United States: New Rules For Omitting Competitively Sensitive Information In SEC-Filed Material Contracts

Last Updated: July 2 2019
Article by Richard E. Baltz

The Fixing America's Surface Transportation Act of 2015, 129 Stat. 1312, mandated that the U.S. Securities and Exchange Commission modernize and simplify certain of its disclosure requirements. On March 22, 2019, the SEC adopted amendments to several of its rules and regulations, including an alternative approach for the omission of confidential information in material contracts attached as exhibits to filings under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended.

The alternative procedures became effective on April 2, 2019. 84 Fed. Reg. 12,674. Following is a summary of these new procedures, addressing what can be redacted, how the new process will work, potential pitfalls, and the possibility of heightened scrutiny from the SEC under the new process.

What Can Be Redacted

New Alternate Procedures

Under the alternative procedures, registrants now may redact specified information in material contracts filed as exhibits to Security Act and Exchange Act reports without contemporaneously submitting a confidential treatment request as was previously required. The criteria supporting such redactions (now embedded within Item 601(b)(10) of Regulation S-K) remain the same. Information in a material contract may be redacted so long as that information is not material and would likely cause competitive harm to the registrant if publicly disclosed.

Earlier Rules (Still Available)

Prior to the effective date of the alternative CTR procedures, Securities Act Rule 406 and Exchange Act Rule 24b-2 set forth the exclusive mechanisms for requesting confidential treatment of information included in material contracts filed as exhibits to Securities Act and Exchange Act filings. Those rules, which still remain available for use, require companies to submit a detailed application to the SEC that identifies the particular text for which confidential treatment is being sought, a statement of the legal grounds under the Freedom of Information Act for the exemption, and an explanation of why, based on the facts and circumstances of the particular case, disclosure of the information would be both competitively harmful to the applicant and unnecessary for the protection of investors. A registrant also is required to specify an expiration date in its CTR.

In addition to the rules, SEC's Staff Legal Bulletin No. 1 (Feb. 28, 1997) and Staff Legal Bulletin 1A, with addendum (July 11, 2001), set forth its detailed views about the requirements a registrant must satisfy when submitting a CTR. In connection with an initial public offering, the staff reviews the CTR in conjunction with its review of the registration statement. All comments on the CTR must be resolved prior to requesting effectiveness. With respect to Exchange Act filings, the staff may decide not to review a CTR or to review the application and issue comments.

New Alternative Procedures

The most significant change under the alternative CTR procedures is that a registrant is no longer required to prepare and submit a CTR application when it files a material contract containing redactions. In the SEC's view, "the sizeable costs to registrants, in terms of financial expenditures, staff time, and potential transactional delays resulting because of time spent on confidential treatment request applications, justifies such an approach where, as here, any corresponding negative impact on investors is expected to be minimal." Release No. 33-10618, 84 Fed. Reg. 12,674, 12,681 (April 2, 2019) (Final Release).

To claim confidential treatment, registrants must:

  • Mark the exhibit index to indicate that portions of the exhibit or exhibits have been omitted.
  • Include a prominent statement on the first page of the redacted exhibit that certain identified information has been excluded from the exhibit because it is both not material and would be likely to cause competitive harm if publicly disclosed.
  • Indicate with brackets where the information has been omitted from the filed version of the exhibit

In effect, this approach requires the registrant to assume responsibility (and liability) for determining whether all material information has been disclosed and whether the redacted information would be protected by one of the disclosure exemptions included in FOIA. Most commonly, that exemption would be the "(b)(4) exemption," which permits non-disclosure of certain trade secrets or privileged or confidential commercial or financial information. 5 U.S.C. §552(b)(4).

Potential Pitfalls

The new alternative CTR procedures do have some potential pitfalls.

Many agreements include strict confidentiality clauses with narrowly drawn exceptions. One such common exception allows a party to disclose terms of an agreement to comply with "applicable law" or, in some cases, the "rules and regulations of the SEC or another regulatory body." The right to disclose may be further qualified by a phrase like "in the reasonable opinion of the disclosing party's counsel."

If the contract is not processed under the tradition CTR regime, counsel to the contracting parties may be placed in the position of having to opine whether these types of exceptions are met. Materiality determinations involve difficult questions of fact and often end with informed, but subjective, judgments. Even if counsel can opine that an agreement must be filed to comply with an applicable law or regulation, he or she will not be able to assess the likelihood of competitive harm if the redacted information is publicly disclosed or address the appropriateness of the redactions.

Another common provision appearing in many agreements is a covenant requiring the registrant to provide a copy of the material agreement, as redacted, to the counterparty in advance of any filing. The counterparty then may review and comment on the scope of the redactions. Occasionally, a registrant's proposed approach to the disclosure is perceived by a counterparty as "too conservative" or "not protective" of what that counter-party views as commercially sensitive information.

Often overlooked by the counterparty in this type of situation is that, under either the traditional or alternative CTR regime, the disclosures are the responsibility of the registrant, and the redacted information must be competitively sensitive and immaterial to the registrant, not to the counterparty. Moreover, as stated in Section II.C.2 of Staff Legal Bulletin No. 1A, "[a]pplicants should note that an agreement between the parties to keep information confidential does not itself provide adequate justification for confidential treatment [and] [t]he [SEC'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."

