Date: February 28, 1997 (Addendum included: July 11, 2001)
Summary: This staff legal bulletin sets forth views of the Division of Corporation Finance ("Division") regarding the requirements a registrant must satisfy when requesting confidential treatment of information that otherwise is required to be disclosed in registration statements, periodic reports and other documents filed with the Securities and Exchange Commission ("Commission"). The procedures are contained in Rule 406 under the Securities Act of 1933 and Rule 24b-2 under the Securities Exchange Act of 1934.
Supplementary Information: The statements in this legal bulletin represent the views of the staff of the Division of Corporation Finance. This bulletin is not a rule, regulation or statement of the Securities and Exchange Commission. Further, the Commission has neither approved nor disapproved its content.
Contact Person: For further information, please contact L. Jacob Fien-Helfman, Special Counsel at (202) 942-2997; the Special Counsel of the office in the Division to which the company is assigned; or, for small business issuers, the Special Counsel in the Office of Small Business.
In recent years, the number of confidential treatment requests ("CTRs" or "applications") processed by the Division has increased steadily from approximately 540 in fiscal year 1992 to more than 1,000 in fiscal year 1996. Applications as initially filed often lack the information and analysis necessary for the staff to evaluate compliance with the requirements of the rules. Consequently, the staff frequently issues deficiency letters which require the applicant to amend its application. Often the applicant also must amend the filing covered by the application.
This legal bulletin provides guidance on the substantive and procedural requirements contained in Rule 4061 under the Securities Act of 1933 ("Securities Act")2 and Rule 24b-23 under the Securities Exchange Act of 1934 ("Exchange Act").4 The bulletin also suggests procedures that, while not required, would facilitate the staff's processing of CTRs. This guidance should help issuers prepare complete confidential treatment applications and thereby reduce the time and costs incurred by issuers and the Division in processing confidential treatment applications.
Failure to comply with either the substantive or procedural aspects of the Commission's confidential treatment process may result in a denial of an application. In this regard, the Commission has delegated authority to the Division to grant and deny requests for confidential treatment.5
II. Substantive and Procedural Requirements
A. General Discussion
The federal securities laws generally require any company that is publicly held or that is registering its securities for public sale to disclose a broad range of financial and non- financial information in registration statements, annual reports and other filings made with the Commission. The disclosure requirements for financial and non-financial information primarily are found in Regulation S-K and, for small business issuers, Regulation S-B.6 Regulation S-X sets forth the financial statement disclosure requirements.7
Sometimes disclosure of information required by the regulations can adversely affect a company's business and financial condition because of the competitive harm that could result from the disclosure. This issue frequently arises in connection with the requirement that a registrant file publicly all contracts material to its business other than those it enters into in the ordinary course of business.8 Typical examples of the information that raises this concern include pricing terms, technical specifications and milestone payments. To address the potential disclosure hardship, the Commission has a system allowing companies to request confidential treatment of information filed under the Securities Act and the Exchange Act.
Specifically, Rules 406 and 24b-2 set forth the exclusive means for obtaining confidential treatment of information contained in a document filed under the Securities Act and under the Exchange Act, respectively,9 that would be exempt from disclosure under the Freedom of Information Act ("FOIA").10
The rules incorporate the criteria for non-disclosure set forth in FOIA and the Commission's FOIA rules.11 FOIA requires all federal agencies to make specified information available to the public, including the information required to be filed publicly by Commission rules. FOIA contains, however, nine specific exemptions.12 The rules require that CTRs contain an analysis of the applicable FOIA exemption. Most applicants rely on the exemption that covers "trade secrets and commercial or financial information obtained from a person and privileged or confidential" which is commonly referred to as "the (b)(4) exemption."13
B. Substantive Requirements: General
1. Confidential treatment cannot be granted if the information is publicly disclosed.
The applicant must make every effort not to disclose any of the confidential information. For example, the applicant should safeguard carefully copies of agreements and restrict access to only those who have a need to know the information or who are under a duty to keep the information confidential. The application must include an affirmative representation as to the confidentiality of the information it covers.
