The SEC’s new rules related to confidential treatment (part of FAST Act Modernization and Simplification of Regulation S-K) became effective today, April 2, when the adopting release was published in the Federal Register. With that in mind, Corp Fin has posted some guidance under the very descriptive title, New Rules and Procedures for Exhibits Containing Immaterial, Competitively Harmful Information to help companies comply with the new confidential treatment process, discussed below. The remainder of the release (other than provisions related to data-tagging, which will be phased in) will become effective on May 2. (For a summary of the new rules, see this PubCo post, which, since the intital posting, has been revised and updated.)

New approach. Under the SEC’s new approach to confidential treatment, companies will be able to redact information from material contracts without the need to submit in advance formal confidential treatment requests, so long as the redacted information (i) is not material and (ii) would be competitively harmful if publicly disclosed. Under the new rules, contained mostly in Reg S-K Item 601(b), companies will now be required to:

  • “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 (i) not material and (ii) would be competitively harmful if publicly disclosed; and
  • indicate with brackets where the information has been omitted from the filed version of the exhibit.”

SideBar

It is worth noting here that the adopting release emphasized that the new rules and processes for confidential treatment “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. Rather, the amendments recognize that the administrative process by which registrants currently are permitted to protect confidential information in certain exhibits is not the most efficient way to serve investors’ interests.”

Compliance Reviews. Not surprisingly, Corp Fin announces here that it intends to review filings for compliance. When the staff conducts a review in connection with a regular filing review (e.g., review of a periodic report), staff members will separate their “requests for supplemental information, and will request that registrants provide their responses to those requests separately from the regular filing review comment and response process to minimize the risk of inadvertent public disclosure of competitive information.”

Why all this attention to separating out all of the materials related to confidential treatment? My understanding is that a critical aspect of the new approach is that the SEC not retain copies of the confidential supplemental material, such as unredacted copies of the material agreements or, if requested by the staff, an analysis supporting the redactions. In general, confidential information retained by the SEC could become publicly available if it is the subject of a valid FOIA request, except to the extent protected by a request for confidential treatment. Accordingly, the company should request that, once the staff has completed its review, all the confidential supplemental material submitted be returned or destroyed, following the procedures of Rule 418 or Rule 12b-4, as applicable. And, because the SEC would not retain unredacted copies or supplemental materials, no CTR would be required for FOIA purposes going forward.

General Compliance Review Process

  • The staff will initiate a redacted exhibit review with a letter request for a paper copy of the unredacted exhibit marked to highlight the redacted information.
  • Upon review, the staff may ask the company to to substantiate the redaction decisions by providing the underlying rationales supplementally.
  • If the staff has no comments, the company will receive a letter indicating that the review is complete.
  • However, if the staff did have questions regarding materiality or competitive harm, the company would receive comments regarding the exhibit separately from any comments on the associated filing.
  • If the staff determined that the supplemental rationales provided by the company did not support the redactions, the staff could request that the exhibit be refiled to disclose additional information.
  • Once questions have been resolved, the company will receive a letter indicating that the review is complete.

Securities Act Registration Statements

  • As in the past, companies will need to resolve any questions relating to redacted exhibits in registration statements before submitting requests for acceleration.
  • The only information that will be publicly posted on EDGAR will be the initial request for an unredacted exhibit and the letter indication the closing of review, both of which will be posted together with the other correspondence related to the filing.
  • The staff will not post staff comments regarding redacted exhibits or company responses, which could contain confidential information.

Exchange Act Filings

  • As with registration statements, only the initial request for an unredacted exhibit and the letter advising that review has been closed for that exhibit will be publicly posted on EDGAR, after the review has been completed.
  • If the review was conducted as part of a regular filing review, the two letters will be posted with the other correspondence related to the filing review.
  • The staff will not post staff comments regarding redacted exhibits or company responses, which could contain confidential information.

Procedures to preserve confidentiality of supplemental materials

  • Companies can request confidential treatment of supplemental materials, such as unredacted copies of agreements or a supplemental analysis of the rationale for the redactions, while in the possession of the staff under Rule 83. (Presumably, the Rule 83 process required here will be a modified version of the process currently used, which does not require submission of justifications for confidential treatment unless a FOIA request is made.)
  • Upon completion of a compliance review, the company should request return or destruction of all supplemental materials by complying with the procedures outlined in Rules 418 or 12b-4, as applicable.
  • Corp Fin will provide specific instructions in the initial request for unredacted exhibits, which should be followed to minimize the risk of inadvertent disclosure: Corp Fin encourages companies “to follow those instructions and not send supplemental responses to requests for unredacted exhibits or other supplemental information relating to those exhibits to individual staff members or the staff member that made the request.”

Transition Issues

  • The regular CTR process for requesting confidential treatment pursuant to Rule 406 or Rule 24b-2 remains available.
  • Pending CTR applications under Rule 406 or Rule 24b-2 may be withdrawn if desired.
  • If the CTR is withdrawn, the company will need to refile the exhibit in redacted form in an amended filing that conforms to the amended rules and coordinate the withdrawal with the AD responsible for reviewing the filings.
  • When the AD processes the withdrawal of the CTR, the application and related materials will be destroyed unless the company requests their return.
  • Corp Fin will continue to process new applications for CTR as well as pending applications that have not been withdrawn following established procedures.
  • Existing orders granting confidential treatment that are still in effect will remain in effect until the date stated on the order.

Questions

  • Requests should include the name, phone number and brief summary of the question.

SideBar

In this statement, SEC Commissioner Robert Jackson voiced his dissent from adoption of the final amendments. One of reasons for his dissent was the “most troubling” decision regarding the confidential treatment process, which, in his view “removes our staff’s role as gatekeepers when companies redact information from disclosures—despite evidence that redactions already deprive investors of important information.” Historically, Jackson observes, companies work with the staff to agree on permitted redactions:

“There are often good reasons for our staff to permit redactions. But recent research shows that redactions already include information that insiders or the market deems material—showing how important careful review of these requests can be for investors. Today’s rule removes both the requirement that firms seek staff review before redacting their filings and the requirement that companies give our staff the materials they intend to redact. The release doesn’t grapple with the effects of that decision for the marketplace. But one thing is clear: In a world where redactions already rob the market of information investors need, firms will now feel more free to redact as they wish. And investors, without the assurance that redactions have been reviewed by our staff, will face more uncertainty.”