Possibility of Heightened Scrutiny

Although the alternative CTR procedures offer a welcome change to the traditional CTR regime, registrants may face heightened scrutiny when relying on those alternatives in addition to the issues like those described above. In dissenting from the SEC's adoption of the alternative CTR procedures, Commissioner Robert J. Jackson, Jr., stated, among other things, that the rules remove "our Staff's role as gatekeepers when companies redact information from disclosures—despite evidence that redactions already deprive investors of important information." Statement on Final Rules Implementing FAST Act (March 26, 2019).

Perhaps in response to Commissioner's Jackson's and others' concerns, the Final Release emphasizes that: "The amendments to Item 601 do not substantively alter registrant disclosure requirements—they do not affect the principles of what a registrant may or may not permissibly redact from its disclosure for reasons of confidentiality, nor do they change the fundamental disclosure obligations a registrant owes its shareholders under the federal securities laws." 84 Fed. Reg. at 12681.

Further, the SEC indicated in the final release that its staff will continue its review of filings and selectively assess whether redactions from exhibits appear to be limited to information that is not material and that would be likely to cause competitive harm if publicly disclosed.

To that end, on April 1, 2019, the day before the effective date of the alternative CTR procedures, the SEC formally announced that its staff would review filings for compliance with the alternative CTR procedures and issued additional guidance regarding the compliance review process. New Rules and Procedures for Exhibits Containing Immaterial, Competitively Harmful Information (April 1, 2019). The approach to that review turns, in part, on the type of filing made.

With respect to a general compliance review of a redacted exhibit, the staff will send a letter requesting that the registrant provide it with a paper copy of the unredacted exhibit marked to highlight the redacted information. The paper copy would be marked to show the redactions in the same manner as when a company submits a traditional CTR. Once the staff completes its review of the unredacted materials, it may or may not ask for further substantiation of the redaction decisions. The substantiation likely would include most of the same information that would appear in the application accompanying a traditional CTR. If that review does not lead to comments, the staff will send a letter indicating that the compliance review is complete.

With respect to an Exchange Act filing, the staff will make its initial request for an unredacted exhibit and the closing of review letter for that exhibit publicly available on EDGAR following the closing of its review. If that review was done in conjunction with a regular filing review, the staff will post the initial request and closing of review letter at the time it posts the other correspondence related to the filing review. Publicly available letters will only note the existence of an opened and a closed redacted exhibit compliance review.

In a significant departure from the traditional CTR procedures, if the staff requests a copy of an unredacted exhibit, a registrant may submit the agreement on a supplemental basis. As a result, a registrant may request confidential treatment of the exhibit and any accompanying materials under Rule 83 while the exhibit and materials are in the staff's possession. Following the completion of its review and at the request of the registrant, the staff either will destroy or return the exhibit and other materials, rather than retaining them in the SEC's files. A similar approach may be taken by registrants choosing to include exhibits with Item 1.01 Form 8-K filings.

Consistent with historical practice, the staff will require registrants to resolve any questions relating to redacted exhibits in registration statements filed under the Securities Act before submitting a request for acceleration of the registration statement's effective date. As a result, a registrant may still face the more rigorous review of redactions that it likely would encounter under the traditional CTR regime.

Considering this, a registrant may choose to use Securities Act Rule 406 despite the need to prepare a complete application for the CTR. Such an approach might streamline the review process because the application may answer some of the questions that the staff otherwise might pose later in the review process. Rule 406 also might prove useful when a counterparty to an agreement is insisting on aggressive redactions. In addition, although the staff will maintain the confidentiality of communications under the alternative CTR procedures, the formality and long history of the Rule 406 process may provide some additional level of comfort that competitively sensitive information will be protected.

Conclusion

When filing redacted exhibits under the streamlined CTR procedures, particularly in connection with exhibits to Exchange Act filings, a registrant should be mindful of the SEC's admonitions and Commissioner Jackson's dissent. While most compliance reviews likely will result only in comments and possibly amended filings, if the staff finds what it believes to be reckless or intentional non-compliance, the staff may refer the matter to the Enforcement Division for investigation and, if appropriate, enforcement action.

With these considerations in mind, each registrant should be prepared to demonstrate how it decides whether information in a material contract is both not material and would likely cause competitive harm if publicly disclosed. That decision-making process should be integrated into the registrant's system of disclosure controls and procedures. If the registrant maintains a disclosure or similar committee to oversee SEC filings, the committee's mandate could be extended to oversight of CTR determinations.

In addition, a registrant should consider preparing a memorandum or other contemporaneous documentation detailing its internal review process and addressing the bases for the redactions under the traditional CTR procedures. While such documentation would not have to be as comprehensive as a traditional CTR application, it might be useful in evidencing a registrant's awareness and consideration of the appropriate factors when making the redactions.

If the filing is selected for a compliance review, the registrant then could proactively provide its analysis to the staff upon receipt of the staff's request for an unredacted copy of an exhibit or use its analysis in framing a response to staff comments. At a minimum, documenting a process that demonstrates compliance with the alternative CTR procedures could mitigate against questions of bad intent or recklessness. This position could be further strengthened by involving outside counsel in the review, analysis, and preparation process.

Originally published by Bloomberg Law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions