For over 50 years, the Securities and Exchange Commission’s (SEC’s) Gag Rule has required defendants who settle enforcement actions to commit to a lifetime prohibition on denying or criticizing—or even permitting others to criticize—the agency’s allegations. In the SEC’s view, this prior restraint on speech is necessary to avoid the incorrect “impression” that “the conduct alleged did not, in fact, occur.” But in reality, the SEC’s Gag Rule systematically deprives individuals of the right to criticize their government.

A group of individuals and entities directly impacted by the Gag Rule urged the SEC to amend the rule to permit agency defendants to freely share their views. They noted that the Gag Rule muzzles the individuals best positioned to criticize the SEC’s enforcement practices. Over Commissioner Hester Peirce’s dissent, the agency denied the petition on the ground that the Gag Rule is necessary to preserve the public’s “confidence” in SEC enforcement actions. On review, a three-judge panel of the Ninth Circuit accepted the agency’s rationale and approved the rule. Now the rule’s challengers are asking the full Ninth Circuit to rehear the case en banc, and Cato has filed an amicus brief supporting their petition (with thanks to Aram Gavoor and the George Washington University Law School Administrative Law, Issues, and Appeals Clinic for drafting our brief).

In our brief, we argue that the panel erred in failing to consider whether the SEC had authority to promulgate the Rule in the first place. The SEC is authorized “to make such rules and regulations as may be necessary or appropriate … for the execution of the functions vested in​” it by the Securities Exchange Act of 1934. An unbounded reading of this statute as one that authorizes the Gag Rule raises significant constitutional concerns. Therefore, the panel should have applied the canon of constitutional avoidance and held that the statute did not authorize the Gag Rule, since the statute lacks a clear statement of congressional intent to restrict speech.

The speech restrictions imposed by the Rule implicate serious First Amendment issues. As the panel acknowledged, the Gag Rule “could impermissibly intrude on First Amendment rights, especially if it prevents civil enforcement defendants from criticizing the SEC.” And the Securities Exchange Act contains no clear authorization to restrict speech. Broad language like “necessary or appropriate” should not be interpreted as a blank check to exercise any power, even if it comes close to the constitutional line.

A clear statement rule is especially appropriate here because freedom of speech is an intrinsic norm that is fundamental to democratic society. We would not expect Congress to unsettle lightly the democratic norm of free speech. If Congress wished for the SEC to issue speech restrictions, it would have done so clearly. The SEC therefore lacked authority to impose the Rule. The full Ninth Circuit should grant rehearing and reverse the panel.