United States: Will A New SCOTUS Decision Affect The SEC's New Confidentiality Process?

Last Updated: July 4 2019
Article by Cydney Posner

If you thought a case, just decided last week by SCOTUS, involving a claim against the VA by a veteran who had been denied benefits (Kisor v. Wilkie) seemed far afield from the securities laws (but really could have a significant impact—see this PubCo post), a case decided last Monday might trigger a similar reaction. Food Marketing Institute v. Argus Leader Media involved an effort by a South Dakota newspaper to obtain from the Department of Agriculture, under the Freedom of Information Act, the names and addresses of retail stores participating in SNAP, the national food-stamp program. The result in the case, which broadened the definition of "confidentiality" under FOIA Exemption 4, will make it substantially easier for parties to claim "confidentiality" under FOIA, preventing disclosure of their information.

Now the question arises as to what, if any, its impact will be on the confidentiality process in connection with filings with the SEC. Had the case been decided on, say, March 19, it could, theoretically, at least, have had a fairly substantial effect: in seeking confidential treatment at that point, companies were required to submit a confidential treatment request (CTR) that stated the grounds for objection to disclosure, analyzing the applicable exemption under FOIA. But, in an interesting turn of events, on March 20, the SEC adopted new rules for confidentiality that streamlined the process, but no longer required submission of a CTR and no longer directly adverted to FOIA Exemption 4. Instead of referring to Exemption 4, ironically, the new rules expressly recite certain requirements for claims of confidentiality drawn from Exemption 4, including one that was tossed out by SCOTUS in the decision. (See this PubCo post.) Accordingly, whether the decision will have any significant impact on the SEC's process for seeking confidentiality will really depend on whether the SEC elects to take up the issue.


Exemption 4, with which anyone who has submitted a CTR to the SEC would be familiar, shields from disclosure "trade secrets and commercial or financial information obtained from a person and priv­ileged or confidential." In National Parks & Conservation Association v. Morton, which was considered the leading case on the issue since it was decided in 1974, the D.C. Circuit held that information was "confidential" within the meaning of Exemption 4 if its disclosure was likely "(1) to impair the Government's ability to obtain necessary information in the future; or (2) to cause substantial harm to the competitive position of the person from whom the information was obtained." Accordingly, in a CTR, companies could redact information only if it was not material, had not been previously disclosed and was commercially sensitive information the disclosure of which would likely cause competitive harm. The cases since, while sometimes critical of National Parks, have focused largely on the "competitive harm" prong of the test. In 1992, Critical Mass Energy Project v. NRC, with the D.C. Circuit sitting en banc, established a different test for confidentiality of information submitted voluntarily, but importantly, reaffirmed the National Parks test for "confidentiality" for information that "the person was obliged to furnish the Government."

In Food Marketing, Argus Media submitted a FOIA request to the USDA, seeking the names and addresses of retail SNAP participants and, for each store, the annual SNAP redemption data for five years. Citing FOIA Exemption 4, the USDA refused to disclose the store-level SNAP data. The District Court, following National Parks, did not find sufficient competitive harm to protect the information from disclosure. Pursuing the appeal was the Food Marketing Institute, a restaurant trade group. The Eighth Circuit affirmed, rejecting the entreaty by the Insti­tute to toss the "substantial com­petitive harm" test and instead look to the "ordinary public meaning of the statutory term 'confidential.'" SCOTUS granted cert.

Writing for the majority, Justice Gorsuch begins by asking "when does information provided to a federal agency qualify as 'confidential'"? For his answer, he first looks to FOIA itself, which "nowhere defines the term 'confiden­tial.' So, as usual, we ask what that term's 'ordinary, contemporary, common meaning' was when Congress enacted FOIA in 1966." A contemporary dictionary defined the term "confidential"

"then, as it does now, 'private' or 'secret.'... Contemporary dictionaries suggest two conditions that might be required for information communicated to another to be considered confidential. In one sense, information communicated to another remains confidential whenever it is customarily kept private, or at least closely held, by the person imparting it....In another sense, information might be considered confi­dential only if the party receiving it provides some assur­ance that it will remain secret."

While certainly the first condition had to be satisfied, Gorsuch leaves open whether satisfaction of the second was also required, since, in this case, it was.

According to Gorsuch, initially, the appellate courts did apply these types of contemporary definitions when interpreting Exemption 4. It was not until National Parks that the court looked to the legislative history and imported into the test the concept of competitive harm. The Court, he wrote,

"cannot approve such a casual disregard of the rules of statutory interpretation. In statutory interpretation disputes, a court's proper starting point lies in a careful examination of the ordinary meaning and structure of the law itself....Where, as here, that examination yields a clear answer, judges must stop.....Even those of us who sometimes consult legislative history will never allow it to be used to 'muddy' the meaning of 'clear statutory language.'.... National Parks' contrary approach is a relic from a 'bygone era of statutory construction.'"

Gorsuch rejects all of Argus Media's arguments, including its final policy argument that a "substantial competi­tive harm" test is necessary because "FOIA exemptions should be narrowly construed." In the end, Gorsuch held that the store-level SNAP data was confidential under his new construction of Exemption 4, reversing and remanding the case.

