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Securities Regulation and Corporate Governance > Posts > SEC Issues Guidance Relating to New Rules and Procedures for Redacting Confidential Information
SEC Issues Guidance Relating to New Rules and Procedures for Redacting Confidential Information

On April 1, 2019, the Division of Corporation Finance (the “Division") of the Securities and Exchange Commission (the “SEC") issued guidance relating to the recently adopted rules and procedures that permit registrants to redact confidential information from certain exhibits without filing a confidential treatment request (available here).  The guidance provides additional information on the Division's process for reviewing redacted information and certain matters relating to the transition to the new rules and procedures. 

As discussed in our prior client alert (available here), the SEC adopted final rules on March 20, 2019 to modernize and simplify disclosure requirements (the “Final Rules").  As part of the Final Rules, Item 601(b) of Regulation S-K was amended to permit registrants to file redacted material contracts and plans of acquisition, reorganization, arrangement, liquidation, or succession[1] without applying for confidential treatment of the redacted information provided the redacted information (i) is not material and (ii) would likely cause competitive harm to the registrant if publicly disclosed.  Under the new rules and procedures, registrants must identify where information has been omitted from a filed exhibit by (1) marking the exhibit index to indicate that portions of the exhibit have been omitted, (2) including 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 likely cause competitive harm to the registrant if publicly disclosed, and (3) indicating with brackets where the information has been omitted from the filed version of the exhibit.  These amendments to Item 601(b) became effective on April 2, 2019.

This aspect of the Final Rules has received significant attention since its adoption.  On March 26, 2019, Commissioner Robert J. Jackson Jr. issued a dissent to the Final Rules (available here), criticizing the provisions that permit registrants to redact confidential information without filing a confidential treatment request.  Commissioner Jackson called the changes “troubling," noting his belief that “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 [the Division], will face more uncertainty."[2]

We provide below a summary of the Division's guidance relating to the staff's compliance review process and certain transition issues relating to the new rules and procedures under amended Item 601(b).

Compliance Reviews

Compliance review process.  The Division emphasized that redacted exhibits will be reviewed for compliance with the Final Rules.[3]  When the staff initiates such a review, a letter will be sent requesting the registrant to provide the Division with a paper copy of the unredacted exhibit marked to highlight the redacted information.  If such review is done in connection with a regular filing review, the initial request and any related comments or responses will be separated from any other comments or responses relating to the associated filing.  Upon reviewing the unredacted materials, the staff may ask the registrant to substantiate the decision to redact information and raise questions about immateriality as well as claims of competitive harm.  If the review does not lead to comments, or after any questions have been resolved, the staff will send the registrant a letter indicating the compliance review is complete.[4]  Accordingly, as good practice, registrants should document internally the rationale and basis for redaction in accordance with the Final Rules at the time of filing the redacted exhibit.

The staff's initial request for an unredacted exhibit and the closing of review letter will be made available on EDGAR.[5]  However, in order to avoid public disclosure of competitively harmful information, Division comments regarding redacted exhibits and registrant responses to requests or comments will not be posted on EDGAR.

Supplemental materials.  The staff will provide specific supplemental material delivery instructions in its request for unredacted exhibits.  Registrants may request that such materials be withheld when requested under the Freedom of Information Act pursuant to Rule 83.  Upon completion of a compliance review, the staff will destroy all supplemental materials so long as the registrant has complied with the applicable confidential treatment procedures.

Impact on request for acceleration of effective date.  With respect to registration statements, registrants will need to resolve any questions relating to redacted exhibits before submitting a request for acceleration of the effective date.  This should apply to both exhibits filed directly with the registration statement and as exhibits to reports incorporated by reference into the registration statement.  This is consistent with historical practice.

Transition Issues

Registrants may continue to request confidential treatment.  The Final Rules have not changed a registrant's ability to request confidential treatment pursuant to Rule 406 or Rule 24b-2.  The staff will continue to process new applications as well as pending applications that are not withdrawn following established procedures.

Pending applications may be withdrawn.  If a registrant has a confidential treatment request pursuant to Rule 406 or Rule 24b-2 pending at the time the Final Rules became effective, the registrant may, but is not required to, withdraw its pending application.  Registrants who elect to withdraw their confidential treatment applications and rely on the Final Rules must amend their filing to conform to the new rule requirements.  Registrants should contact the Assistant Director's office responsible for reviewing their filings to coordinate the withdrawal of a confidential treatment application.

Prior orders are unaffected.  If the registrant has received an order granting confidential treatment and the order is still in effect, the grant of confidential treatment will continue until the date stated on the order.  The guidance does not specifically discuss what a registrant's options are prior to expiration of an existing order; however, based on the amendments in the Final Rules, we believe that, in lieu of submitting a request for extension of the order, the registrant could simply refile the agreement in redacted form pursuant to the new provisions of 601(b), assuming the conditions for redaction are met.  The guidance does not address how unredacted exhibits in the SEC's files will be treated if a Freedom of Information Act request is received after expiration of an existing order.

Special thanks to David Korvin, Rex Jordan and Rob Kelley for their contributions to this post. 



 

   [1]   The changes also apply to exhibits filed in connection with Item 1.01 of Form 8-K to the extent such exhibits are filed with the intention of being incorporated by reference into future filings in satisfaction of Item 601(b).

   [2]   In his dissent, Commissioner Jackson also criticized the fact that the Final Rules do not require registrants to disclose the “legal entity identifier" (LEI), a 20-character, globally-recognized alpha-numeric code that allows for unique identification of entities engaged in financial transactions, for the registrant and its subsidiaries.

   [3]   For guidance relating to the staff's views on appropriate redactions, registrants can continue to look to Staff Legal Bulletins 1 and 1A (available here).

   [4]   The new guidance does not specify whether an unresolved comment regarding redactions would need to be disclosed under Part I, Item 1B of Form 10-K if received 180 days or more before the end of a registrant's fiscal year.  Given that Item 1B is limited to those “comments that the registrant believes are material" and the Final Rules are limited to redactions of immaterial information, we expect registrants will generally consider comments related to such redactions to be immaterial, and thus not require disclosure under Item 1B.

   [5]   In the case of Securities Act registration statements, the initial request and the closing of review letter will be made available on EDGAR in connection with posting the other correspondence related to the filing review.  In the case of Exchange Act filings, the initial request and the closing of review letter will be made available on EDGAR following the closing of that review or, if done in conjunction with a regular filing review, at the time other correspondence related to the filing review is posted.

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