SEC Rescinds Rule Prohibiting Denials in Settled Enforcement Actions

On May 18, the Securities and Exchange Commission (SEC) announced that it had rescinded its rule (codified in 17 C.F.R. § 202.5(e)) of refusing to settle enforcement actions unless the defendant or respondent agreed not to deny publicly the SEC’s allegations. The SEC explained that rescinding the rule aligns the SEC with other federal agencies, gives the SEC more flexibility in settling enforcement actions, provides certainty, and potentially expedites the return of money to injured investors.

Importantly, the SEC stated that it will not take any action to enforce existing no-deny provisions in settlement agreements that predate rescission of the rule. In other words, if a defendant breaches a no-deny provision in an existing settlement, the SEC will not seek to reopen the administrative proceeding or ask a district court to vacate the settlement. The SEC also stated that the rescission of the no-deny rule does not affect the SEC’s general practice of settling enforcement actions without requiring settling defendants or respondents to admit the allegations against them.

Background of the SEC’s No-Deny Rule

Since 1972, the SEC has had a rule of refusing to settle enforcement actions unless the defendant or respondent agreed not to deny publicly the allegations in the SEC’s complaint or administrative order. According to the SEC, prohibiting settling defendants and respondents from denying the SEC’s allegations was “important to avoid creating, or permitting to be created, an impression that a decree is being entered or a sanction imposed, when the conduct alleged did not, in fact, occur.” 17 C.F.R. § 202.5(e).

In practice, the SEC implemented this rule by inserting terms into its standard settlement documents that broadly prohibited defendants and respondents from taking any action or making any public statement denying, directly or indirectly, any allegation or creating the impression that the allegations lacked a factual basis. Additionally, if a settling defendant or respondent stated publicly that they had not admitted to the SEC’s allegations, the defendant or respondent was required also to state that they did not deny the allegations. See 17 C.F.R. § 202.5(e). If a defendant or respondent violated the no-deny rule, the SEC could reopen its administrative proceeding or ask a district court to vacate the settlement.

In recent years, defendants and courts have raised questions regarding the appropriateness of the SEC’s no-deny rule, including questioning whether the policy violated freedom of speech rights under the First Amendment to the Constitution. See, e.g., SEC v. Novinger, 40 F.4th 297, 308 (5th Cir. 2022) (Jones, J., joined by Duncan, J., concurring). One defendant recently petitioned the Supreme Court to review the SEC’s no-deny rule. See Powell v. SEC, No. 25-1100 (Mar. 19, 2026).

Against this backdrop, the SEC reevaluated its no-deny rule and concluded that allowing defendants and respondents to deny the SEC’s allegations would have a minimal negative effect on the public interest, but continuing to prohibit denials could create the incorrect impression that the SEC was trying to shield itself from criticism.

Rationale for the SEC’s Decision to Rescind the No-Deny Rule

The SEC provided four reasons for its decision to rescind the no-deny rule:

1. The no-deny rule had limited benefit to the SEC. The SEC explained that its only recourse for a violation of the no-deny rule was to reopen an administrative proceeding or ask a district court to vacate a settlement. Remarkably, despite a no-deny provision being included in thousands of enforcement settlements in the decades since the rule was adopted, the SEC explained that it was not aware of any instance in which it had reopened an administrative proceeding or asked a court to vacate a settlement for breach of a no-deny provision. The SEC explained that scarce resources, the passage of time, and the risk that a court would not agree to vacate the settlement were factors that discouraged the SEC from seeking to enforce no-deny provisions in settlement agreements. The limited utility of the rule contributed to the SEC’s decision to rescind it.
2. Technological changes, particularly the use of social media, blurred the lines between public and private denials. The SEC explained that its no-deny rule prohibited public denials of the SEC’s allegations, but the line between public and private statements was not always clear, particularly with respect to statements made on social media. Additionally, the SEC’s standard settlement terms — such as the term prohibiting public statements that “indirectly” deny the allegations — arguably were broader than the actual language of the no-deny rule. The SEC explained that it chose to repeal the no-deny rule rather than be required to evaluate whether certain statements violated the no-deny provision.
3. Rescinding the no-deny rule aligned the SEC with other federal agencies. The SEC explained that most federal agencies, including the Department of Justice, do not have a no-deny rule. The SEC observed that these agencies have been able to settle enforcement actions without noticeable consequence, even though the settling parties were permitted to deny the allegations against them. Based on these other agencies’ experience, the SEC concluded that rescinding its no-deny rule would not harm the public interest.
4. Rescinding the no-deny rule gives the SEC more flexibility in negotiating settlements. Before the rescission of the no-deny rule, some individuals or entities facing enforcement actions simply refused to agree to a settlement that prohibited them from denying the SEC’s allegations. These individuals and entities opted to litigate with the SEC rather than agree to a settlement with a no-deny provision. Litigation can be risky for the SEC and consumes scarce SEC resources. But the no-deny rule was inflexible and required the SEC to include a no-deny provision as a condition of every settlement. This requirement limited the circumstances under which the SEC could settle cases to avoid the risks and costs of litigation. Rescinding the no-deny rule removes this potential impediment to settlement, which may result in more and faster settled actions. For the SEC, settled actions remove the risk and costs of litigation and could result in the SEC obtaining disgorgement proceeds more quickly, which would allow the SEC to distribute those proceeds to injured investors more quickly.

Looking Ahead

The rescission of the SEC’s longstanding no-deny rule is a significant development for individuals and entities involved in SEC enforcement actions. Two immediate effects of the rescission are clear: (1) the SEC no longer will prohibit settling defendants and respondents from denying the SEC’s allegations; and (2) the SEC will take no action against defendants and respondents who breach no-deny provisions in existing settlement agreements.

Rescission of the no-deny rule is the latest in a series of significant changes to the SEC’s enforcement program (Paul Hastings has written about prior changes here and here). It remains to be seen whether the rescission will change the overall dynamics of SEC settlement negotiations, but, on balance, the rescission has the potential to benefit defendants and respondents.