Assessment of Corporation 

Finance’s Confidential Treatment 

Processes and Procedures

 September 28, 2010 

Report No. 479 
Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

Report No. 479

i 

O .....CI[ 0 ..

'N ...ItCTOA GI[NI[IIlAL

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON. D.C. 20!549

MEMORANDUM

September 28.2010

To: Meredith Cross, Director, Division of Corporation Finance (CF)

From: H. David Kotz. Inspector General, Office of Inspector Generaf#k

Subject: Assessment of Corporation Finance's Confidential Treatment

Processes and Procedures, Report No. 479

This memorandum transmits the U.S. Securities and Exchange Commission,

Office of Inspector General's (OIG) final report detailing the results of our audit

on the CF's confidential treatment processes and procedures. This audit was

conducted as part of our continuous effort to assess the management of the

Commission's programs and operations and as a part of our annual audit plan.

The final report contains eight recommendations that were developed to

strengthen the Commission's confidential treatment processes and procedures.

CF fUlly concurred with four recommendations, partially concurred with three

recommendations, and did not concur with one recommendation. CF's written

response to the draft report is included in its entirety in Appendix V.

Within the next 45 days, please provide the OIG with a written corrective action

plan that is designed to address the agreed-upon recommendations. The

corrective action plan should include information such as the responsible

official/point of contact, time frames for completing the required actions,

milestones identifying how you will address the recommendations cited in this

report.

Should you have any questions regarding this report, please do not hesitate to

contact me. We appreciate the courtesy and cooperation that you and your staff

extended to our staff during this audit.

Attachment

cc: Kayla J. Gillan, Deputy Chief of Staff, Office of the Chairman

Diego Ruiz, Executive Director. Office of the Executive Director

Shelly Parratt, Deputy Director, Division of Corporation Finance,

Disclosure Operations
Assessment of Corporation Finance’s 

Confidential Treatment Processes and 

Procedures

Executive Summary 

Background. The Division of Corporation Finance’s (CF) chief roles within the 

agency are to ensure that investors are provided with material information, offer 

interpretive assistance to companies on the Securities and Exchange 

Commission’s (SEC or Commission) rules and forms, and make proposals to the 

Commission for new disclosure rules or revisions to existing disclosure rules. 

Material information is provided to investors to assist them in making an informed 

decision. This is not only done when a company originally offers its stock to the 

public. It is also provided on a consistent basis as the company discloses 

information to the marketplace. Companies are required to comply with the 

reporting requirements set forth by the Securities Act of 1933 (Securities Act) and 

the Securities Exchange Act (Exchange Act) of 1934. 

CF has a number of statutory requirements and review priorities that it must meet 

in pursuing its core investor protection responsibilities. For example, in addition 

to processing requests for confidential treatment, CF reviews registrants’ 

Exchange Act reports, including the review of the financial statements of every 

registrant at least once every three years, as mandated by the Sarbanes-Oxley 

Act of 2002. Consistent with its investor protection mandate and the spirit of the 

Sarbanes-Oxley Act, CF further reviews a substantial number of registrant’s 

Exchange Act reports. CF also: 

• Reviews and declares effective Securities Act registration statements; 

• Reviews the filings of all companies registering with the Commission 

for the first time, regardless whether they are filing under the Securities 

Act or the Exchange Act; 

• Responds to requests for no action relief; 

• Assists the Commission with rule writing; 

• Reviews tender offers and other transactions; and 

• Provides interpretive guidance to registrants and would-be registrants. 

The Securities Act is commonly referred to as the “truth in securities” law. This 

act has two main components: 1) the Act requires that investors receive financial 

and other significant information concerning securities being offered for public 

sale; and 2) the Act prohibits deceit, misrepresentations, and other fraud in the 

sale of securities. The basic means of accomplishing these goals are the 

disclosure of important financial information through the registration of securities. 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

Report No. 479

ii 
With the Exchange Act, Congress created the Securities and Exchange 

Commission. The Exchange Act empowers the Commission with extensive 

authority over all aspects of the securities industry. This includes the power to 

register, regulate, and oversee brokerage firms, transfer agents, and clearing 

agencies, as well as the nation’s securities self regulatory organizations (SROs). 

The federal securities laws generally require any company that is publicly held or 

is registering its securities for public sale to disclose a broad range of financial 

and non-financial information in registration statements, annual reports, and 

other filings made with the Commission. The disclosure requirements for 

financial and non-financial information primarily are found in Regulation S-K. 

Regulation S-X sets forth the financial statement disclosure requirements. 

Sometimes the public disclosure of information required by the disclosure rules 

(e.g., Regulation S-K) can adversely affect a company’s business and financial 

condition because of the competitive harm that could result from the disclosure.1

 

This issue frequently arises in connection with the requirement that a registrant 

file publicly all contracts material to its business other than those it enters into in 

the ordinary course of business.2 Typical examples of the information that raises 

this concern include pricing terms, technical specifications and milestone 

payments.3 To address the potential disclosure hardship, the Commission has 

adopted a system that allows companies to request confidential treatment of 

information filed under the Securities Act and the Exchange Act.4

Specifically, Commission Rules 406 and 24b-2 set forth the exclusive means for 

obtaining confidential treatment of information contained in documents filed 

under the Securities Act and the Exchange Act, respectively that would be 

exempt from disclosure under the Freedom of Information Act (FOIA). FOIA 

requires all federal agencies to make specified information available to the public, 

including information required to be filed publicly by Commission rules. FOIA, 

however, contains nine specific exemptions. Rules 406 and 24b-2 require that 

confidential treatment requests contain an analysis of the applicable FOIA 

exemptions. Most applicants rely on the exemption for “trade secrets and 

commercial or financial information obtained from a person privileged or 

confidential,”5

 which is commonly referred to as “the (b)(4) exemption.” 

Congressional Report. On January 25, 2010, the U.S. House of 

Representatives Committee on Oversight and Government Reform issued a 

special report focused on the disclosure surrounding payments made to 

Report No. 479

iii 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

 

1

 Division of Corporation Finance Staff Legal Bulletin No.1 (with Addendum), February 28, 1997 (Addendum 

included: July 11, 2001), page 2. See http://www.sec.gov/interps/legal/slbcf1r.htm. 

2 Id. Regulation S-K, Item 601, 17 C.F.R. § 229.601, requires all material contracts not made in the ordinary 

course of business to be filed with the SEC as an exhibit. 

3

 Division of Corporation Finance Staff Legal Bulletin No.1 (with Addendum), February 28, 1997 (Addendum 

included: July 11, 2001), page 2. See http://www.sec.gov/interps/legal/slbcf1r.htm. 

4 Id. 5

 5 U.S.C. § 552(b)(4).
counterparties of American International Group (AIG), as a result of the Federal 

Reserve Bank of New York (FRBNY) Maiden Lane III (ML 3) transaction.6

 The 

report stated that, as a result of the ML 3 transaction between AIG and the 

FRBNY, AIG was required to file an 8-K report with the SEC to disclose 

information as required under the securities laws.7

 The report further described 

AIG’s 8-K regulatory filing submission process for the ML 3 transaction, which 

included a confidential treatment request to the SEC for information contained in 

an attachment to the ML 3 contract agreement identified as “Schedule A.” The 

report stated that the “Schedule A" attachment contained details of payments 

certain companies received as a result of the ML 3 transaction that terminated 

certain derivative agreements, to which AIG was a counterparty. 

In a statement issued by the FRBNY regarding public disclosure of the ML 3 

transaction with AIG, the FRBNY stated that AIG’s decision to initiate a 

confidential treatment request with the SEC for its 8-K filing associated with the 

ML 3 transaction was not an uncommon practice and within the confines of the 

SEC rules, as the SEC typically receives 1,500 confidential treatment requests 

each year and grants confidential treatment requests 95 percent of the time.8

 

Considering the Congressional efforts to provide the public with greater 

transparency surrounding the Federal assistance to AIG, along with the 

statements rendered by the FRBNY pertaining to the SEC’s confidential 

treatment request process, the OIG decided to conduct an audit of CF’s 

confidential treatment request processes and procedures. This audit aligns with 

our overall objective and audit plan to continuously assess management of the 

Commission’s programs and operations. 

The OIG did not assess the confidential treatment request submitted by 

American International Group (AIG) during its audit. Our audit objective was to 

evaluate the CF confidential treatment request process in its entirety and 

included testing a sample of confidential treatment requests, which did not 

include the AIG request. Moreover, the findings do not specifically relate to any 

single confidential treatment request including the AIG confidential treatment 

request, but rather reflect observations that pertained to the overall confidential 

treatment request processes and procedures. 

Objectives. The audit’s objectives were to assess the adequacy of CF’s internal 

policies that govern the intake, processing, and decision-making associated with 

confidential treatment requests. In addition, our audit was planned to assess if 

registrants that were provided confidential treatment by CF adhered to the SEC 

rules that govern confidential treatment requests. Throughout our audit, the OIG 

6

 U.S. House of Representatives Committee on Oversight and Government Reform Special Report: Public 

Disclosure as a Last Resort: How the Federal Reserve Fought to Cover Up the Details of the AIG 

Counterparties Bailout From the American People, January 25, 2010. 7 Id., page 6. 8

 Federal Reserve Bank of New York: Statement Regarding Public Disclosures of AIG Concerning Maiden 

Lane III LLC, January 19, 2010. Available at http://www.newyorkfed.org/markets/st100119.html. 

Report No. 479

iv 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

 
also tested whether CF followed its internal policies and procedures for 

processing confidential treatment requests. The OIG also determined where 

improvements and best practices could be implemented for the CF confidential 

treatment process. However, the OIG audit was not planned to render an 

opinion on the decisions made by CF with respect to grants or denials of 

confidential treatment requests. 

Prior OIG Audit Reports. The OIG last audit of the CF confidential treatment 

process was conducted in 1994. All of the recommendations provided were 

followed up on and implemented by management. The OIG more recently 

performed audits/reviews of the Commission’s Office of the Secretary9

 and FOIA 

Office,10 which included examining the activities performed in these offices that 

pertain to confidential treatment requests. However, our audit focused on 

confidential treatment requests submitted in connection with SEC regulatory 

filings under the Securities Act of 1933 and Securities Exchange Act of 1934, and 

did not extend to confidential treatment granted for information related to the 

SEC comment letter process. 

