How SEC’s Gag Rule Faces Scrutiny

SEC Commissioner Hester Peirce Challenges Gag Rule Impacting Crypto Defendants

US Securities and Exchange Commissioner Hester Peirce has criticized the Commission’s policy to amend a gag rule for defendants who settle. This policy of the US Securities and Exchange Commission (SEC) is unfair to those less equipped than crypto titans Ripple Labs (XRP) and Grayscale Investments to enter litigation.

The SEC recently denied amending a 1972 rule that prevents defendants from criticizing allegations after they settle. The proposal, filed by the New Civil Liberties Alliance in October 2018, defends Americans’ rights to speak freely.

Why an SEC Lawsuit Will Make You Cry

Peirce said the SEC’s attempt to quash dissent post-settlement has no legal footing. In addition, the Commissioner argues against the rationale for the rule, which is to prevent anyone who settles from creating an impression that their punishment is unwarranted.

“The demand by the government that a defendant waive a fundamental constitutional right as a condition of settlement ought to be supported by a compelling rationale…The most logical solution to that concern…is to make sure that settlements are rooted in fact, are fairly negotiated, and are legally sound.”

By keeping the rule as is, Peirce says the SEC is undermining its integrity and the thoroughness of its investigations. Settlements can also help the SEC avoid expensive and difficult legislation and legally bind defendants to silence. Moreover, the rule’s ambiguity implicates a defendant who jokes about the SEC.

“A defendant looking at this language is not going to have any idea where it ends…Can a defendant tell a post-settlement joke: “How many SEC Commissioners does it take to screw in a lightbulb? Zero because they prefer to let the truth languish in the dark.”

Last year, Peirce criticized the SEC’s enforcement policy after the agency sued crypto exchange Kraken. The SEC alleged that Kraken’s staking products violated US securities laws. Jesse Powell, the former CEO of Kraken, said the exchange settled because litigation was not feasible.

Read more: What Does It Mean To Receive a Wells Notice From the SEC?

This is Why the SEC Hates Crypto Titans

Last year, the SEC won a case against the decentralized content distribution platform LBRY. The victory essentially put LBRY out of business.

SEC Litigations and Administrative Proceedings in 2023 | Source: Cornerstone Research

However, cases against well-heeled crypto companies like Grayscale Investments and Ripple Labs saw the agency suffer defeat. A US judge did not agree with the SEC’s argument to deny Grayscale Investments a spot Bitcoin ETF, nor its assessment of XRP’s security status.

Most recently, the SEC admitted mistakes while litigating a temporary restraining order against a crypto company called Debt Box.

Read more: Everything You Need To Know About Ripple vs SEC

Peirce has made it clear in a recent Bloomberg interview that her criticism is not an endorsement of crypto. Rather, she is critical of the Commission’s approach to crypto regulation. Earlier this year, Peirce, fellow Republican Commissioner Mark Uyeda, and SEC chairman Gary Gensler voted to approve 11 spot Bitcoin exchange-traded funds.

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