Ninth Circuit Decision on SEC Settlements Raises Serious Concerns

Since 1972, the SEC has adhered to a strict policy – enshrined in 17 C.F.R. § 202.5(e) – which prohibits a defendant from publicly denying the charges against him in the context of a standard SEC no-admit/no-deny settlement. In a recent opinion, the Ninth Circuit upheld the prima facie constitutionality of such settlements on First Amendment grounds, reasoning that there is nothing preventing a settling defendant from voluntarily relinquishing a constitutional right. Powell v. SEC, No. 24-1899, 2025 U.S. App. LEXIS 19791 (9th Cir. Aug. 6, 2025). While superficially defensible, the opinion underestimates the problem Rule 202(e) creates for settling defendants.

Attacks on and criticism of SEC Rule 202.5(e) are not new. See, e.g., Rodney A. Smolla, Why the SEC Gag Rule Silencing Those Who Settle SEC Investigations Violates the First Amendment, 29 WIDENER L. REV. 1 (2023); James Valvo, Notice & Comment, The CFTC and SEC Are Demanding Unconstitutional Speech Bans in Their Settlement Agreements, YALE J. ON REG. (Dec. 4, 2017); see also SEC v. Novinger, 40 F.4th 297, 308 (5th Cir. 2022) (Jones, J., concurring); SEC v. Moraes, No. 22-cv-8343, 2022 WL 15774011, at *3–5 (S.D.N.Y. Oct. 28, 2022). The Second Circuit nonetheless affirmed the constitutionality of the SEC’s no-admit/no-deny policy in the face of a First Amendment challenge to Rule 202.5(e). See SEC v. Romeril, 15 F.4th 166, 172 (2d Cir. 2021), cert. denied sub nom. Romeril v. SEC, 142 S. Ct. 2836 (2022) (observing that “parties can waive their First Amendment rights in consent decrees and other settlements of judicial proceedings”). The Ninth Circuit opinion in Powell provides a new, more fulsome examination of the issue.

While the Powell Court expressly noted that its decision was narrowly tailored to the constitutional challenge to the rule as written (i.e., facially), The Court questioned “how easy the SEC’s line will be to police in practice, should the SEC ever seek to enforce Rule 202.5(e).” The Court specifically noted that “utilization of Rule 202.5(e) to prevent criticism of the agency, its officers, or its enforcement programs, . . . would likely raise substantial First Amendment concerns in application.” The Court went on to acknowledge “the SEC’s interests are not so compelling that they would justify a broad restriction on speech,” but reasoned “Rule 202.5(e) “is a relatively narrow limitation” on defendants’ speech.

But is the limitation really narrow? Is a settling defendant free to criticize the SEC or its staff? Can a defendant say publicly that the prosecution was unfair or unwise or unjustified. Experience suggests “no.” What if a defendant in a SEC case is sued in a private civil action. Would such a party be free to defend itself by denying culpability? And how does a job applicant address a prior SEC settlement if questioned?

In practice, a SEC settlement gags a defendant from saying anything about their prior conduct. Blanket denials of violating the law are clearly prohibited. Even the standard “I settled to get the matter behind me” raises doubt.

The Powell Court signaled its willingness to reconsider the constitutionality of the rule as applied in the future. In that regard, The Panel noted troubling language in some SEC settlement agreements that implicates the legality of the rule, for example, prohibiting defendants from making statements that merely “create the impression” that the SEC’s allegations or findings lack a factual basis or from “permitting” others to speak on their behalf. Additionally, The Court left open the possibility of challenges to the Rule’s unrestricted time period: “[n]or do we decide if it would be constitutional for the facial restrictions in Rule 202.5(e) to apply in perpetuity.”

SEC Commissioner, Hester Pierce, previously expressed concern over the necessity and constitutionality of Rule 202.5(e). In her dissent from a SEC decision rejecting similar claims by the same parties, Peirce wrote that denying defendants the right to publicly criticize a settlement after signing it was unnecessary, undermined regulatory integrity and raised First Amendment concerns. According to Peirce, there was “scant factual basis” for the SEC needing this rule, and if the agency was worried about defendants speaking out, she argued that this policy was “not the right way to protect the Commission’s reputation.”

While Peirce was the lone commissioner displaying sympathy toward the petitioners’ First Amendment claims, there is now a Republican majority of commissioners at the SEC, making a different result possible. The next constitutional challenge to Rule 202.5(e) may come administratively or in federal court, but one point remains clear: a settling defendant will be hard-pressed to contradict SEC findings in light of the Commission’s prevailing no-admit/no-deny policy.