Results. The OIG found that CF is not performing a robust review and 

examination of many confidential treatment requests. Specifically, out of 3,381 

confidential treatment requests submitted to CF between January 2008 through 

March 2010, 2,298, or approximately 68 percent, were processed without review, 

as a result of the initial screening process. A total of 789 out of 3,381, or 

approximately 23 percent requests, were monitored for one or more particular 

matters (e.g., duration, materiality, etc.), while 286 out of 3,381, or approximately 

8.5 percent of the requests, were selected for full review. As a result, over 90 

percent of confidential treatment requests submitted were not subject to a 

thorough review and examination for compliance with all aspects of the 

confidential treatment request rules. As a result, the OIG believes there is an 

increased risk that material information to investors may not be disclosed. 

Additionally, the OIG determined that the denial of a confidential treatment 

request is a rare occurrence, as we only found one confidential treatment request 

that CF did not grant during the scope of our review, January 2008 through April 

2010.11

Additionally, the OIG found that the use of conclusory statements in some 

applicants’ analyses of the applicable FOIA exemptions and in arguments 

regarding the potential competitive harm that could result if the subject matters 

for which confidential treatment was requested were disclosed. The OIG also 

identified instances where the scope of confidential treatment requests appeared 

9

 OIG Audit Report No. 402, “Office of the Secretary,” September 20, 2005. 10 OIG Audit Report No. 465, “Review of the SEC’s Compliance with the Freedom of Information Act,” 

September 25, 2009, and OIG Audit Report No. 422, “Backlog of FOIA Requests for Comment Letters” 

(March 30, 2007). 

11 Some confidential treatment requests are granted in situations where the applicant will revise their 

confidential treatment request applications and reduce the scope of the initial confidential treatment request 

based on comments from CF examiners or counsel. 

Report No. 479

v 

 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 
to be overly broad. In addition, the OIG found that documentation explaining why 

the subject matter of the confidential treatment request was not necessary for the 

protection of investors did not always include a robust assessment of both 

qualitative and quantitative factors that should be considered in assessing 

materiality. 

During our audit, the OIG also identified numerous cases where confidential 

treatment requests were assigned for review to CF staff in Assistant Director 

(AD) offices that do not normally review the SEC filings of the confidential 

treatment request applicants or companies in the confidential treatment request 

applicants’ industry group. CF’s Disclosure Operations function is structured into 

11 AD offices that specialize in reviewing the disclosures of registrants for 

various industry clusters.12 The industry experts in each AD group are 

knowledgeable of the accounting, disclosure, and technical issues associated 

with their respective assigned industry and perform the file reviews for those 

associated companies. However, only 247 out of 914, or 27 percent, of 

confidential treatment requests received from January 2008 through December 

2009 from companies in the healthcare and insurance industries were assigned 

to AD office No. 1, which processes confidential treatment requests submitted by 

companies in the healthcare and insurance industries. The OIG notes that CF 

has established its Disclosure Operations component along AD offices 

segregated by industry groups with similar accounting and financial reporting 

matters. Staff who are not assigned to a confidential treatment request 

applicant’s industry group may not be as knowledgeable of the subject matter of 

certain confidential treatment requests, thus increasing the risk that confidential 

treatment may be improperly granted for material information to investors. 

Lastly, the OIG determined that CF needs to implement additional controls in its 

confidential treatment request tracking database to ensure data is captured 

correctly. The OIG identified some data discrepancies in the CF confidential 

treatment request database. The OIG also found that the confidential treatment 

request tracking database lacks certain functionality, such as the ability to track 

confidential treatment requests that are modified after the initial submission. The 

CF confidential treatment request tracking database is used by management as 

a medium to generate performance reports. As such, the OIG determined that 

the reliability, accuracy, and completeness of information contained in the 

confidential treatment request tracking database is necessary to assist those 

charged with oversight of and decision-making for the confidential treatment 

request process. 

Summary of Recommendations. This report contains eight recommendations 

for CF that are designed to improve CF’s policies and procedures for processing, 

screening, and examining confidential treatment requests. 

12 CF recently announced the creation of a few additional offices to focus on capital market trends, 

structured finance products, and large financial services companies. See 

http://www.sec.gov/news/press/2010/2010-124.htm. 

Report No. 479

vi 

 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 
The OIG recommendations cover a facet of areas that can be implemented to 

improve CF’s confidential treatment request program. The recommendations 

include CF recommend to the Commission that the substantive requirements for 

confidential treatment requests that are currently described in Staff Legal Bulletin 

No. 1, as well as any additional substantive requirements deemed appropriate, 

be codified as formal guidance for confidential treatment request applicants. 

Additionally, the OIG recommends that CF revise its internal procedures for 

processing confidential treatment requests to require additional documentation of 

the substantive review of the materiality and competitive harm applicationspecific requirements. Such additional documentation should detail the specific 

qualitative and/or quantitative factors considered in assessing the materiality and 

competitive harm of the confidential treatment subject matter. The OIG also 

recommends that CF perform periodic internal assessments of the confidential 

treatment program and verify on a periodic basis that the information that has 

been granted confidential treatment has not been publicly disclosed. If CF 

determines that information previously granted confidential treatment has been 

publicly disclosed, it should take steps, as appropriate, to revoke the confidential 

treatment grant. The OIG also recommends that CF should revise its internal 

procedures for handling the initial screening of confidential treatment requests to 

ensure that the materiality and competitive harm criteria are not met by simply 

making conclusory statements or including boilerplate language in the 

applications by requiring additional documentation of how the screening and 

review process identified specific and concrete representations to support each 

criteria. Within CF, the OIG believes an opportunity exists for increased 

information sharing, such as our recommendation for AD offices that receive the 

highest number of confidential treatment requests to provide training to CF staff 

in other AD offices that review confidential treatment requests submitted by 

applicants outside their assigned AD offices. The OIG also recommends that CF 

add controls to the confidential treatment tracking database to ensure the 

accuracy and completeness of data used by management to evaluate program 

performance, and enhance the functionality of the database to allow 

management to identify applicants that are consistently provided with comments 

by CF to refine their confidential treatment requests. 

A detailed list of our recommendations can be found in Appendix IV. 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

Report No. 479

vii 
TABLE OF CONTENTS 

Executive Summary ................................................................................................

Table of Contents ...................................................................................................

Background and Objectives ............................................................................

Background .................................................................................................

Objectives ....................................................................................................

Findings and Recommendations ....................................................................

Finding 1: CF’s Policies Do Not Provide for In-Depth Substantive Reviews

of Most Confidential Treatment Requests ....................................................

Recommendation 1 .................................................................

Recommendation 2 .................................................................

Recommendation 3 .................................................................

Recommendation 4 .................................................................

Finding 2: The OIG Identified Significant Use of Conclusory Statements, 

Boilerplate Language and Overly Broad Scopes in Confidential Treatment 

Requests ......................................................................................................

Recommendation 5 .................................................................

Finding 3: Many Confidential Treatment Requests are not Reviewed by 

Staff Experts in the Confidential Treatment Request Applicant’s Industry ...

Recommendation 6 .................................................................

Finding 4: CF Needs to Enhance the Application Controls in the 

Confidential Treatment Requests Database .................................................

Recommendation 7 .................................................................

Recommendation 8 .................................................................

Appendices 

Appendix I: Acronyms. ................................................................................

Appendix II: Scope and Methodology ..........................................................

Appendix III: Criteria ....................................................................................

Appendix IV: List of Recommendations ......................................................

Appendix V: Management Comments .........................................................

Appendix VI: OIG Response to Management’s Comments.........................

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

..... ii 

... viii 

..... 1 

..... 1 

..... 9 

... 10 

... 10 

... 18 

... 19 

... 20 

... 20 

... 21 

... 23 

... 23 

... 24 

... 25 

... 27 

... 27 

... 28 

... 29 

... 31 

... 32 

... 34 

... 40 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

Report No. 479

viii 
Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

Report No. 479

ix 

Tables 

Table1: Average Confidential Treatment Request Processing Time .............

.

.

.... 8 

.. 12 

.. 13 

Figures 

Figure 1: Confidential Treatment Requests Processed in FY 2008 by CF ...

Figure 2: Confidential Treatment Requests Processed in FY 2009 by CF ...
 

Background and Objectives 

Background 

Introduction. Federal securities laws generally require any company that is 

publicly held or registering its securities for public sale to disclose a broad range 

of financial and non-financial information in registration statements, annual 

reports, and other filings made with the Securities and Exchange Commission 

(SEC or Commission).13 Companies that are registered with the SEC are 

required to comply with the reporting requirements set forth by the Securities Act 

of 1933 (the Securities Act), 15 U.S.C. § 77a et seq., and the Securities 

Exchange Act of 1934 (the Exchange Act ), 15 U.S.C. § 78a et seq.

14 The 

specific disclosure requirements for financial and non-financial information are 

primarily found in Regulation S-K, 17 C.F.R. § 229.10. Regulation S-X, 17 

C.F.R. § 210.1-01 et seq., sets forth the financial statement disclosure 

requirements.15

The Division of Corporation Finance (CF) assists the Commission in executing its 

responsibility to oversee corporate disclosure of important information to the 

investing public and manages the confidential treatment request process. 

CF has a number of statutory requirements and review priorities that it must meet 

to pursue its core investor protection responsibilities. For example, in addition to 

processing requests for confidential treatment, CF reviews registrants’ Exchange 

Act reports and reviews the financial statements of every registrant at least once 

every three years, as mandated by the Sarbanes-Oxley Act of 2002.16 

Consistent with its investor protection mandate and the spirit of the SarbanesOxley Act, CF reviews a substantial number of registrants’ Exchange Act reports 

much more frequently. CF further: 

• Reviews and declares effective Securities Act registration statements; 

• Reviews the filings of all companies registering with the Commission for 

the first time, regardless of whether they file under the Securities Act or 

the Exchange Act; 

• Responds to requests for no action relief; 

• Assists the Commission with rule writing; 

• Reviews tender offers and other transactions; and 

• Provides interpretive guidance to registrants and would-be registrants. 

