What Is Confidential Treatment?
Confidential treatment, within the realm of regulatory compliance and corporate finance, refers to the formal process by which entities can request the U.S. Securities and Exchange Commission (SEC) to withhold specific information from public disclosure that would otherwise be required in their filings. This mechanism allows companies to protect sensitive business data, such as trade secrets or proprietary information, from being made publicly available while still adhering to their disclosure requirements under federal securities laws. The primary objective of confidential treatment is to balance the public's right to information with a company's legitimate need to protect competitive intelligence.
History and Origin
The practice of confidential treatment has long been a feature of U.S. securities regulation, stemming from the need to protect sensitive corporate information. Historically, the Securities Act of 1933 and the Securities Exchange Act of 1934 established broad disclosure requirements for public companies. However, recognizing that certain disclosures could harm a company's competitive standing, the SEC developed rules to allow for the nondisclosure of specific information under defined circumstances. Key among these are Rule 406 under the Securities Act and Rule 24b-2 under the Exchange Act. These rules provide the exclusive means for companies to object to the public release of confidential information otherwise required to be filed25, 26, 27.
Prior to March 2019, confidential treatment applications under these rules were the primary method for companies to protect confidential commercial or financial information filed as exhibits, such as material contracts24. However, amendments adopted in March 2019 and November 2020 streamlined several exhibit filing requirements, allowing companies to omit immaterial information routinely treated as private or confidential without a formal confidential treatment request23. This shift was aimed at reducing the burden on filers while maintaining appropriate transparency.
Key Takeaways
- Confidential treatment is a formal process for companies to request that the SEC withhold sensitive information from public filings.
- It primarily applies to information that would constitute trade secrets or proprietary information, the disclosure of which would cause competitive harm.
- The process is governed by specific SEC rules, notably Rule 406 of the Securities Act and Rule 24b-2 of the Exchange Act.
- Recent regulatory changes have introduced more streamlined methods for redacting certain immaterial information without a full confidential treatment application.
- The SEC reviews applications to ensure the request is justified and consistent with the Freedom of Information Act (FOIA) exemptions.
Interpreting Confidential Treatment
Confidential treatment is interpreted and applied in the real world as a critical tool for corporate governance and intellectual property protection within the framework of regulatory compliance. When a company seeks confidential treatment, it is essentially arguing that the public interest in disclosure is outweighed by the potential harm to the company from revealing specific details. The SEC's Division of Corporation Finance reviews these requests to determine if the applicant has provided sufficient information to warrant an order granting the confidential treatment22.
The information typically includes details related to the justification for the request, often referencing specific exemptions under the Freedom of Information Act, and an explanation of why disclosure is unnecessary for the protection of investors20, 21. This process is vital for companies to protect competitively sensitive data within material contracts and other exhibit filings without running afoul of disclosure requirements.
Hypothetical Example
Imagine "BioGen Innovations Inc.," a biotechnology startup, is preparing for its Initial Public Offering (IPO). As part of its registration statement, BioGen must file certain material contracts, including a licensing agreement for its groundbreaking new drug with a major pharmaceutical company, "PharmaGiant Corp." This agreement contains highly sensitive details about the royalty rates and development milestones, which are critical trade secrets.
BioGen's legal team determines that disclosing these specific financial terms would severely harm its competitive position, as rivals could use this information to undercut future deals or reverse-engineer its valuation model. Therefore, BioGen decides to seek confidential treatment for these particular sections of the licensing agreement.
Following SEC rules, BioGen files the agreement as an exhibit, omitting the confidential portions and indicating where information has been redacted. Simultaneously, it submits a formal confidential treatment application, providing a detailed justification for why these specific terms should remain private, citing their proprietary nature and potential for competitive harm. The SEC reviews the application, and after a series of communications and clarifications, grants confidential treatment for a specified period, allowing BioGen to protect its sensitive data while proceeding with its IPO.
Practical Applications
Confidential treatment provisions manifest in various areas of finance and business operations, primarily in contexts requiring extensive disclosure.
- Corporate Filings: Public companies regularly utilize confidential treatment for sensitive details within their financial reporting, particularly in exhibit filings to annual reports (Form 10-K), quarterly reports (Form 10-Q), and registration statements19. This includes terms in strategic alliances, joint ventures, or supply agreements.
- Mergers and Acquisitions (M&A): During M&A transactions, confidential treatment can be sought for specific terms within merger agreements or asset purchase agreements that contain commercially sensitive data relevant to due diligence but not crucial for investor understanding of the overall deal structure.
- Intellectual Property Protection: Companies often protect information related to patents, unpatented know-how, and product development plans embedded within contracts by requesting confidential treatment. This ensures that their innovations are not prematurely revealed to competitors.
