(Bloomberg Opinion) -- Among the weird things in Elon Musk's recent TED interview was how blatantly he appeared to violate the terms of a settlement agreement he reached with the Securities and Exchange Commission in 2018. At issue was his claim that he had the financing to take Tesla private. “Funding was actually secured,” he assured TED chief Chris Anderson.
The SEC investigated, concluded otherwise and charged Musk with civil securities fraud. His deal with the agency, following its standard policy, committed him not to “[deny] directly or indirectly, any allegation in the complaint or [create] the impression that the complaint is without factual basis.”
In practice, it's unlikely that Musk will suffer any consequences for violating what some people call the SEC's “no deny” rule and others more pejoratively call its “gag rule.” That's because the commission isn't in the practice of enforcing its policy.
But that practical reality of non-enforcement makes it all the more important to consider whether the rule is justified. In recent years, a number of people who have been subject to an enforcement action and settled it have gone to court to challenge the policy as a violation of their free speech. They've all lost; yet it is conceivable that the Supreme Court might eventually consider the First Amendment issue important enough to take up despite the unanimity among the courts of appeal.
The SEC's gag rule for settlements dates back to 1972. The basic rationale, as the commission put it recently, is to avoid creating “the impression that a decree is being entered or a sanction imposed, when the conduct alleged did not, in fact, occur.”
The strongest argument in favor of the practice is that someone entering a settlement with the agency should do so in good faith. If you are agreeing to pay a fine, you shouldn't go out the next day and say you didn't do anything wrong. To say so seems like an admission of bad faith on your part — or at least the suggestion that you took the settlement despite not having done anything that deserved an enforcement action being brought against you.
Then there is the SEC's institutional interest, which is far from trivial. It makes sense that the agency charged with policing Wall Street doesn't want a lot of people walking around saying they were forced to pay fines when they were in fact entirely blameless. That would undermine the agency's legitimacy and reputation and make it much harder to police the markets. And in principle, we all have an interest in the SEC both being and appearing legitimate in its enforcement role. Without the promise and reality of credible and reliable enforcement, the markets couldn't function.
The argument against the gag rule is that it's pretty worrisome that an agency can make denial of your right to criticize its handling of your case into a condition of your settling it. Imagine if the SEC were off the rails, bringing enforcement actions arbitrarily or in pursuit of a political agenda. The gag order would then function to insulate the agency from criticism by precisely those people best positioned to tell the world what's wrong with the enforcement process, namely those who have been subject to it.
Now consider that, to some SEC critics, this is not far from the current state of affairs. Public oversight of a powerful federal agency is hugely important. The gag rule makes that oversight considerably harder.
Seen through this lens, the SEC's failure to systematically enforce the gag order isn't much of a reassurance. In principle, it always could — which is enough to scare most anyone who isn't the richest person in the world into silence.
As for the First Amendment argument against the gag rule, its most compelling element is probably that, if you refuse to settle with the SEC and take your case to trial and lose, the agency almost certainly couldn't (and definitely wouldn't) ask or convince a trial court judge to deny you the right to question the verdict.
In our constitutional system, even a convicted felon retains the constitutional free-speech right to tell the world he should have been acquitted and why. On the surface, at least, it seems anomalous that the SEC could demand silence as a condition of settlement when it couldn't require silence after conviction. (This argument was made in a recently filed petition to the Supreme Court to take up the issue, a petition filed by lawyers including Floyd Abrams, the still-reigning dean of the First Amendment bar.)
Probably the reason the courts haven't been sympathetic to this argument is that a settlement negotiation is different from a trial. In a settlement, each side gives up something, and each side gets something. That's why, technically, no rule says the government can't demand something in settlement talks that it couldn't get after a trial.
The whole reason the SEC doesn't require people it settles with to admit their liability actively is so those folks won't be opening the door to being sued civilly by third parties, or even prosecuted criminally by the Department of Justice. Someone who settles without admitting wrongdoing is therefore getting a big benefit compared with going to trial and losing. In exchange for that benefit, it makes some sense that the person settling shouldn't impugn the whole process by denying liability and muddying the waters of public perception.
The upshot is that the SEC has a rule it insists on yet doesn't enforce; that has observable social benefits; and nevertheless makes oversight of the agency harder. The First Amendment doesn't prohibit unwise policies. It does, however, stand for the principle that government shouldn't be able to suppress ideas it doesn't like — including criticism of government agencies.
Although the time has likely not yet come for the Supreme Court to take on the SEC gag rule, it might well be time for the agency to reconsider the policy and make sure it applies evenhandedly to everyone, no matter how rich.
More From Writers at Bloomberg Opinion:
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Elon Musk Is Not What Twitter Needs Right Now: Timothy O'Brien
Musk Isn't Joining Twitter. Twitter Has Joined Him: Liam Denning
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Noah Feldman is a Bloomberg Opinion columnist and host of the podcast “Deep Background.” He is a professor of law at Harvard University and was a clerk to U.S. Supreme Court Justice David Souter. His books include “The Three Lives of James Madison: Genius, Partisan, President.”
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