 

13 Division of Corporation Finance Staff Legal Bulletin No.1 (with Addendum), February 28, 1997 (Addendum 

included: July 11, 2001), page 2. See http://www.sec.gov/interps/legal/slbcf1r.htm. 

14 Division of Corporation Finance Overview: The Investor's Advocate. How the SEC Protects Investors, 

Maintains Market Integrity, and Facilitates Capital Formation. See 

http://www.sec.gov/about/whatwedo.shtml#corpfin.

15 Division of Corporation Finance Staff Legal Bulletin No.1 (with Addendum), February 28, 1997 (Addendum 

included: July 11, 2001), page 2. See http://www.sec.gov/interps/legal/slbcf1r.htm. 

16 Section 408 of Public Law 107-204, July 30, 2002, 15 U.S.C. § 7266.

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

Report No. 479

1 
 

Sometimes disclosure of information required by the disclosure rules (e.g., 

Regulation S-K) can negatively affect a company’s business and financial 

condition because of the competitive harm that could result from the disclosure.17 

This issue can arise in connection with the requirement that a registrant file 

publicly all contracts material to its business other than those it enters into in the 

ordinary course of business.18 To address the potential disclosure hardship, the 

Commission has established a system that allows companies to request 

confidential treatment of information filed under the Securities Act and the 

Exchange Act.19

Rules Governing CF’s Confidential Treatment Request Process. The rules 

promulgated at 17 C.F.R. § 230.406, “Confidential Treatment of Information Filed 

with the Commission,” and 17 C.F.R. § 240.24b-2, “Non-Disclosure of 

Information Filed with the Commission and with Any Exchange” (Rules 406 and 

24b-2), prescribe the requirements for obtaining confidential treatment of 

information contained in documents filed under the Securities Act and the 

Exchange Act, respectively, that would be exempt from disclosure under the 

Freedom of Information Act (FOIA).20 FOIA requires all federal agencies to 

make specified information available to the public, including information required 

to be filed publicly by Commission rules.21 FOIA, however, includes nine spe

exemptions.22 Rules 406 and 24b-2 require that confidential treatment requests 

contain an analysis of the applicable FOIA exemptions.23 

Rule 24b-2, 17 C.F.R. § 24b-2(b)(2), requires an applicant to include the 

following items, among other things, in an application to the Commission for a 

confidential treatment request: 

1) Identification of the confidential portion of the filing; 

2) A statement of the grounds of objection to disclosure, including an 

analysis of how the confidential portion meets an applicable FOIA 

exemption(s); and 

3) A justification of the time period for which confidential treatment is 

requested. 

Report No. 479

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

2 

cific 

 

17 Division of Corporation Finance Staff Legal Bulletin No.1 (with Addendum), February 28, 1997 

(Addendum included: July 11, 2001), page 2. See http://www.sec.gov/interps/legal/slbcf1r.htm. 

18 Id. Regulation S-K, Item 601, 17 C.F.R. § 229.601, requires all material contracts not made in the 

ordinary course of business to be filed with the SEC as an exhibit. 

19 Division of Corporation Finance Staff Legal Bulletin No.1 (with Addendum), February 28, 1997 (Addendum 

included: July 11, 2001), page 2. See http://www.sec.gov/interps/legal/slbcf1r.htm. 

20 Id. 21 Id. 22 See 5 U.S.C. § 552(b). 23 17 C.F.R. § 230.406(b)(2); 17 C.F.R. § 240.24b-2(b)(2)(ii). 
 

Similarly, Rule 406, 17 C.F.R. § 230.406(b)(2), requires that an applicant include 

similar information in its request for confidential treatment.24

CF’s Confidential Treatment Process – Intake. The confidential treatment 

request process is initiated upon an applicant’s submission of a confidential 

treatment request application to the SEC’s Office of the Secretary. Upon receipt 

of the applicant’s confidential treatment request application, the Office of the 

Secretary will acknowledge receipt with a date stamp on the application and 

subsequently file it in CF’s mail slot in the Office of the Secretary. Staff from 

CF’s Office of Disclosure Support (ODS) pick up applicants’ confidential 

treatment request applications in person from CF’s mail slot in the Office of the 

Secretary on a daily basis. 

During the course of the audit, the OIG observed that upon obtaining possession 

of the applicant’s confidential treatment request application, staff from CF’s ODS 

enter the application as a record in CF’s confidential treatment tracking system (a 

Microsoft Access database). The system assigns a control number to each 

record entered into the confidential treatment tracking system. In addition, a staff 

member from ODS then creates a file folder for the application and places a 

confidential treatment tracking form on the cover of the file folder. 

CF’s Confidential Treatment Process – Screening. Research specialists in 

ODS perform a screening of the applicant’s confidential treatment request 

application using CF’s confidential treatment request screening form. Per CF’s 

confidential treatment request screening form, the research specialist is 

responsible for populating the following information pertaining to the confidential 

treatment request: 

• Applicant’s Name. 

• Assistant Director (AD) office number (“AD office No.” per the form). 

• Control No. (Automatically generated by CF’s Confidential Treatment 

Tracking system). 

• Date Request Submitted. 

• Indication if the application is for a new request or extension of a 

confidential treatment order previously granted (“New Request or 

extension?” per the form). 

• Form Type. 

• File No. 

• Date Form Filed.25

Report No. 479

3 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

 

24 CF has acknowledged that there is a difference in the language of Rules 406 and 24b-2, as Rule 24b-2 

does not include a statement similar to the provision at 17 C.F.R. § 230.406(b)(2)(iii), which requires the 

applicant to include “[a] detailed explanation of why, based on the facts and circumstances of the particular 

case, disclosure of the information is unnecessary for the protection of investors. However, CF has indicated 

that in practice it views no difference in the requirements to which applicants must adhere to when 

requesting confidential treatment under Rule 406 or Rule 24b-2. 25 Based on a screenshot of fields from CF’s Confidential Treatment Request Tracking Database. 
 

In addition, the research specialist is required to answer “Yes” or “No” to the 

following statements (both company-related and application-related) as they 

pertain to the applicant’s confidential treatment request application: 

Company-Related Items26

Applicant is a 

 If the application was submitted by a reporting company, 

Note:

Application-Related Items

• Applicant claims 

 Applicant includes 

 Applicant 

 Applicant 

 

 Applicant filed the document subject to the confidential treatment request 

on EDGAR 

 Applicant requests a 

 

26 In the audit, we identified one additional criterion that was included in the past as part of ODS screening. 

 CF Confidential Treatment Request Screening Form, April 2008. 28 Id. 29 Id. 30 Id. 31 Id. 32 Id. 33 Id. 34 Id. Per CF’s confidential treatment operating procedures, CF usually does not grant confidential treatment 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

Report No. 479

for a duration beyond 

4 
 

 Applicant provides 

Subsequent to answering “Yes” or “No” to the above mentioned statements, the 

research specialist in ODS proceeds to recommend the type of review the AD 

office will perform. The options available to the research specialist are: 

• “None.”37 

• “Full Review.” 

• “Monitor.”38

 

During the audit, the OIG learned that in cases where ODS recommends a 

review level of “None,” to the AD office, ODS will prepare a draft “No Review” 

letter and draft “Grant Order” for confidential treatment and forward these 

documents and the confidential treatment file folder (which includes the 

application initially submitted to the Office of the Secretary and a confidential 

treatment request screening form) to the assigned AD office based upon the 

industry group of the applicant. The OIG also learned that in cases where the 

recommended level of review by ODS is “Monitor,” ODS will prepare a draft 

“monitor letter.” Similarly, the OIG learned that if the recommended level of 

review by ODS is “Full Review,” ODS prepares a draft “review letter.” 

CF’s Confidential Treatment Process – AD Office Examination. On a 

periodic basis, staff members (e.g., special counsel/attorneys) from the AD 

offices assigned to examine the confidential treatment applications will pick up 

applicants’ confidential treatment request file folders for their assigned offices 

from ODS. Staff members are required to sign off acknowledging receipt of the 

confidential treatment request file folders containing the confidential treatment 

application, an unredacted copy of the filed materials, and the confidential 

treatment request screening form. After obtaining the confidential treatment 

request file folder, the AD office will make a determination whether to concur or 

disagree with the level of review recommended by ODS. 

In cases where the ODS recommended level of review is “None” and the 

processing AD office concurs, the AD office will prepare the confidential 

treatment grant order. In cases where the AD office does not concur with the 

ODS recommended level of review of “None,” the AD office will perform some 

level of review of the confidential treatment application. 

Report No. 479

5 

 

35 CF Confidential Treatment Request Screening Form, April 2008 36 Id. 37 This level of recommendation generally arises in instances where the research specialist answers “Yes” to 

all of the application-related items. 

38 The screener is asked to indicate the subject matter to be monitored.

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 
 

For applications that were recommended for a level of review of “Monitor,” the 

assigned processing AD office may issue a “monitor letter” and concurrently 

issue comments (written or oral) to the applicant on certain matters pertaining to 

the confidential treatment application. The applicant can submit an amended 

confidential treatment application in order to satisfy the concern(s) raised by the 

AD office. The amended confidential treatment application will be reviewed by 

the AD office, and a determination will be made whether or not to grant 

confidential treatment. In cases where the AD office determines to grant the 

applicant’s amended confidential treatment request, the AD office will prepare the 

confidential treatment grant order. 

In some cases, the AD office may perform a “Full Review” of an applicant’s 

confidential treatment request. The AD office staff member (e.g., special 

counsel/attorney) performing the full review/examination must complete a 

confidential treatment request examination report. In the confidential treatment 

request examination report, the AD office staff member will be required to answer 

“Yes” or “No” to the following statements as they pertain to the applicant’s 

confidential treatment request application: 

 

CF’s Confidential Treatment Process – Grants and Denials. Upon 

completion of the examination, the AD office will make a decision to grant or 

deny the confidential treatment application. According to CF, the authority to 

grant a confidential treatment request is limited to specific members of its staff. 

In most AD offices, the staff members delegated the authority to grant requests 

include the Special Counsel, Legal Branch Chief or the Assistant Director. In 

cases where the AD office determines to grant the applicant’s confidential 

treatment request, the AD office will prepare the confidential treatment grant 

Report No. 479

6 

 

39 CF Confidential Treatment Request Examination Report, January 2009. 40 Id. 41 Id. 42 Id. 43 Id. 44 Id. 45 Id.

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 
 

order. The OIG found during its audit that denial of a confidential treatment 

request is a very rare occurrence. 