- Regulatory Scrutiny: Investment managers, for instance, may seek confidential treatment for certain trading strategies or portfolio holdings to prevent market manipulation or front-running, as outlined in specific SEC guidance for Section 13(f) filings18.
The SEC's Division of Corporation Finance provides detailed guidance on how to submit these applications, specifying the necessary documentation and legal grounds required for approval17. This guidance is regularly updated to reflect changes in disclosure rules and technological advancements in filing.
Limitations and Criticisms
While confidential treatment serves a legitimate purpose in protecting proprietary information, it also faces limitations and has drawn criticism. One primary concern is the potential for companies to over-redact information, thereby reducing transparency for investors. Although the SEC selectively reviews filings, some redacted exhibits might not undergo a formal review, potentially leading to the withholding of information that would not otherwise qualify for confidential treatment16. If the SEC identifies questionably protectable information, it can require the company to provide additional explanation or even publicly file an unredacted copy of the exhibit, which could result in negative publicity15.
Another limitation is the evolving nature of disclosure rules. The March 2019 amendments, for example, aimed to simplify redaction for immaterial and commercially sensitive information in certain exhibits without requiring a formal confidential treatment request, lessening the burden but also potentially altering the landscape of what information is formally reviewed for confidentiality14. Critics argue that while these changes offer companies more flexibility, they also place more onus on companies to make appropriate judgments about what constitutes "immaterial" information, with less direct oversight on every specific redaction compared to the formal confidential treatment process. Furthermore, confidential treatment orders are typically granted for a limited period and require extensions, which adds an ongoing compliance burden for companies13.
Confidential Treatment vs. Redaction
While often used interchangeably in general discourse, "confidential treatment" and "redaction" refer to distinct processes in the context of U.S. financial disclosure.
| Feature | Confidential Treatment | Redaction (Streamlined) |
|---|---|---|
| Process | Formal application to the SEC under specific rules (e.g., Rule 406, Rule 24b-2), requiring detailed justification and analysis.12 | Direct omission of information by the company, often without prior SEC review, under amended exhibit filing rules.11 |
| Scope | Typically for highly sensitive, material information (e.g., trade secrets, significant contractual terms) whose public disclosure would cause competitive harm. | For immaterial information or personally identifiable information that is customarily and actually treated as private.10 |
| Review Level | Requires SEC staff review and approval, culminating in a formal order granting or denying the request.9 | Self-executing; the company makes the determination. Subject to selective SEC review post-filing.8 |
| Legal Basis | Relies on specific SEC rules and Freedom of Information Act (FOIA) exemptions (e.g., Exemption 4 for commercial or financial information).7 | Relies on amended exhibit filing requirements (e.g., Regulation S-K Item 601(b)(10)(iv)) that allow for certain omissions.6 |
| Unredacted Copy | An unredacted copy of the document must be provided to the SEC confidentially.5 | Generally, the unredacted version is not provided to the SEC at the time of filing unless specifically requested later.4 |
Confidential treatment is a more rigorous and formal procedure aimed at protecting truly critical business secrets from public disclosure in regulatory filings, requiring explicit SEC approval. Redaction, particularly under the streamlined rules, allows companies to omit less material, but still private, information from public view without undergoing the extensive formal review process of confidential treatment.
FAQs
What kind of information typically qualifies for confidential treatment?
Information that typically qualifies for confidential treatment includes trade secrets, proprietary formulas, sensitive pricing terms in material contracts, specific royalty rates, detailed development milestones, or highly confidential strategic plans. The key criterion is that its public disclosure would cause substantial competitive harm to the company.
How long does confidential treatment last?
The period for which confidential treatment is granted is justified by the applicant and reviewed by the SEC. It is not indefinite and often requires renewal applications, especially if the underlying contract or information remains material and confidential3. The SEC guidance provides different extension procedures depending on the age of the initial order.
Can the SEC revoke confidential treatment?
Yes, the SEC can revoke a grant of confidential treatment. If a prior grant of confidential treatment is revoked or if an objection to disclosure is disallowed, the company that requested the treatment will be informed. Companies may also petition the Commission for review of such a determination2.
Does applying for confidential treatment guarantee the information will remain private?
No, applying for confidential treatment does not guarantee that the information will remain private. The SEC reviews each application and may issue comments or require further justification. If the SEC determines that the information does not meet the criteria for confidential treatment, it may require the company to make it publicly available1.
What happens if a company discloses confidential information that was subject to confidential treatment?
If a company voluntarily discloses information for which confidential treatment was granted, or if the SEC revokes the confidential treatment, the information would then become publicly available. Companies must be careful to manage their disclosure obligations in light of any confidential treatment orders.