Securities Law Blog

Obtaining confidential treatment of sensitive, proprietary information contained in a material contract to be publicly filed as an exhibit to an SEC filing has always been among the most serious concerns of management teams when going public. This author’s article, “Withholding Confidential Information from Required Filings,” appearing in The Review of Securities & Commodities Regulation in May 1992 provided a step-by-step guide to requesting confidential treatment of portions of a contract through a special application submitted separately to the Secretary of the SEC in a non-public file at the time of an SEC filing. Since that time, the confidential treatment process has remained essentially unchanged . . . until now. The SEC has proposed in its FAST Act Modernization and Simplification of Regulation S-K release (Nos. 33-10425 and 34-81851) to eliminate the need for public companies to submit applications for confidential treatment, allowing them to first redact specific confidential portions of a contract and leaving it up the SEC staff to then monitor whether the redactions are properly limited to specific contractual provisions during its normal review process.

The proposed revisions under the release would permit registrants to omit confidential information from material contracts where such information is both (i) not material and (ii) competitively harmful if publicly disclosed.  Instead, registrants would be required to mark the exhibit index to indicate that portions of the exhibit or exhibits have been omitted and include a prominent statement on the first page of each redacted exhibit that information in the marked sections of the exhibit has been omitted from the filed version of the exhibit.  Registrants would also be required to indicate with brackets where the information has been omitted from the filed version of the exhibit.

Although registrants would not be required to file a confidential treatment request in accordance with Rule 406 under the Securities Act of 1933 or Rule 24b-2 under the Securities Exchange Act of 1934 in connection with the redacted exhibit, the responsibility of a registrant to determine whether all material information has been disclosed and whether they may redact the information under the proposed rules would remain unchanged.  The SEC staff would continue its selective review of registrant filings and would selectively assess whether redactions from exhibits appear to be limited to information that is not material and would subject the registrant to competitive harm if publicly disclosed.  As is currently the case, the redacted information should include no more text than necessary to prevent competitive harm to the registrant.  

Upon the SEC’s request, registrants would be expected to promptly provide supplemental materials to the staff similar to those currently required in a confidential treatment request, including an unredacted paper copy of the exhibit and an analysis of why the redacted information is both (i) not material and (ii) would cause competitive harm if publicly disclosed. The timing of any staff review would not alleviate a registrant’s obligation to disclose all material information and its obligation to limit redactions to those provisions and terms that are both (i) not material and (ii) would cause competitive harm if publicly disclosed. Registrants could request confidential treatment of this supplemental information pursuant to Rule 83 under the Securities Act while it is in the staff’s possession. If the registrant’s supplemental materials do not support its redactions, similar to the process the staff currently follows for confidential treatment requests under Rule 406 and Rule 24b-2, the staff may request that the registrant file an amendment that includes some, or all, of the previously redacted information.

The proposed rules present the following potential issues:

• There may be a tendency for registrants to overly omit entire contractual provisions of a contract filed with the SEC, rather than narrowly selected words, phrases and figures that constitute the essence of the proprietary information, to try to keep more information undisclosed.  A registrant may find it tempting to shift the burden to the SEC to object to redactions of information that the registrant believes constitutes a trade secret or is considered proprietary data that if disclosed could cause substantial competitive harm to the registrant.  There may be a natural bias by public companies, especially entrepreneurial tech companies, to believe most of their business processes fall into this category.
• There may be a tendency for registrants to file redacted material contract exhibits along with their “less typically reviewed” Exchange Act filings, such as annual, quarterly and current reports, rather than with a registration statement that is monitored and/or reviewed by the SEC staff and requires SEC clearance of all comments before being declared effective, in order to avoid potential review.
• There appears to be perpetual confidential treatment granted for a material contract exhibit under the SEC’s proposing release.  Historically, a registrant was required to provide in its request for confidential treatment the time period sought for such confidentiality and the justification for that period of time, which depended on factors such as the term of the contract, whether similar contracts are being negotiated or where “state of the art” technology is covered in a contract.  Since the SEC staff may never actually have an unredacted copy of the exhibit to make available to the public at a later date, the proposed rule provides for no specific ending date for the period of confidentiality.
• There may be a good deal of confusion in finding the most updated material contracts of a registrant.  Under the proposed release, if the registrant’s supplemental unredacted materials do not support its redactions, the SEC staff may request that the registrant file an amendment that includes some, or all, of the previously redacted information.  In these situations, a material contract may be filed numerous times until the staff is satisfied.  Registrants are likely not to include a redlined copy reflecting the change or include an explanatory note describing why or where an amended version of the contract is being filed.  Additionally, in instances in which the SEC staff conducts a full review in connection with a public offering registration statement, it may comment on a registrant’s past periodic filings, including redacted material contract exhibits, a year or more after the original filing of the exhibit.  By then, the registrant may determine the contract is no longer “competitively harmful” or otherwise required to be filed.