Subsequent to the processing of the AD office’s determination to grant the 

confidential treatment request, the application file folder is returned to ODS. The 

Records Management group picks up completed confidential treatment request 

files weekly and carries them to the Records Management office. A signature is 

required by Records Management on the confidential treatment tracking form, 

indicating receipt of the applicant’s confidential treatment request file folder at the 

time they pick up the folder. 

The Majority of Confidential Treatment Requests are for Material Contracts 

Filed as Exhibits. The majority of confidential treatment requests received by 

CF seek redactions of provisions of material contracts that are included as 

exhibits in filings submitted to the Commission. Such contracts are required to 

be filed under the authoritative guidance of Item 601(b)(10) of Regulation S-K. 

This section requires material contracts not entered into in the ordinary course of 

business to be filed as exhibits in filings made with the Commission. 17 C.F.R. § 

229.601(b)(10). Item 601(b)(10) of Regulation S-K also contains four exceptions 

whereby contracts even made in the ordinary course of business have to be filed 

unless they are immaterial in amount or significance. Generally, information in 

material contracts such as pricing terms, technical specifications and milestone 

payments are considered to potentially cause substantial harm to the competitive 

position of the applicant if publicly disclosed. While the majority of confidential 

treatment requests are associated with provisions in material contracts required 

to be filed under S-K Item 601 “Exhibits,” it is CF’s view that such items are 

eligible for confidential treatment, as CF interprets the word “required” in Staff 

Legal Bulletin (SLB) No. 1 as follows: 

CF considers if the confidential portion in an exhibit (e.g., 

contract) is required to be disclosed based upon existing 

disclosure requirements (e.g., an S-K required disclosure 

such as the identity of a 10 percent customer per 17 C.F.R. 

§ 229.101(c)(vii)). 

CF’s policy is to not grant confidential treatment to such 

items required by other existing disclosure requirements. 

Items in exhibits (e.g., contracts) that are the subject matter 

for confidential treatment requests are not considered 

“required” information if the subject matter is not required by 

other existing disclosure requirements and the subject 

matter is included in the filing solely as a result of it being a 

component of the exhibit.46

Report No. 479

7 

 

46 Testimonial evidence based on inquiry with an Associate Director in CF’s Disclosure Operations. 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 
 

While the contracts filed under Regulation S-K, Item 601, are assumed to be 

material, the granting of confidential treatment to portions of material contracts 

filed as exhibits requires a judgment by the CF counsel that the terms of a 

material contract that are the subject matter of a confidential treatment request 

are immaterial to an investor. In our sample, the OIG identified a few instances 

where both parties to a contract filed a confidential treatment request. 

Confidential Treatment Request Processing Time. CF’s goal is to complete 

the initial review of confidential treatment requests filed pursuant to Rule 24b-2 

within 28 days after the filing date. Upon completion of the review of the 

confidential treatment request, comments may be issued (either verbally or 

written) to the applicant. If the staff has no comments, an order will be issued 

granting the confidential treatment request. If the staff issues comments, 

applicants must respond to those comments within 21 days of the date of the 

comment letter. If the applicant does not respond within this period, the staff will 

consider, pursuant to its delegated authority from the Commission, what action is 

warranted based on the record before it, including whether to grant, or deny the 

confidential treatment application. The staff will base its decision on the initial 

application and all amendments and supplemental information received.

Over a span of ten years CF has made significant strides in reducing the average 

processing time for confidential treatment requests. As shown in Table 1 below, 

the average number of days it takes to render a confidential treatment request 

disposition (grant or denial) has improved dramatically in the past few years. CF 

informed the OIG that in 2008 it was able to reduce a substantial backlog of 

confidential treatment requests that had been submitted in previous years. 

Table 1: Average Confidential Treatment Request Processing Time47 

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 

Average 

Number of 

Days to 

Render A 

Disposition 

198 178 204 207 293 279 160 77 61 37 

Source: SEC’s Division of Corporation Finance 

CF’s Overall Disclosure Review Program is Selective. According to CF, the 

Division’s selective review program allows it to balance the need to conduct a 

sufficient level of review of each confidential treatment request to make the 

necessary findings, with the need to allocate resources to meet all the 

requirements of its mission. The purpose of the selective review program is to 

provide a sufficient level of review for each request so that legal staff in the AD 

offices can determine whether a request demonstrates all the required elements 

 

47 The OIG did note a few instances where the processing time was significantly longer than the average 

processing time. One confidential treatment request was granted after the requested period for confidential 

treatment had expired. Within our sample, the OIG found instances where companies did not submit all of 

the required information for exhibits which sometimes led to amended confidential treatment requests 

resulting in lengthier processing times.

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

Report No. 479

8 
 

needed for a valid confidential treatment request under Rules 406 and 24b-2.48

Further, the purpose is to permit staff to identify requests that either have 

demonstrated deficiencies or have other characteristics that might require further 

review.49

Based on CF’s overall disclosure program, CF has set a target goal to perform a 

review of the filings of at least 33 percent of Exchange Act reporting 

companies.50 This is consistent with the requirement under the Sarbanes-Oxley 

Act of 2002 that requires companies to undergo a filing review at least once 

every three years.51 CF uses a risk assessment (risk-based approach) for 

determining which companies are selected for the overall filing review. Although 

CF does not have a formal policy in place for conducting a risk assessment for 

confidential treatment requests, CF informed the OIG that there are certain types 

of confidential treatment requests for which CF will more likely perform an indepth review 

 

Objectives 

The audit’s objectives were to assess the adequacy of CF’s internal policies that 

governed the intake, processing, and decision-making associated with 

confidential treatment requests. In addition, our audit was planned to assess if 

registrants that were provided confidential treatment by CF adhered to the SEC 

rules that govern confidential treatment requests. Throughout our audit, the OIG 

tested whether CF followed its internal policies and procedures for processing 

confidential treatment requests. The audit was also intended to determine where 

improvements and best practices could be implemented for the CF confidential 

treatment process. However, the audit was not planned to render an opinion on 

the decisions made by CF with respect to grants or denials of confidential 

treatment requests. 

Report No. 479

9 

 

48 Memorandum from CF (September 2, 2010) Re: Division’s Response to Discussion Draft – Assessment of 

Corporation Finance’s Confidential Treatment Processes and Procedures. 49 Memorandum from CF (September 2, 2010) Re: Division’s Response to Discussion Draft – Assessment of 

Corporation Finance’s Confidential Treatment Processes and Procedures. 50 CF’s target percentage of reporting companies reviewed per the SEC 2009 Performance and 

Accountability Report. 

51 Section 408 of the Sarbanes-Oxley Act of 2002, 15 U.S.C. § 7266. “Enhanced Review of Periodic 

Disclosures by Issuers.” 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 
 

Findings and Recommendations

Finding 1: CF’s Policies Do Not Provide for 

In-Depth, Substantive Reviews of Most 

Confidential Treatment Requests 

CF’s internal policies and procedures do not require the 

majority of confidential treatment requests to be thoroughly 

examined and reviewed for compliance with the confidential 

treatment request rules. As a result, there is an increased 

risk that confidential treatment will be improperly granted for 

information that may be considered material information to 

investors. 

CF’s Confidential Treatment Request Policies and Procedures. During our 

review of CF’s internal policies and procedures for the processing of confidential 

treatment requests, we found that confidential treatment requests typically go 

through an initial screening process by ODS.52 In the initial screening process, 

research specialists in ODS screen confidential treatment request applications 

using a set of company-specific and application-specific criteria.53

The research specialists inspect the confidential treatment request application 

and indicate in the application where the applicant has made representations 

regarding the FOIA exemption applicable to the confidential treatment request 

subject matter, why the information that is the subject of the confidential 

treatment request is not necessary for the protection of investors, and how 

disclosure of the information would cause competitive harm. We found that the 

research specialists, however, do not perform any substantive evaluation of the 

aforementioned items identified in the confidential treatment request application. 

At the conclusion of the screening process, the research specialist in ODS will 

make a recommendation of the type of review to be performed by the AD office. 

The following options are available for recommendation: 

• “No Review.”54

• “Full Review.” 

• “Monitor.”55

 

52 Division of Corporation Finance Operating Procedures Manual, Confidential Treatment Requests 

(December 2008). 

53 See pages 4 and 5 in the background section above for the company-specific and application-specific 

criteria. 

54 This level of recommendation generally arises in instances where the research specialist answers “Yes” to 

all of the application-related items.

55 Where this option is recommended, the screener will indicate to the Assistant Director’s office the subject 

matter to be monitored. 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

Report No. 479

10 
 

In instances where the ODS recommended level of review was “No Review” and 

the processing AD office concurs, the AD office will prepare the confidential 

treatment grant order. According to CF, if the AD office staff member decides 

that an additional, substantive review is necessary because legal judgment is 

needed to determine whether a particular assertion is supportable, the staff 

member may recommend an additional review of that matter. However, we 

found rare instances when the AD office did not concur with ODS’ 

recommendation of “No Review,” or conducted any substantive evaluation of the 

application after such a recommendation was made. We also found no 

documentation of the factors considered by the AD office in determining whether 

or not to concur with the “No Review” recommendation. 

For applications that were recommended with a level of review of “Monitor,” the 

assigned processing AD office may issue a “monitor letter,” and concurrently 

issue comments (written or oral) to the applicant on certain matters pertaining to 

the confidential treatment application. 

When it has been determined that there is to be “full review” of a confidential 

treatment application, an examiner in the assigned AD office will perform a full 

review, which will include a review of the applicant’s confidential treatment 

request and the screening form completed by ODS, and completion of an 

examination report to document the results of the full review. Special Counsel in 

each AD office will perform a review of the examiner’s report and discuss the full 

review with the examiner. Key judgments and factors considered in evaluating 

the applicant’s confidential treatment request are discussed at length, and 

comments are prepared to be issued to the applicant (if applicable) to revise the 

confidential treatment requests. 