Based on the staff's experience, there are a few common mistakes that result in the inadvertent disclosure of the information that is the subject of the application.14 The following points illustrate typical mistakes.
For paper filings, the text can be read through the marking used to delete the information.
For filings by the Commission's electronic filing system, EDGAR,15 the applicant fails to remove all of the confidential information from the electronic version of the document.
The applicant omits the information, such as pricing terms, from one part of the document, but not from another part of that document or another document or report. Applicants should be aware that information may appear in more than one place in a document. For example, a section heading may appear in the table of contents of an agreement as well as in the agreement itself. In addition, preparers of applications should pay particular attention to the description of the business of the company, the financial statement footnotes and the Management's Discussion and Analysis of Financial Condition and Results of Operations section of disclosure documents.
Another party to the agreement has disclosed (or intends to disclose) the information publicly.
The company has included the information in a press release or news article or has provided the information to one or more analysts.
The company has disclosed the information in documents filed publicly with other regulators, such as insurance, banking, utility or environmental regulators.
The staff understands, however, that an applicant may in a general manner inform the market about, for example, a newly negotiated contract. This may occur through various methods such as the issuance of a press release. General disclosure about a contract should not prevent an applicant from requesting confidential treatment of selected terms of the contract that remain undisclosed.
2. Required and/or material information must be disclosed, even if confidential.
In some instances the Commission's specific disclosure requirements cover information that could be withheld under FOIA. Except in unusual circumstances, disclosure required by Regulation S-K or any other applicable disclosure requirement is not an appropriate subject for confidential treatment, regardless of the availability of an exemption under FOIA. This type of information includes, for example,
the identity of a 10% customer;
the dollar amount of firm backlog orders;
interest expense and other similar terms in a material credit agreement;
"...the duration and effect of all patents, trademarks, licenses, franchises and concessions held";16
required disclosure in the Management's Discussion and Analysis of Financial Condition and Results of Operations section17 relating for instance to loan arrangements and installment payment obligations on debt; and
In addition, confidential treatment is generally not appropriate for information that is material to investors. Depending on the facts and circumstances, examples of material information could include the name of a key supplier, material contingency clauses, indemnification clauses, anti-assignability clauses, take-or-pay clauses, and financial covenants in material financing or credit agreements. Materiality must be analyzed in the context of the issuer's business, financial condition and financial results. Where there is any question about the materiality of the information, the application must address the issue and provide factual support for the issuer's belief that the information is not material to investors.19
C. Substantive Requirements: Specific
In addition to complying with the general substantive requirements discussed above, an application for confidential treatment must comply with several more specific substantive requirements. In the staff's experience, however, applications often do not.
1. The application should not be overly broad.
Applicants should be selective when identifying the information covered by their application. Frequently, applications are overly broad and attempt to cover information that is not confidential under FOIA and the Commission's confidential treatment system. The information covered by an application should include no more text than necessary to prevent competitive harm to the issuer. A CTR should cover only those words and phrases for which confidentiality is necessary and supported by FOIA and applicable Commission rules.
The staff will comment on applications that cover lengthy portions of agreements. Absent a satisfactory demonstration that such extensive omissions are appropriate under the Commission's confidential treatment rules, the CTR will be denied. For example, the omission of an entire section is not appropriate without an analysis that specifically addresses:
(i) why the disclosure of the existence of the section would be commercially harmful; and
(ii) why its disclosure is not necessary for the protection of investors.
2. Applicants must set forth their analysis of the exemption.
The rules require that the application include a "statement of the grounds of the objection referring to and analyzing the applicable exemption(s) from disclosure under...the Commission's rule adopted under [FOIA]."20 Applicants should note that an agreement between the parties to keep information confidential does not itself provide adequate justification for confidential treatment. The Commission's confidential treatment system is premised on the disclosure requirements of the federal securities laws and FOIA, and does not contemplate non-disclosure based on a private contractual provision between the parties.
The application should avoid conclusory statements and must include a sufficient legal analysis, including case law references. Two seminal cases covering the definition of "confidential" information are National Parks and Conservation Association v. Morton, 498 F.2d 765 (D.C. Cir. 1974) and National Parks and Conservation Association v. Kleppe, 547 F.2d 673 (D.C. Cir. 1976).