Justice Breyer, joined by Justices Ginsburg and Sotomayor, concurred in part and dissented in part. In essence, he argued for a third condition: "Release of such information must also cause genuine harm to the owner's economic or business interests." That the harm must be "competitive," or "substantial," in his view, went too far. Requiring some level of genuine harm would convey

"something about the nature of the information itself, not just (as the majority suggests) how it is kept by those who possess it. Reading 'confidential' in this more restrictive sense is more faithful to FOIA's purpose and how we have inter­preted the Act in the past.....But a tool used to probe the relationship between government and business should not be unavailable whenever government and business wish it so. And given the temptation, common across the private and public sectors, to regard as secret all information that need not be disclosed, I fear the ma­jority's reading will deprive the public of information for reasons no better than convenience, skittishness, or bu­reaucratic inertia."

Breyer would have remanded the case for a determination of whether disclosure of the information would cause that genuine harm.

Now, back to the SEC. Prior to April 2 (the effective date of the new confidentiality rules), companies could apply for confidential treatment by filing a CTR with the Secretary of the SEC at the time of submission of the exhibit, with copies to the FOIA office. The CTR would exhaustively detail their rationales for confidentiality, typically under Exemption 4. As stated in SLB No. 1A,

"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, that would be exempt from disclosure under [FOIA.] The rules incorporate the criteria for non-disclosure set forth in FOIA and the Commission's FOIA rules.... 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.'"

Under Rule 24b-2, for example, a company filing an exhibit could "make written objection to the public disclosure of any information contained therein" by submitting a CTR that includes, among other things, "a statement of the grounds of objection referring to, and containing an analysis of, the applicable exemption(s) from disclosure under the Commission's rules and regulations adopted under the Freedom of Information Act. (17 CFR 200.80)...." Rule 406 contains a similar provision. As these rules refer to the FOIA exemptions, presumably the Court's new opinion would affect the analysis by broadening the scope of confidentiality.

However, on March 20, the SEC adopted amendments, which became effective on April 2, designed to "streamline" the confidential treatment process. The amendments made no reference to FOIA or Exemption 4. Rather, the amendments revised the rules and forms to permit companies to omit or redact from these exhibits confidential information that was "both not material and would likely cause competitive harm to the registrant if publicly disclosed" without having to submit an unredacted copy and formal CTR in advance to the staff, as was previously required. (See, for example, Reg S-K, Item 601((b)(10)(iv).) If requested by the staff, the company would be required to "promptly provide an unredacted copy of the exhibit on a supplemental basis. The Commission or its staff also may request the registrant to provide its materiality and competitive harm analyses on a supplemental basis."

However, as discussed in this PubCo post, a critical aspect of the new approach was that the SEC not retain copies of the confidential supplemental material, such as the unredacted copies or the supplemental analysis supporting the redactions. In general, unless protected by a CTR, confidential information retained by the SEC could become publicly available if it were the subject of a valid FOIA request. Under the SEC's new approach, if the staff asked for supplemental confidential information, once the staff had completed its review, all the confidential supplemental material submitted would be returned or destroyed, upon request of the company, following the procedures of Rule 418 or Rule 12b-4. And, because the SEC would not retain unredacted copies or other supplemental materials, no CTR would be required for FOIA purposes going forward. Accordingly, Exemption 4—including SCOTUS's new interpretation—never comes into play.

What's more, as noted above, the language employed in the new amendments expressly required a determination that the information to be redacted "would likely cause competitive harm to the registrant if publicly disclosed," language certainly derived from the standard under Exemption 4, but now, notwithstanding the new SCOTUS opinion which eliminated the competitive harm prong, ironically still extant as part of the rules.

Under the new approach, companies can request confidential treatment of supplemental materials submitted, such as agreements or supplemental analyses of the rationales for the redactions, while in the possession of the staff under Rule 83. (As noted in SLB 1A, "Rule 83 governs applications for confidential treatment of information not required to be filed under the Securities Act or the Exchange Act.") Interestingly, Rule 83 also expressly refers to a "competitive harm" discussion: the substantiation of a request for confidential treatment under Rule 83, is supposed to describe, to the extent appropriate or necessary to make a determination regarding the request—in addition to information regarding the reasons why the information should be withheld, referring to the FOIA exemptions—the "adverse consequences to a business enterprise, financial or otherwise, that would result from disclosure of confidential commercial or financial information, including any adverse effect on the business' competitive position," and the "ease or difficulty of a competitor's obtaining or compiling the commercial or financial information."

Notably, the regular CTR process for requesting confidential treatment pursuant to Rule 406 or Rule 24b-2, which relied on the Exemption 4 analysis, apparently remains available. To the extent that companies elect to comply with that more cumbersome process, they presumably would be able to invoke the Court's new, more lenient definition with respect to the FOIA exemption. However, whether that alternative continues to have any appeal as a result remains to be seen. Similarly, on April 16, Corp Fin posted a new streamlined procedure for confidential treatment extensions. To streamline the extension process, the staff developed a one-page short-form application, which requires the company to affirm that the information in the most recent CTR regarding the confidential information "continues to be true, complete and accurate." Of course, that process originally relied on an Exemption 4 analysis. However, if it were necessary in seeking an extension, presumably, the new definition could also be invoked in that context. (See this PubCo post.)

It is, however, noteworthy that the adopting release for the new amendments emphasized that the intent of the amendments was not to "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." With that in mind, the question is whether, in light of the new case from SCOTUS, the SEC will elect to retain the current language or seek to amend it, or otherwise provide guidance, to conform to SCOTUS's new interpretation of "confidential" under Exemption 4.

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.

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