If a confidential treatment request is filed by an applicant that concurrently has an 

open filing review being performed by CF, the confidential treatment request is 

generally reviewed by the AD office performing the open filing review.56 In 

addition, if the AD office is performing a review of the filing referenced in the 

confidential treatment application, the AD office will review the application and 

filing to ensure that the material omitted in the filing reconciles with the material 

for which requested for confidential treatment is requested in the application. 

Generally, a full review is performed for a confidential treatment request 

submitted in connection with an initial registration statements 

 the confidential treatment request. CF policies allow for an 

AD office to override the level of review recommended by ODS. 

Report No. 479

11 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

 

56 CF is a required under the Sarbanes-Oxley Act of 2002 to perform some level of review of each reporting 

company at least once every three years. See Section 408 of the Sarbanes Oxley-Act of 2002, 15 U.S.C. § 

7266, “Enhanced Review of Periodic Disclosures by Issuers.”
 

The Majority of Confidential Treatment Requests are Screened with a 

Recommendation for No Review by the AD Offices. During the audit, we 

reviewed all confidential treatment requests submitted to CF for the period from 

January 2008 to March 2010. Based on our scope, we found that CF granted 

approximately 87 percent (2,956 of 3,381) of the confidential treatment requests 

it received, and an additional 9.3 percent (316 of 3,381) of the confidential 

treatment requests were still pending. Further, approximately three percent (108 

of 3,381) of the confidential treatment requests were withdrawn during this 

period. Of the 3,381 confidential treatment requests made from January 2008 to 

March 2010, CF only denied one confidential treatment request. 

We also found that approximately 68 percent (2,298 of 3,381) of the confidential 

treatment requests submitted during this period were processed without review, 

as a result of the initial screening process. Approximately 23 percent (789 of 

3,381) of requests were monitored for one or more particular matters (e.g., 

duration, materiality), while only approximately 8.5 percent (286 of 3,381) were 

selected for full review. 

Overall, we found that more than 90 percent of the confidential treatment 

requests CF processed from October 2008 to March 2010 were granted. As 

shown in Figure 1, there were a total of 2,444 confidential treatment requests 

processed in FY 2008, of which 1,556 or approximately 64 percent were 

processed with no review beyond the screening process.57 

 Figure 1: Confidential Treatment Requests Processed in 

 FY 2008 by CF 

 Source: SEC’s Division of Corporation Finance 

 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

Report No. 479

12 

57 The high number of confidential treatment requests processed in FY 2008 is related to CF’s clearing of a 

backlog of confidential treatment requests submitted in previous fiscal years. 
 

As Figure 2 demonstrates, the percentage of confidential treatment requests that 

were not reviewed in FY 2009 is comparable to the data for FY 2008. In FY 

2009, 65 percent (958 of 1,472) of confidential treatment requests were not 

reviewed beyond the initial screening process. 

 Figure 2: Confidential Treatment Requests Processed in 

 FY 2009 by CF 

 Source: SEC’s Division of Corporation Finance 

Ease of Compliance with the Procedural Requirements of the Rules. Upon 

review of Rules 40658 and 24b-2,59 which govern the confidential treatment 

process, OIG determined that these rules are procedural, rather than 

substantive, in nature, and focus exclusively on the requirements for what must 

be included in a confidential treatment application submitted to the Commission. 

Furthermore, Rules 406 and 24b-2 contain no specific provisions that restrict the 

scope of the confidential treatment that can be requested by an applicant. The 

rules also do not specify on what grounds a confidential treatment request should 

or should not be granted. The decision to grant or deny an applicant’s request is 

solely at the discretion of CF examiners and legal counsel.60 

An Associate Director for CF’s Disclosure Operations stated that CF does not 

wish to have a narrow scope for the nature of items that could potentially be the 

subject matter of a confidential treatment request. Further, CF does not want to 

create a bright-line test or enumerate a specific set of items that are permitted to 

be submitted in a confidential treatment request. 

 

58 17 C.F.R. § 230.406, “Confidential Treatment of Information Filed with the Commission.” 59 17 C.F.R. § 240.24b-2, “Non-Disclosure of Information Filed with the Commission and with Any 

Exchange.” 

60 The confidential treatment request rules provide an outlet for an applicant to appeal a denial of a 

confidential treatment request. 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

Report No. 479

13 
 

Our audit found that as a result of the procedural requirements, the screening 

process and the lack of substantive review, achieving compliance with the 

requirements of the rule may become a rote process, whereby applicants can 

mimic the language in the requirements and create an application that will likely 

result in a “No Review” finding by a CF research specialist. 

We found that in many cases, applicants include sub-title headings in their 

applications to identify each requirement to be included per Rules 406 and 24b-2, 

so that research specialists can easily conclude that each requirement has been 

met. We found an extraordinary level of consistency in the form and presentation 

of a number of confidential treatment requests that we examined. Such 

consistency may be attributed to many applicants employing to assist in the 

preparation of confidential treatment applications legal counsel who are 

knowledgeable of the SEC’s requirements pertaining to confidential treatment 

requests and routinely prepare confidential treatment requests for various SEC 

registrants. 

We also found during the audit that the majority of confidential treatment 

requests leave the screening process with a recommended level of “No Review,” 

as the screening process does not involve a substantive evaluation of the 

application-specific criteria. The research specialists in ODS only verify that 

representations or statements are made in the application regarding how the 

subject matter of the confidential treatment request meets a FOIA exemption and 

that this subject matter is not material to investors. CF’s policies currently do not 

provide for any in-depth analysis to verify the reasonableness of the assertions 

made by applicants regarding the application-specific criteria. Thus, it is not 

difficult for a company to comply with the procedural requirements of the 

confidential treatment request rules, as they are only required to affirmatively 

state that they comply with the criteria, and their applications are easily reviewed 

and verified by CF. 

A Deeper Review of Materiality and Competitive Harm Arguments Is 

Needed. The OIG found that several components of a confidential treatment 

request require a substantive analysis, which is currently not being conducted. 

The issues related to why disclosure of the confidential portion would cause 

competitive harm, and why disclosure of the confidential portion is not necessary 

for the protection of investors, should be analyzed in more than a rote fashion. 

There are numerous cases in which courts have expressed opinions on what 

constitutes competitive harm, as well as the concept materiality. The Supreme 

Court has taken the position that a fact is material if there is “a substantial 

likelihood that the disclosure of the omitted fact would have been viewed by the 

reasonable investor as having significantly altered the ‘total mix’ of information 

made available.”61 

Report No. 479

14 

 

61 Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988) 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 
 

According to CF, confidential treatment request applicants must assess 

materiality from the perspective of their “business, financial condition, and 

financial results.”62 In addition, SLB No.1 notes that the determination of 

materiality depends upon the facts and circumstances of each particular request 

for confidential treatment. The assessment of an applicant’s argument that the 

information is not material to investors is subjective by nature and should be 

based upon qualitative and quantitative factors. Given that CF takes a broad view 

of the term “investors,”63 which includes existing holders with a financial interest 

(e.g., whether debt or equity and long or short positions), the analysis to 

determine if the subject matter of the confidential treatment request is material to 

investors is an analysis that requires significant judgment and can be difficult, as 

the investment objectives of individual investors are not all the same and a 

determination of what constitutes material information can differ from investor to 

investor. 

Staff Accounting Bulletin No. 99 (SAB 99) describes the importance of the 

concept of materiality with respect to financial statements. SAB 99 requires that 

an assessment of materiality include both quantitative and qualitative factors. 

We found that in many cases, companies’ confidential treatment applications do 

not describe any qualitative or quantitative factors showing why the information is 

not material to investors or necessary for the protection of investors. We also 

found that CF does not have a specific policy regarding how an applicant’s 

submission regarding materiality should be documented or analyzed. We further 

found in numerous cases, the entirety of the materiality analysis performed by CF 

was in the screening process which only required that the screener respond with 

a “Yes” or “No” checked next to a question indicating whether the applicant 

 

Similarly, the representations made on the behalf of confidential treatment 

applicants pertaining to the competitive harm that could arise from disclosure of 

the subject matter of the confidential treatment request is a component that 

involves significant judgment. According to the confidential treatment request 

requirements, an applicant must cite the FOIA exemption it believes is applicable 

to the confidential treatment request. We found that the majority of applicants 

stated that the subject matter of the confidential treatment request fell within the 

scope of Exemption four,64 which covers “trade secrets and commercial or 

financial information obtained from a person [that is] privileged or confidential.”65 

Moreover, a significant number of these confidential treatment requests pertained 

Report No. 479

15 

 

62 Division of Corporation Finance Staff Legal Bulletin No.1 (with Addendum), February 28, 1997 (Addendum 

included: July 11, 2001), page 4. See http://www.sec.gov/interps/legal/slbcf1r.htm 

63 CF believes that the term “investors” should be treated broadly. However, CF does not consider investors 

in the competitor of an applicant in its analysis of whether the confidential portion is material to investors 

(sometimes stated by applicants “unnecessary for the protection of investors”). 64 5 U.S.C. § 552(b)(4). 65 See CF’s Staff Legal Bulletin No. 1 (with Addendum), February 28, 1997, page 2 (Addendum included: 

July 11, 2001). 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 
 

to commercial or financial information that was purportedly privileged or 

confidential. In order for an applicant to establish that the subject matter of the 

confidential treatment was request qualifies as confidential commercial or 

financial information, the applicant is supposed to establish that the subject 

matter is commercial or financially related, obtained from a “person,” and 

privileged or confidential.66 

A number of confidential treatment requests the OIG reviewed included 

statements that courts have taken broad views as to whether information is 

classified as commercially or financially related. The requests also contained 

statements to the effect that anything related to a company’s generation of profits 

can be considered commercial or financial information based on applicable court 

cases. Applicants also referenced particular legal decisions in attempting to 

establish that the redacted information is actually confidential or privileged, citing 

the fact that the information would “cause substantial harm to the competitive 

position of the [company.]”67 Based on our review, we have determined that 

many confidential treatment requests included statements made on behalf of the 

applicant that would require significant judgments to be made by CF to determine 

if the application fell within the FOIA exemption relied on by the applicant. 

For example, a large company submitted a confidential treatment request 

pertaining to an exhibit filed with a 10-Q quarterly report. The exhibit was a 

separation agreement with a former senior executive officer of the company. The 

agreement included a restrictive covenant provision that prohibited the departing 

senior executive from being employed by, providing advice to or acting as a 

consultant for a number of companies listed in the agreement as the company’s 

competitors. 