The application also should include a factual analysis of the basis for the exemption requested (for example, commercial harm to the filing party) with respect to the specific information that is the subject of the request. Where the application relates to different types of information (for example, trade secrets and financial provisions), the application should address each type separately.
Finally, the application should describe anything about the issuer's business or the specific contract that would help the staff evaluate the sensitivity and importance of the information to the issuer.
The application must request a specific date (year, month and day) for the termination of confidential treatment of the subject information. Further, the application must include an analysis that supports the period requested.
This analysis must be specific to the confidential information and to the company and its business. The application should tie the term to specific provisions of, anticipated performance under, or other facts related to, the contract from which the confidential information is omitted.
Confidential treatment beyond the minimum term of an agreement usually is inappropriate, as the value of the information typically is associated with the effective period of an agreement. Where continued confidential treatment after the term of the agreement is justified, the staff will consider applications to extend the period. This bulletin addresses applications for extension in Section III below ("Other Matters").
4. Applicants must identify clearly the information that is the subject of the application.
Applicants must identify clearly the information that is the subject of a request for confidential treatment. To make sure there is a complete record as to which information has been granted confidential treatment, the application should describe each item or category of information omitted pursuant to the CTR. The staff will question any inconsistencies between the material identified in the application and the material deleted from the public file.
5. Applicants must consent to the release of the information for official purposes.
The application must include a written consent to the furnishing of the confidential portion "to other government agencies, offices or bodies and to the Congress."22 Conditions to this consent -- which have appeared most frequently when the applicant demands notification if the Commission releases the subject information to any of the institutions listed -- are not consistent with the requirement of the rules. Applicants should recognize that in granting any order for confidential treatment pursuant to delegated authority, the staff of the Commission is not explicitly or implicitly agreeing to furnish notice other than as required under the applicable rules and regulations.
D. Procedural Requirements
1. Applicants must file the application with the Office of the Secretary.
Applicants must send every application for confidential treatment to the Office of the Secretary in an envelope marked "confidential" which is separate from the envelope for any materials which are to be or have been filed publicly.23 Applicants should send to the filing desk only documents that they mean to have on public file.
2. Applicants, including EDGAR filers, must file the application in paper form.
Both rules require, in introductory notes, that applicants file CTRs in paper form, not by EDGAR, the electronic filing system.24 This paper filing requirement applies regardless of whether the applicant files other documents electronically. Once an applicant files electronically by mistake information meant to be covered by a CTR, such information is immediately available to the public and is no longer confidential.25
3. Applicants should file the application at the same time they file the material from which they have omitted the confidential information.
The confidential treatment process contemplates that issuers file CTRs at the same time that they file the publicly disclosed portions.26 The staff will not process the application unless and until the material from which information is omitted has been filed publicly. There is only one exception to that general rule with respect to domestic registrants. In the case of joint proxy statements/prospectuses filed confidentially pursuant to Rule 14a- 6(e)(2) of Regulation 14A, the registrant customarily files the wrap registration statement on Form S-4 only after the staff has completed its review of the non-public proxy statement/prospectus.27 The staff must review the CTR on a preliminary basis at the same time it is reviewing the proxy statement/prospectus to avoid delays in the acceleration of effectiveness at the time the registrant files the Form S-4.
4. Applicants must omit from the public filings all of the information that is the subject of the application.
As discussed above, the grant of confidential treatment is premised on the subject information being non-public. See Section II.B.1 of this bulletin. The release of the information by the issuer, even if inadvertent, precludes the grant of confidential treatment.
5. Applicants must adequately mark the confidential portions of publicly filed documents.
The applicant must "indicate at the appropriate place in the material filed that the confidential portion has been so omitted and filed separately with the Commission."28 An application will be considered incomplete unless the publicly-filed document has been marked to indicate both that the material has been omitted pursuant to a request for confidential treatment and that the material has been filed separately.
