In a significant ruling on Wednesday, the US Court of Appeals for the Ninth Circuit endorsed a longstanding Securities and Exchange Commission (SEC) policy that restricts defendants in SEC settlements from publicly denying the allegations against them. This decision reaffirms the SEC's authority to impose speech limitations on defendants as part of settlement agreements, a practice often criticized as a 'gag rule.'

The court's verdict confirms that such restrictions are constitutionally valid, applying the "voluntary waiver" principle from the 1987 Supreme Court decision in Town of Newton v. Rumery. The framework suggests that defendants consciously choose to accept certain limits on their speech in return for the benefits of settling their cases. If a defendant breaches this agreement, the SEC is permitted to request the reopening of the case through court approval, rather than imposing automatic penalties.

Judges explained that there is a direct connection between the government's interest in resolving enforcement allegations and the defendant's waiver of rights to contest these allegations. They emphasized that the rule does not stop individuals from making broader criticisms of the SEC or its practices, focusing solely on the denial of specific enforcement allegations.

Additionally, the court dismissed challenges under the Administrative Procedure Act (APA), confirming that the SEC had adequate statutory authority to enforce this rule under 15 U.S.C. § 78u(d)(1) and that the rule falls under exemptions from the usual "notice-and-comment" requirements of federal rulemaking.

Originating from a policy formalized in 1972, the SEC stipulates that defendants may neither admit nor deny the allegations but cannot outright deny them. Any violation of this agreement allows the SEC to petition for the case's reinstatement. This policy was contested by the New Civil Liberties Alliance (NCLA), which argued that it infringes on First Amendment rights and that the SEC lacked the proper authority and procedural adherence to establish such a rule.

The decision aligns with previous rulings from other circuits, such as the Second Circuit in 2021 and a procedural ruling from the Fifth Circuit in 2022, which did not address the First Amendment implications directly. However, the Ninth Circuit's ruling leaves open the potential for future "as-applied" challenges, which could argue the rule's unconstitutional application in specific instances, despite being deemed constitutionally sound in a broader sense.

This ruling marks another chapter in the ongoing debate over the balance between regulatory enforcement powers and constitutional rights, indicating that the courts may continue to see challenges to this SEC policy in future cases.