. 

Further, we found a number of confidential treatment requests that appeared to 

be difficult to assess for both materiality and competitive harm, as the facts and 

circumstances involved significant subjective judgments and analysis on the part 

of CF counsel. Yet, we found that in numerous cases, such confidential 

treatment requests were granted with limited evidence of a review of any 

qualitative or quantitative factors pertinent to the materiality and competitive harm 

Report No. 479

16 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

 

66 The Department of Justice Guide to the Freedom of Information Act, 2009 Edition, “Exemption 4”, page 

263, http://www.justice.gov/oip/foia_guide09/exemption4.pdf. 67 Public Citizen Health Research Group v. Food and Drug Administration, 704 F.2d 1280, 1290-1291 (D.C. 

Cir. 1983). 
 

representations after the initial screening. This initial screening simply verified 

that the applicant claimed the subject matter of the confidential treatment request 

was not material to investors and met an applicable FOIA exemption and 

included some manner of legal analysis. 

Need for Continuous Monitoring. The OIG learned that CF currently does not 

perform periodic internal audits to verify that its staff are screening and 

examining confidential treatment requests in accordance with CF policy. Based 

on a review of the sample files examined in our audit, we determined that a 

periodic review could help CF identify best practices and also identify instances 

where sufficient review is not conducted. An internal monitoring program could 

also help CF identify issues arising in the confidential treatment request program 

on a timelier basis and take corrective action sooner to improve its program. 

Additionally, OIG found that CF currently does not perform any periodic 

assessments to determine if the subject matter of a confidential treatment 

request has been disclosed by an applicant after confidential treatment has been 

grant. Public disclosure of the subject matter of a confidential treatment request 

negates the effectiveness of the confidential treatment order and should prompt 

CF to terminate the confidential treatment that has been granted. The OIG also 

found that CF does not perform any checks to determine if subsequent filings 

have any effect on the subject matter of a previous confidential treatment request 

that was granted. For example, we found an instance where a company 

submitted a confidential treatment application associated with a stock purchase 

agreement that included a request to redact information concerning its ability to 

manage pending litigation strategies. Before the confidential treatment request 

was granted, the company publicly disclosed that the pending litigation had been 

settled and also filed an amended stock purchase agreement that included 

provisions that deleted clauses in the original stock purchase agreement. 

However, these deleted clauses remained a part of the subject matter of the 

confidential treatment request. 

Requirements Not Codified in Rules. In reviewing management’s policies for 

confidential treatment requests, the OIG further determined that the requirements 

to which an applicant must adhere when submitting a confidential treatment 

request are actually not codified in Rules 406 and 24b-2, but are contained in 

CF’s SLB No. 1.68 In a number of comment letters CF issued to confidential 

treatment applicants, CF directed the applicant to seek guidance concerning the 

requirements for the confidential treatment request in SLB No.1 and not Rules 

406 and 24b-2.69 CF’s SLB No. 1 specifies what an applicant must provide in 

order to have a request for confidential treatment granted. SLB No. 1 also 

contains the requirements that applicants should follow when requesting 

confidential treatment of material contained in filings. For example, SLB No. 1 

Report No. 479

17 

 

68 Staff Legal Bulletin No. 1 is not an official SEC rule and does not have the same level of authority as 

Rules 406 and 24b-2. 

69 Based on the OIG’s inspection of a sample of confidential treatment request files obtained from CF. 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 
 

states that confidential treatment cannot be granted if the information has been 

publicly disclosed and notes that confidential treatment should not be requested 

for required and/or material information.70 It also includes the following 

requirements for an applicant to follow when submitting a request: 

1. The application should not be overly broad. 

2. Applicants must include an analysis of why the confidential portion meets 

a FOIA exemption. 

3. Applicants must specify a particular duration for which it requests the SEC 

to keep the information confidential. 

4. Applicants must clearly identify the confidential portion of the application. 

5. Applicants must consent to the release of the information for official 

purposes.71

These requirements, as contained in CF’s internal SLB No.1, govern the process 

for approving confidential treatment requests. Thus, OIG determined that the 

Commission could achieve greater transparency by codifying these requirements 

in its formal rules, which are subject to notice and comment from the public. 

Conclusion. As a result of CF granting an applicant’s confidential treatment 

request, portions of materials filed with the Commission are not publicly 

disclosed. Given the high number of confidential treatment requests that are not 

subject to full review, there is a risk that information that is material to investors is 

not being fully disclosed. The high degree of subjectivity particularly with regard 

to competitive harm and materiality analyses necessitates a more substantive 

review. Yet, most applications are being approved after an initial screening 

process that is not substantive in nature and verifies only that the applicant 

indicated that it met the requirements. 

Recommendation 1: 

The Division of Corporation Finance should recommend to the 

Commission that the substantive requirements for confidential treatment 

requests that are currently described in Staff Legal Bulletin No. 1, as well 

as any additional substantive requirements deemed appropriate, be 

codified as formal guidance for confidential treatment applicants. 

Management Comments. CF does not concur with this 

recommendation. See Appendix V for management’s full comments. 

OIG Analysis. During the audit, the OIG found that CF’s Staff Legal 

Bulletin No. 1 sets forth the views of CF regarding the requirements a 

registrant must satisfy when requesting confidential treatment of 

Report No. 479

18 

 

70 Division of Corporation Finance Staff Legal Bulletin No.1 (with Addendum), February 28, 1997 (Addendum 

included: July 11, 2001), pages 2-4. See http://www.sec.gov/interps/legal/slbcf1r.htm. 71 Id. pages 5-6.

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 
 

information that otherwise is required to be disclosed in registration 

statements, periodic reports and other documents filed with the SEC. 

Although CF claims in its Management Comments that Staff Legal Bulletin 

No. 1 does not represent the substantive requirements that a company 

must meet in order to request confidential treatment, the audit found that 

the requirements to which an applicant must adhere when submitting a 

confidential treatment request are contained in CF’s Staff Legal Bulletin 

No. 1 and that in a number of comment letters CF issued to confidential 

treatment applicants, CF directed the applicant to seek guidance 

concerning the requirements for the confidential treatment request in Staff 

Legal Bulletin No. 1 and not Rules 406 and 24b-2. 

Thus, our position remains that CF should recommend that the 

Commission codify the substantive requirements currently described in 

Staff Legal Bulletin No. 1, as well as any additional substantive 

requirements deemed appropriate for confidential treatment request 

applicants. 

Recommendation 2: 

The Division of Corporation Finance should revise its internal procedures 

for processing confidential treatment requests to require additional 

documentation of the substantive review of the materiality and competitive 

harm application-specific requirements. Such additional documentation 

should detail the specific qualitative and/or quantitative factors considered 

in assessing the materiality and competitive harm pertinent to the subject 

matter of the confidential treatment request. 

Management Comments. CF has partially concurred with this 

recommendation. See Appendix V for management’s full comments. 

OIG Analysis. While the OIG acknowledges and appreciates CF’s 

concerns with the commitment of staff resources that are needed to fully 

implement this recommendation, our audit found that a number of 

requests that were granted did not contain sufficient documentation of the 

factors CF considered to determine why the information was not material 

to investors. Without sufficient documentation providing the quantitative 

and/or qualitative factors considered in the materiality analysis of a 

confidential treatment request, CF lacks critical support or evidence to 

demonstrate that a full and appropriate level of review was conducted. 

Therefore, we believe CF should reconsider its decision and fully 

implement this recommendation. 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

Report No. 479

19 
 

Recommendation 3: 

The Division of Corporation Finance should revise its internal procedures 

to require additional documentation of the Assistant Director Office’s 

review of the Office of Disclosure Support’s recommendations of “No 

Review” to document the factors considered in making the determination 

that no review is required. 

Management Comments. CF has concurred with this recommendation. 

See Appendix V for management’s full comments. 

OIG Analysis. We are pleased that CF has concurred with this 

recommendation. 

Recommendation 4: 

The Division of Corporation Finance (CF) should perform periodic internal 

audits of the confidential treatment process to provide for continuous 

monitoring of the confidential treatment program. As part of these periodic 

internal audits, the CF should verify on a periodic basis that the 

information for which confidential treatment was granted has not been 

publicly disclosed. If CF determines that information previously granted 

confidential treatment has been publicly disclosed, it should take steps, as 

appropriate, to revoke the confidential treatment grant. 

Management Comments. CF has partially concurred with this 

recommendation. See Appendix V for management’s full comments. 

OIG Analysis. We are pleased that CF agrees with the essence of this 

recommendation. While the OIG acknowledges and appreciates CF’s 

concerns with the commitment of staff resources, our audit found that CF 

currently does not perform any procedures to monitor whether 

confidentiality has been maintained after a grant order is issued. The OIG 

believes that the failure to maintain the confidentiality of the subject matter 

contained in the confidential treatment request negates the effect of the 

confidential treatment order. Therefore, OIG requests that CF reconsider 

its position and fully implement this recommendation. 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

Report No. 479

20 
 

Finding 2: The OIG Identified Significant Use 

of Conclusory Statements, Boilerplate 

Language and Overly Broad Scopes in 

Confidential Treatment Requests 

Numerous confidential treatment requests appeared to be 

overly broad and included conclusory statements and 

boilerplate language in the applicants’ analysis of 

competitive harm and materiality. 

Companies’ Confidential Treatment Requests Failed to Contain Specific 

Statements. As noted above, SLB No. 1 contains the following content 

requirements for an applicant to follow when submitting a confidential treatment 

request: 

1. The application should not be overly broad. 

2. Applicants must include an analysis of the why the confidential portion 

meets a FOIA exemption. 

In the sample of confidential treatment requests the OIG tested, we found 

numerous confidential treatment requests that appeared to be overly broad. 

Many of these requests included boilerplate language and conclusory statements 

in the applicant’s analysis of the applicable FOIA exemption(s) and in arguments 

regarding the potential competitive harm that would result if the subject matter of 

the confidential treatment request were disclosed. In addition, we found that 

confidential treatment request applications did not always include documentation 

explaining why disclosure of the subject matter of the confidential treatment 

request was not necessary for the protection of investors and did not always 

include a robust assessment of the qualitative and quantitative factors that 

should be considered in assessing materiality. For example, in a confidential 

treatment request submitted by one company, the application included simply the 

following conclusory phrase supporting the argument for why disclosure of the 

subject matter of the confidential treatment request was not necessary for the 

protection of investors: 

The applicant does not believe the redacted details are 

material to an investor's decision to invest. Instead, 

disclosure would be material to the applicant's competitor 

and would harm the applicant's investors. 