A recommended method of marking is to place an asterisk or other mark in the precise places in the document where the applicant deletes information. If the registrant uses this method of marking, it should key the mark to a legend which includes the required language on the page from which material is omitted and/or on the first page of the exhibit. In the unusual case where the confidential information consists of multiple pages, the publicly-filed document also must include an indication of the number of pages omitted pursuant to the CTR.
Finally, the applicant should mark the exhibit index to indicate that portions of the exhibit or exhibits have been omitted pursuant to a request for confidential treatment.
6. Applicants should show clearly which portions of the complete documents filed with the application are the subject of the CTR.
The application must include one complete copy of the document clearly marked to show those portions of the document covered by the CTR. The applicant must submit the complete marked copy "in the same form as the remainder of the material filed."29 The confidential segments should be underlined, highlighted, circled or otherwise clearly marked in that copy.
7. Applicants should indicate to whom correspondence, orders and notices should be sent.
Rule 406(b)(2)(v) requires the application to include "the name, address and telephone number of the person to whom all notices and orders issued under [the] rule should be directed."30 If an application filed pursuant to Rule 24b-2 does not specifically include this information, the service list for the order will include the person who prepared the application.
III. Other Matters
A. Requests for extension of previously granted orders for confidential treatment
An applicant requesting the extension of a previously granted order for confidential treatment should submit the application before the expiration date of the earlier order. After the expiration date of an order, the subject information is publicly available upon request under FOIA.
The request for extension (including the substantive supporting argument) must comply with the disclosure and confidential treatment rules at the time the applicant submits the extension request. The application should include a complete copy of the agreement or agreements, a copy of the original order, and copies of the original application and correspondence with the Commission, if available.
The substantive and procedural requirements discussed in this bulletin are equally applicable to any extension request. Therefore, the applicant should represent that (a) none of the confidential information has been disclosed, (b) disclosure of the information will cause substantial competitive harm to the issuer, and (c) disclosure of the confidential information is not necessary for protection of investors.
To the extent that the applicant cannot make these representations, the applicant should refile the agreement to disclose the information that no longer satisfies the requirements. The applicant should refile the agreement with the first filing it makes after the order expires. The extension application should include a request for confidential treatment of the information in the newly filed document as well as continuing confidential treatment for the document that the issuer filed earlier. The applicant should take care to cite the appropriate rule for each part of the application.
B. Timing of CTR Submission
1. Initial public offerings
The staff processes confidential treatment requests filed with initial public offerings pursuant to Rule 406 concurrently with the review of the registration statement. All issues must be resolved, and the CTR must be complete, before the acceleration of effectiveness of the registration statement. Issuers are advised to file the CTR at the time they initially file the registration statement, rather than waiting to file the agreements and the CTR with later amendments to the registration statement. See Section II.D.3. of this bulletin regarding the need to file the application and the agreements at the same time. In addition, because the issuer files the CTR and the registration statement separately, the staff may not be aware that a CTR has been filed at the time of the filing of the registration statement. The applicant should include a reference to the related application for confidential treatment in its cover letter to the registration statement.
2. Registered offerings by reporting companies
Regardless of whether the staff selects a registration statement for review, the staff must act on a confidential treatment request filed in connection with a registration statement pursuant to Rule 406 before the acceleration of effectiveness of a pending registration statement.
Please note that the same restriction applies to registration statements that incorporate by reference periodic reports. All CTRs filed pursuant to Rule 24b-2 must be completed before the effectiveness of the registration statement can be accelerated. The applicant should include in its cover letter to the registration statement a reference to the pending CTR, and issuers should allow enough time in their offering schedules for processing of the CTR by the staff.
3. Applications pursuant to Rule 24b-2 when no registration statement is pending
The goal of the Division is to complete the initial review of confidential treatment requests filed pursuant to Rule 24b-2 within 28 days from the filing date. Comments will usually be issued within this period. If the staff has no comments, an order will be issued granting the CTR. If the staff issues comments, applicants must respond to those comments within 21 days of the date of the comment letter. If the applicant does not respond within this period, the staff will consider, pursuant to its delegated authority from the Commission, what action is warranted, including whether to grant, deny, or grant and deny in part confidential treatment applications based on the record before it. The staff will base its action on the initial application and all amendments and supplemental information received.
