SEC Rescinds Long-Standing “No-Deny” Policy For Settlements

In a development that will have implications for companies and individuals both who have previously settled cases with the SEC and who may settle cases in the future, the U.S. Securities and Exchange Commission issued a new final rule on May 18, rescinding its longstanding “no-deny” policy.

For 50 years, the SEC used the “no-deny” policy to routinely condition the settlement of an enforcement investigation on a defendant’s agreement to not publicly deny the allegations in the SEC’s complaint or administrative order, regardless of whether the SEC had proven (or could prove) those allegations in court. The no-deny policy, sometimes called a public “gag order,” had the potential to hamstring defendants who, following an SEC settlement, faced public relations issues or questions from stakeholders about the same “facts,” but could not deny them, even if they weren’t true.

Significantly, the new, final rule (i) eliminates the no-deny policy in future settlements and (ii) indicates the Commission will not enforce no-deny provisions in existing settlement agreements. The new, final rule recognizes the practical realities involved when an individual or company chooses to settle a matter with the SEC, i.e., that the choice to settle often involves cost or other business concerns, and should not be taken in every case as an implicit agreement with the allegations in the SEC’s complaint or administrative order.

Rescission of No-Deny Policy

The Final Rule amends 17 CFR Part 202 by removing and reserving paragraph (e), eliminating the SEC rule of informal procedure that since 1972 had required the Division of Enforcement ("Enforcement") to insist on a "no-deny" covenant as a condition of any settlement in which a sanction is imposed.

The Final Rule has two critical components. First, on a prospective basis, the Commission will no longer require defendants or respondents to agree to a no-deny provision as a condition of settlement. Second, with respect to settlements already entered, the Commission has stated that it "will not enforce existing no-deny provisions" and will take no action to ask a district court to vacate a prior settlement, or to reopen an adjudicatory proceeding, in the event a previously settling defendant publicly denies the allegations.

Importantly, the rescission does not alter the Commission's discretion regarding admissions; the Commission may continue to settle on a no-admit basis, and may still negotiate for admissions where it deems appropriate—particularly in matters involving a parallel criminal proceeding. The Final Rule likewise does not alter the testimonial obligations of settling parties, nor their ability to take legal or factual positions in proceedings to which the Commission is not a party.

Practical Implications

For parties currently in or contemplating settlement discussions with SEC’s Enforcement Division, the most immediate consequence is the removal of a non-trivial term from the standard settlement package. Going forward, defendants and respondents may settle without committing to perpetual silence on the merits of the Commission's allegations, which may meaningfully alter the cost-benefit calculus of settlement for reputation-sensitive registrants, public companies, and individual respondents.

As a matter of administrative law, rule rescissions and policy changes of this nature generally operate prospectively rather than retroactively, and nothing in the Final Rule purports to alter the contractual force of no-deny covenants embedded in previously entered consents and orders. As a strictly contractual matter, prior settling defendants remain bound by the terms to which they consented. As a practical matter, however, the Commission has signaled in unusually direct terms that it does not intend to enforce those covenants: in the event of a breach of an existing no-deny provision, "the Commission will take no action to ask a district court to vacate the settlement (or to reopen an adjudicatory proceeding).”

The Commission under Chairman Paul S. Atkins has prioritized clarifying the enforcement process. The rescission of the “no-deny” policy reflects the latest in a series of recent announcements addressing revised SEC enforcement policies and priorities, including the recent overhaul of the SEC Enforcement Manual. This most recent policy shift creates new risks that must be effectively managed by market participants and provides new opportunities to consider during the settlement process:

• Those involved with settlements without no-deny provisions should still carefully consider the risks posed by providing public denials or making public statements concerning the underlying investigation. Case law dictates that if a company speaks on an issue, it has a duty to tell the whole truth. Attempting to characterize an investigation – either in process or substance - led by the Staff may unexpectedly cross a line into whose truth the company is, in good faith, trying to explain. And of course, making materially false or misleading statements regarding the settled action could lead to renewed scrutiny.
• Those with existing settlements containing no-deny provisions should consult with counsel before making public comment on prior matters. Entities must consider collateral obligations, as well as the possibility of future Commission policy reversion before such a step should be taken.

• With respect to new opportunities during the settlement process, the bifurcation of liability and remedies is now a more attractive option. Specifically, should the respondent choose to settle the underlying allegations, there should now be the ability to make denials about those same allegations when litigating the remedies.

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