In the above instance, CF did not select this confidential treatment request for a 

full review and did not perform a substantive evaluation of whether the 

information was necessary for the protection of investors even though the 

language in the application was overly broad and did not provide any substantive 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

Report No. 479

21 
 

basis for the request for confidential treatment. In instances when CF does not 

perform a significant review, conclusory statements and boilerplate language are 

unlikely to be identified and applicants are unlikely to revise their confidential 

treatment requests to provide a better analysis of how the subject matter of the 

confidential treatment request meets an applicable FOIA exemption or why the 

information is not necessary for the protection of investors. 

The ODC Screening Lends Itself to Conclusory, Boilerplate Statements in 

the Applications. The “Confidential Treatment Request Screening Form” 

utilized by the research specialists in the ODS screening process, identifies the 

questions for which a “Yes” or “No” answer is to be given, as follows: 

 

Thus, for example, with respect to the issue of “materiality,” the application 

passes the initial screening if the applicant 

 There is no requirement 

that the applicant provide more than conclusory, boilerplate language that the 

information is not material. 

The OIG determined that having a screening process by which conclusory and 

boilerplate language that criteria are met simply passes through an initial 

approval stage does not constitute a useful manner of review of confidential 

Report No. 479

22 

 

72 CF Confidential Treatment Request Screening Form, April 2008. 73 Id. 74 Id. 75 Id. 76 Id. 77 Id. Per CF’s confidential treatment operating procedures, CF usually does not grant confidential treatment 

for a duration beyond 78 CF Confidential Treatment Request Screening Form, April 2008. 79 Id.

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 
 

treatment requests, particularly when, in most of the cases, this initial screening 

review is the only review conducted of an application. 

Recommendation 5: 

The Division of Corporation Finance should revise its internal procedures 

for handling the initial screening of confidential treatment requests to 

ensure that the materiality and competitive harm criteria are not met by 

simply making conclusory statements or including boilerplate language in 

the applications by requiring additional documentation of how the 

screening and review process identified specific and concrete 

representations to support these criteria. 

Management Comments. CF has partially concurred with this 

recommendation. See Appendix V for management’s full comments. 

OIG Analysis. While the OIG acknowledges that the identification of 

specific representations may require the commitment of additional 

resources we found, and it is not disputed, that numerous applicants’ 

requests contained boilerplate language and conclusory statements. The 

audit found that these requests were not always reviewed beyond the 

screening process, which is not intended to focus on the quality of the 

responsive portions of the requests. Without a more in-depth review of 

the quality of representations for the materiality analysis and a competitive 

harm argument associated with a confidential treatment request, the OIG 

notes that information material to investors that may be needed for them 

to make informed decisions, may not always be disclosed. As such, the 

OIG would like CF to reconsider implementing this recommendation in full.

Finding 3: Many Confidential Treatment 

Requests are Not Reviewed by Staff Experts 

in the Confidential Treatment Request 

Applicant’s Industry 

The OIG identified a significant number of confidential 

treatment requests that were not assigned to the appropriate 

industry group of the applicant for processing. 

Some AD Offices Receive a Disproportionate Number of Confidential 

Treatment Requests. CF’s Disclosure Operations function is structured into 

various AD offices that specialize in reviewing the disclosures of registrants for 

different industry clusters. The industry experts in each AD group are 

knowledgeable of the accounting, disclosure and technical issues associated 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

Report No. 479

23 
 

with their respective assigned industry and perform the filing reviews for 

companies within that industry. 

A significant number of confidential treatment requests are not assigned for 

processing to the industry group of the applicant. For example, a total of 914 of 

2,970 confidential treatment requests received from January 2008 through 

December 2009 were from companies in the healthcare and insurance 

industries. Based on CF’s internal structure, healthcare and insurance 

companies’ filings and confidential treatment requests should have been 

assigned to AD office No. 1, which has expertise in the healthcare and insurance 

industries. However, the OIG found that only 27 percent (247 of 914) of the 

confidential treatment requests submitted by healthcare and insurance 

companies were actually processed and reviewed by AD office No. 1. 

We found that the high concentration of confidential treatment requests from a 

few industry groups is likely a significant factor resulting in the assignment of 

confidential treatment requests to AD offices that are not experts in the industry 

groups of the applicants. Of the 11 AD offices in CF’s Disclosure Operations,80

about a third of all confidential treatment requests came from companies in the 

industry group assigned to AD office No. 1 (Healthcare/Insurance), and close to 

half (approximately 47 percent) came companies in the industry group assigned 

to either AD office No. 1 and AD office No. 10. We understand that large 

numbers of companies in the healthcare industry have biotech and 

pharmaceutical contracts that contain sensitive information about patents and 

trade secrets and, therefore, prompt a higher number of confidential treatment 

requests compared to other industry groups. Our audit found that, there is an 

increased risk that a CF official in an AD office outside of the confidential 

treatment applicant’s industry group may not evaluate an application with the 

same level of expertise as an individual assigned to the applicant’s industry 

group due to a lack of familiarity of the subject matter of the confidential 

treatment request. This may cause certain confidential treatment requests to be 

granted where confidential treatment is, in fact, not warranted. 

Recommendation 6: 

The Assistant Director offices with the highest percentage of confidential 

treatment requests (i.e., Assistant Director office No. 1 and Assistant 

Director office No. 10) should provide training to staff in the other Assistant 

Director offices in order to share knowledge about specific industry 

matters with those who will be performing reviews of confidential treatment 

requests for companies in industries outside of their assigned industry 

group. 

Report No. 479

24 

 

80 CF recently announced the creation of a few additional offices to focus on capital market trends, 

structured finance products, and large financial services companies. See 

http://www.sec.gov/news/press/2010/2010-124.htm. 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 
 

Management Comments. CF has concurred with this recommendation. 

See Appendix V for management’s full comments. 

OIG Analysis. We are pleased that CF has concurred with this 

recommendation. 

Finding 4: CF Needs to Enhance the 

Application Controls in the Confidential 

Treatment Request Database

The OIG identified data errors in the confidential treatment 

request population that CF uses to evaluate the confidential 

treatment request program’s performance measurements. 

These errors resulted from the lack of certain controls over 

data residing in the confidential treatment request tracking 

database. 

Confidential Treatment Request Tracking Database. We identified in our 

review of the population of confidential treatment requests some data anomalies 

that resulted from the lack of controls in the confidential treatment request 

tracking database. We found instances where certain dates were incorrectly 

entered by end users; however, the system did not detect such errors. For 

example, in several instances, the disposition date of the confidential treatment 

request was before the date the confidential treatment request was received by 

CF. In addition, some data fields, such as the date of receipt of the request by 

CF, were not populated at all. 

Additionally, we found that management does not currently have the capability in 

the confidential treatment request tracking database to identify requests that 

were modified from their initial state. Thus, some data analysis by management 

may contain inaccurate information, and certain items that should be prioritized 

may not be given the appropriate priority (e.g., confidential treatment requests 

that have been pending for a lengthy period of time and need to have processing 

completed). The OIG learned that CF management monitors the performance of 

the confidential treatment request program through various reports generated 

from data maintained in the confidential treatment tracking system. During the 

audit, the OIG found that CF management pays close attention to confidential 

treatment requests that have been in a pending status for a lengthy period of 

time. If data is not accurately captured in the confidential treatment request 

tracking database, there is a potential that management will not track confidential 

treatment requests that have been in a pending state for a significant period of 

time. Additionally, the data that management uses to evaluate its performance 

such as average processing time may be skewed due to errors in the data. 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

Report No. 479

25 
 

The Tracking Database Lacks the Ability to Track Modified Confidential 

Treatment Requests. During the audit, the OIG also found that CF does not 

currently have the ability to track confidential treatment requests that are 

modified in scope after the initial submission to CF but before confidential 

treatment is granted. For CF’s purposes, all requests for which any aspect of the 

application has been modified from its initial state are categorized as “granted,” 

with no separate distinction for applications where the scope of the request was 

revised during the course of processing the application. 

However, we found in our review of confidential treatment requests situations 

where the scope of the confidential treatment request was significantly altered 

during the comment and review period. In fact, we identified instances where 

numerous comments were provided to applicants to make substantial changes to 

their confidential treatment requests. 

As indicated above, we learned that most confidential treatment requests were 

submitted in connection with portions of material contracts and agreements filed 

as exhibits to various filings (e.g., 8-K, 10-LK, 10-Q, and S-1.) Within our 

sample, we found instances when companies did not provide all the required 

information for the exhibits. In those instances, CF staff requested that the 

applicants submit amended filings that included the additional required 

information (e.g., schedules and addendums to contracts.) 

In another example, a company included a large number of items in its initial 

confidential treatment request related to its 10-Q quarterly filing; however, upon 

the final granting of the confidential treatment request, only one redacted item 

remained from the company’s initial request. CF staff provided numerous 

comments on the various items for which the company initially requested 

confidential treatment. In most instances when CF asked the company to 

provide better justifications of why those items merited confidential treatment, the 

company simply withdrew these requests. However, upon review of the 

confidential treatment request database, one would assume that the initial 

request had been granted without modification. 

In a number of instances when confidential treatment requests were modified 

during the course of a review during which comments were issued to the 

applicant, the time period between the initial submission of the confidential 

treatment request and the granting of the modified request was, on average, 

considerably longer than the normal processing time for confidential treatment 

requests. As such, having the ability to track modified confidential treatment 

requests could permit CF to better allocate staff and perform a larger number of 

full reviews by focusing its staff’s efforts on applicants that have historically 

provided CF with initial confidential treatment requests that did not require 

significant modifications prior to granting the request. 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

Report No. 479

26 
 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

Report No. 479

27 

Recommendation 7: 

The Division of Corporation Finance should implement controls in the 

confidential treatment request database to perform validity checks for 

fields and to ensure that all information for each record has been 

completely populated. 