Addendum to Staff Legal Bulletin No. 1
Dated July 11, 2001
This addendum updates Staff Legal Bulletin No. 1, dated February 28, 1997, relating to the Division's processing of confidential treatment requests. The first matter discussed below represents a change from the original bulletin and the second represents an addition to it.
In footnote 9 to the original bulletin, we stated that issuers should request confidential treatment for the application itself, as well as for any supplemental materials provided during the processing of the request, under Rule 83 of the Commission's Rules of Practice. Rule 83 governs applications for confidential treatment of information not required to be filed under the Securities Act or the Exchange Act. We have recently changed our position to be consistent with the practices of the Division of Investment Management. Requests for confidential treatment of the application and other supporting supplemental information should be submitted under Securities Act Rule 406 or Exchange Act Rule 24b-2, whichever is appropriate for the underlying filing.
In Section II.C.3 of the original bulletin, we stated that confidential treatment beyond the minimum term of an agreement is usually inappropriate. We stated in Section III.A that if an issuer wanted confidential treatment beyond the term originally granted, it should file an application for extension before the expiration of the earlier order to justify continued confidential treatment. However, we gave no guidance with respect to the length of time we would consider appropriate for continued confidential treatment. We believe the following guidelines will assist issuers in preparing their extension applications:
If the remaining term of the contract is greater than 10 years from the date of the extension application, we generally will only grant confidential treatment for 10 years;
If the remaining term of the contract is less than 10 years from the date of the extension application, we will consider a request for the remaining term of the contract;
If the remaining term of the contract is less than five years from the date of the application, but there is a possibility that it will be extended beyond its stated term, we will consider granting confidential treatment for a period of up to five years.
These guidelines assume that the applicant provides adequate support for any period requested.
See Item 601(b)(10) of Regulation S-K [17 CFR 229.601(b)(10)]. Item 601(b)(10) requires that:
Every contract not made in the ordinary course of business which is material to the registrant and is to be performed in whole or in part at or after the filing of the registration statement or report or was entered into not more than two years before such filing.
While Rule 406 under the Securities Act of 1933, in particular, appears to contemplate confidential treatment for portions of filed documents, this Bulletin will address requests made with respect to exhibits to filings only. Issuers requesting confidential treatment with respect to other portions of filings should bring such requests to the attention of the staff before public filing.
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This staff legal bulletin is not intended to include an exhaustive discussion of all Commission rules relating to confidential treatment of information submitted to the Commission. For example, Rule 418 of Regulation C under the Securities Act of 1933 [17 CFR 230.418] and Rule 12b-4 under the Securities Exchange Act of 1934 [17 CFR 240.12b-4] cover specific types of supplemental information requested by the staff in processing registrant filings with the Commission. Rule 171 under the Securities Act [17 CFR 230.171] and Rule 0-6 under the Exchange Act [17 CFR 240.0-6] cover the disclosure of information detrimental to the national security of the United States. Public availability of no- action and interpretive letters is governed by Rule 81 under the Rules of Practice [17 CFR 200.81]. Confidential treatment of other information not required to be filed under either Act is covered by Rule 83 under the Rules of Practice [17 CFR 200.83]. Confidential treatment of the CTR and supplemental information provided to the staff in connection with the processing of the CTR should be requested pursuant to Rule 83.
Even if the disclosure is made in error, whether by the issuer or its agent, the staff will not attempt to edit a filed document and will not grant confidential treatment for any of the disclosed information. See Release No. 33-6977 (February 23, 1993) [58 FR 14628].
In a release issued on December 6, 1996 (Release No. 33-7369) [61 FR 65440], the Commission solicited comment as to whether the EDGAR system should be enhanced to allow confidential treatment requests to be filed electronically.
See Rule 406(b) [17 CFR 230.406(b)] and Rule 24b-2(b) [17 CFR 240.24b-2(b)]. As an accommodation to foreign private issuers, the Division developed an informal procedure whereby the staff will review and comment on draft registration statements. Typically, a foreign private issuer will formally file a CTR concurrently with its submission of its draft registration statement. This bulletin does not change the procedures applicable to foreign private issuers.