rosy for future defendants who'd be free to contest the SEC's allegations after a settlement.

Williams told me he could envision the SEC becoming less flexible in the wording of settlements. “For example, they may be less willing to keep inflammatory or damaging material out of the order so that parties have less wiggle room in speaking out against the order later.”

The gag rule, Williams says, requires defense lawyers to “spend a lot of time” on the wording of consent orders. And after a settlement, the rule can require defense lawyers to counsel their clients on what they can—or, as is often the case, cannot—say about their alleged misconduct and dealings with the SEC.

“It can be a very frustrating thing. It can be frustrating for clients not to be able to go out and talk about the situation, provide some extra facts and context,” Williams said. “Sometimes the SEC is unwilling to put that in the order and it just doesn't get out.”

The Cato Institute's lawsuit comes just week after U.S. Sen. Tom Cotton, R-Arkansas, asked SEC Chairman Jay Clayton (pictured above) during an oversight hearing whether the gag rule raised ““First Amendment problems.” At the December hearing before the Senate Banking Committee, Clayton appeared to support the SEC's approach, saying “if we can settle matters quickly, we can move on to look at other matters.”

“I think that we have a long history of people agreeing to restrict certain things that they can say in the commercial arena,” Clayton said.

Compliance Headlines: What Caught My Eye

>> Law firms are facing “uncharted waters” as Trump's partial government shutdown grinds some practices to a halt, my colleague Christine Simmons reports. “Capital markets lawyers can't close on initial public offerings. Antitrust lawyers aren't getting votes on mergers. And white-collar defense lawyers are delaying presentations before the Securities and Exchange Commission.”

>> “More financial services companies are seeking AI guidance from agencies such as the U.S. Treasury Department's anti-money-laundering division,” The Wall Street Journal reports. Last month, federal regulators issued guidance encouraging companies to consider “innovative approaches” in anti-money laundering compliance, Reuters reported.

>> “More than 60 Republicans exited the House this month, and so many of them are considering heading to K Street that not all of them are likely to find work, according to interviews with lobbyists and headhunters,” Politico reports.

>> The U.S. Supreme Court, with Justice Brett Kavanaugh on the sidelines, on Monday turned down a challenge to the power of the single-director at the Consumer Financial Protection Bureau. Justice Brett Kavanaugh was recused, based on his prior involvement in the case, brought by a team from O'Melveny & Myers for State National Bank of Big Spring. Other CFPB challenges, including one from Gibson, Dunn & Crutcher's Ted Olson, are developing in the lower courts.

>> “There was a myth that enforcement actions against companies would decline under the Trump administration, but the latest numbers clearly show that law enforcement is robust, said Kendall Day, a partner at Gibson, Dunn & Crutcher in Washington, D.C.” My colleague Sue Reisinger has more here. Read the firm's report—2018 Year-End Update on Corporate Non-Prosecution Agreements and Deferred Prosecution Agreements—here.

>> Robert Bench, chief compliance officer for the Goldman Sachs-backed cryptocurrency company Circle, opens up about regulatory challenges. “The law enforcement community (both U.S. and globally) understands that crypto, like any means of value, can be used to facilitate or fund crime. As they get smarter every day in this space, they'll request information from firms like Circle where they think such transactions may have occurred on the platform,” Bench said in a post on the Internet forum Reddit.

Who Got the Work

>> Morrison & Foerster partner Deanne Maynard convinced an appeals court to overturn a jury ruling against Fannie Mae over allegations that the mortgage finance giant gave inaccurate information about consumers to potential mortgage lenders. Maynard convinced a divided panel of the U.S. Court of Appeals for the Ninth Circuit that Fannie Mae should not be considered a consumer reporting agency. The ruling vacated an award of more than $650,000 in legal fees and $68,000 in costs to a couple who claimed that Fannie Mae, through its proprietary software, falsely told potential lenders that they had a foreclosure on a past mortgage account. Here's a link to the Ninth Circuit's opinion.

>> Herbert Greenman of Buffalo's Lipsitz Green Scime Cambria represented Mark Briandi in the Second Circuit in a dispute involving an FTC debt-collection enforcement action. The court last week ruled against Briandi, upholding disgorgement, which was challenged as excessive. Read the decision here. Michelle Arington appeared for the FTC.

>> A team from Baker & McKenzie—including former Senate Finance Committee tax counsel Joshua Odintz—has registered to lobby for CVS Health on issues related to corporate taxation.

>> Tesla Inc. has hired a team from Steptoe & Johnson LLP to lobby on developments on international trade policy. The team includes Washington partner Eric Emerson, chair of the firm's international trade and investment group.

Notable Moves & Announcements

>> Sandra Moser, who stepped down as acting chief of the criminal division's fraud section at the Justice Department, is heading to Quinn Emanuel Urquhart & Sullivan, where she will be co-head of the global white-collar practice and its crisis law and strategy group, my colleague Ryan Lovelace reports. William Burck, co-managing partner of the Washington office, said Moser's “tremendous amount of leadership experience” and “great reputation,” particularly in the white-collar bar, make her a key hire for the firm. “We wanted her because we think that she is a world-class lawyer,” Burck said.

>> Tech lobbyist Gregory Guice has jumped to McGuireWoods Consulting from Akin Gump Strauss Hauer & Feld, Bloomberg reports. “McGuireWoods Consulting is the latest lobbying firm to add to its roster in hopes of exerting greater influence over Washington policy and legislation after the midterm elections,” the report said.

>> Morrison & Foerster has hired Kathleen “Kitty” Ryan as financial services counsel in Los Angeles. Ryan formerly was a deputy assistant director for the office of regulations at the Consumer Financial Protections Bureau.

>> King & Spalding has recruited Aaron Lipson as a partner after he stepped down in December as the SEC's head of enforcement for the Atlanta regional office, my colleague Meredith Hobbs reports. Lipson has joined the firm's special matters and government investigations practice, and will focus on securities enforcement.

>> Covington & Burling brought on Karen Solomon, a former acting deputy comptroller and chief counsel at the Office of the Comptroller of the Currency, as a senior of counsel in the firm's financial services practice. At the OCC, Solomon played a leading role in the office's push to create a national charter for fintech startups, a move that drew a legal challenge from state bank supervisors.

>> Former Treasury Department lawyer Kara Ward has left Venable for Holland & Knight, where she'll be a partner in the firm's financial services practice. Ward plans to represent clients before financial regulators and Congress, where House Democrats are already beginning to mount aggressive investigations.