Management Comments. CF has concurred with this recommendation. 

See Appendix V for management’s full comments. 

OIG Analysis. We are pleased that CF has concurred with this 

recommendation. 

Recommendation 8: 

The Division of Corporation Finance should add functionality to the 

confidential treatment request tracking database to identify confidential 

treatment requests that were modified from their initial state. 

Management Comments. CF has concurred with this recommendation. 

See Appendix V for management’s full comments. 

OIG Analysis. We are pleased that CF has concurred with this 

recommendation. 
Appendix I 

Acronyms

AD Assistant Director 

AIG American International Group 

CF Division of Corporation Finance 

FOIA Freedom of Information Act 

FRBNY Federal Reserve Bank of New York 

ML 3 Maiden Lane III 

ODS Office of Disclosure Support 

OIG Office of Inspector General 

SAB Staff Accounting Bulletin 

SEC or Commission U.S. Securities and Exchange Commission 

SLB Staff Legal Bulletin 

SROs Self Regulatory Organizations 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

Report No. 479

28 
Appendix II 

Scope and Methodology 

We conducted this performance audit in accordance with generally accepted 

government auditing standards. Those standards require that we plan and 

perform the audit to obtain sufficient, appropriate evidence to provide a 

reasonable basis for our findings and conclusions based on our audit objectives. 

We determined that the evidence obtained provides a reasonable basis for our 

findings and conclusions based on our audit objectives. 

Scope. We obtained CF’s policies and procedures for processing confidential 

treatment requests submitted under Rules 406 and 24b-2, as of December 2008. 

We conducted our fieldwork from April 2010 to August 2010. We reviewed 

documentation pertaining to the CF confidential treatment request program 

covering the calendar years 2008 and 2009 and January through March 2010. 

The OIG reviewed the confidential treatment request rules and authoritative 

guidance and assessed CF’s internal policies and procedures to determine if 

internal policies ensure that applicants met all confidential treatment request rule 

requirements. Additionally, our audit tested whether applicant’s confidential 

treatment requests were submitted in accordance with the confidential treatment 

request rules and if CF followed its internal policies and procedures in processing 

confidential treatment requests. 

Methodology. In order to accomplish our objectives to assess the adequacy of 

CF’s internal policies that govern the intake, processing, and decision-making 

associated with confidential treatment requests, we reviewed CF’s policies and 

procedures for the intake, processing, screening, and examination of confidential 

treatment requests. The OIG also reviewed the confidential treatment request 

rules and authoritative guidance and assessed the adequacy of CF’s policies and 

procedures to determine if they ensured applicants met all confidential treatment 

request rule requirements. We conducted inquiries of CF management charged 

with overseeing the confidential treatment request program to understand CF’s 

policies and procedures and to obtain interpretation of the confidential treatment 

request rules. The OIG also physically observed the intake, screening, 

processing and examination of a confidential treatment request in a walkthrough 

with staff members from CF. Further, the OIG performed testing of a sample of 

confidential treatment requests for the period within our audit scope by examining 

the confidential treatment application, the screening and examination reports 

completed by CF, and other supporting documentation in confidential treatment 

request files. We conducted inquiries of members of CF AD groups to 

understand some of the key judgments involved with certain confidential 

treatment requests in our sample selection. 

Judgmental Sampling. Our population of confidential treatment requests 

consisted of those received by CF for the period from January 2008 through 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

Report No. 479

29 
Appendix II 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

Report No. 479

30 

 

March 2010 under Rules 406 and 24b-2 of the Securities Act and Exchange Act, 

respectively. The population consisted of confidential treatment requests from 

companies in various industries, including financial services, healthcare, 

insurance, telecommunications and travel, and requests that pertained different 

types of filings, including 10-Qs, 10-Ks, 8-Ks and S-1s. Based on data received 

from CF’s Disclosure Operations, the total number of confidential treatment 

requests during the period from January 2008 through March 2010 was 3,381. 

From the population universe, we judgmentally selected a sample of 30 

confidential treatment requests covering our scope. In addition, our sample was 

judgmentally selected to include companies that represented a span of industry 

groups (e.g., banking, healthcare and manufacturing) from the various AD 

offices. Our sample was also chosen to ensure coverage over the various forms 

filed under the Securities Act and the and Exchange Act (e.g., 10-Ks, 10-Qs and 

S-1s). 

Internal or Management Controls. During our audit, the OIG reviewed internal 

and management controls that related to our audit objectives. A walkthrough 

was performed to verify management controls were in operation. 

Use of Computer-Processed Data. We relied on data from the SEC’s EDGAR 

system and from CF’s confidential treatment request tracking database. The 

OIG performed testing of the accuracy of the CF database by comparing 

information for a sample of confidential treatment requests from the database 

against orders granting confidential treatment from the SEC’s EDGAR database. 

Prior Audit Coverage. The OIG last conducted an audit of the CF confidential 

treatment process in 1994. All of the prior report’s recommendations were 

followed up on and implemented by management. More, recently, the OIG 

conducted audits/reviews of the Office of the Secretary81 and the SEC’s FOIA 

Office82 which included examining the activities performed in each office that 

pertained to confidential treatment requests. However, our audit was focused on 

confidential treatment requests submitted in connection with SEC regulatory 

filings under the Securities Act of 1933 and Securities Exchange Act of 1934 and 

did not extend to confidential treatment granted for information related to the 

SEC comment letter process. 

81 OIG Audit Report No. 402, “Office of the Secretary,” September 20, 2005. 82 OIG Audit Report No. 465, “Review of the SEC’s compliance with the Freedom of Information Act,” 

September 25, 2009, and OIG Audit Report No. 422, “Backlog of FOIA Requests for Comment Letters, 

March 30, 2007.
Appendix III 

Criteria 

Rule 406 under the Securities Act of 1933 (17 C.F.R. § 230.406). Governs the 

submission of confidential treatment requests for filings submitted under the 

Securities Act of 1933. 

Rule 24b-2 under the Securities Exchange Act of 1934 (17 C.F.R. § 240.24b2). Governs the submission of confidential treatment requests for filings 

submitted under the Exchange Act of 1934. 

Division of Corporation Finance Staff Legal Bulletin No. 1 (with Addendum), 

“Confidential Treatment Requests”, February 28, 1997 (Addendum included 

July 11, 2001). This staff legal bulletin sets forth the Division of Corporation 

Finance’s requirements that a registrant must satisfy when requesting 

confidential treatment of information that otherwise is required to be disclosed in 

registration statements, periodic reports and other documents filed with the 

Commission. 

Division of Corporation Finance Operating Procedures Manual – 

Confidential Treatment Requests policies and procedures (December 

2008). CF’s formal policies and procedures for processing confidential treatment 

requests submitted under Rules 406 and 24b-2. 

Regulation S-K, Item 601 “Exhibits, 17 C.F.R. § 229.601” Authoritative 

guidance for disclosures associated with exhibits to forms filed with the SEC. 

Item 601(b)(10) contains the provision that requires material contracts to be filed 

with the SEC. The majority of confidential treatment requests submitted under 

Rules 406 and 24b-2 are related to filing of exhibits (such as material contracts). 

SEC Staff Accounting Bulletin No. 99 – Materiality, August 12, 1999. This 

staff accounting bulletin expresses the views of the staff that exclusive reliance 

on certain quantitative benchmarks to assess materiality in preparing financial 

statements and performing audits of those financial statements is not 

appropriate.

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

Report No. 479 

Page 31 
Appendix IV 

List of Recommendations 

Recommendation 1: 

The Division of Corporation Finance should recommend to the Commission that 

the substantive requirements for confidential treatment requests that are 

currently described in Staff Legal Bulletin No. 1, as well as any additional 

substantive requirements deemed appropriate, be codified as formal guidance for 

confidential treatment request applicants. 

Recommendation 2: 

The Division of Corporation Finance should revise its internal procedures for 

processing confidential treatment requests to require additional documentation of 

the substantive review of the materiality and competitive harm applicationspecific requirements. Such additional documentation should detail the specific 

qualitative and/or quantitative factors considered in assessing the materiality and 

competitive harm pertinent to the subject matter of the confidential treatment 

request. 

Recommendation 3: 

The Division of Corporation Finance should revise its internal procedures 

to require additional documentation of the Assistant Director Office’s 

review of the Office of Disclosure Support’s recommendations of “No 

Review” to document factors considered in making the determination that 

no review is required. 

Recommendation 4: 

The Division of Corporation Finance (CF) should perform periodic internal audits 

of the confidential treatment process to provide for continuous monitoring of the 

confidential treatment program. As part of these periodic internal audits, the CF 

should verify on a periodic basis that the information for which confidential 

treatment was granted has not been publicly disclosed. If CF determines that 

information previously granted confidential treatment has been publicly disclosed, 

it should take steps, as appropriate, to revoke the confidential treatment grant. 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

Report No. 479 

Page 32 
Appendix IV 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

Report No. 479 

Page 33 

Recommendation 5: 

The Division of Corporation Finance should revise its internal procedures for 

handling the initial screening of confidential treatment requests to ensure that the 

materiality and competitive harm criteria are not met by simply making 

conclusory statements or including boilerplate language in the applications by 

requiring additional documentation of how the screening and review process 

identified specific and concrete representations to support each criteria. 

Recommendation 6: 

The Assistant Director offices with the highest percentage of confidential 

treatment requests (i.e., Assistant Director office No. 1 and Assistant Director 

office No. 10) should provide training to staff in the other Assistant Director 

offices in order to share knowledge about specific industry matters with those 

who will be performing reviews of confidential treatment requests for companies 

in industries outside of their assigned industry group. 

Recommendation 7: 

The Division of Corporation Finance should implement controls into the 

confidential treatment request database to perform validity checks for fields and 

to ensure that all information for each record has been completely populated. 

Recommendation 8: 

The Division of Corporation Finance should add functionality to the confidential 

treatment request tracking database to identify confidential treatment requests 

that were modified from their initial state.
Appendix V 

Management Comments 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

Report No. 479 

Page 34 

MEMORANDUM

September 24, 2010

To: H. David Kotz. Inspector General

Office ofInspector General

From: Meredith B. Cross, Director

Division ofCorporation Finance

Re: Division's Response to the Office ofInspector General's Report, Assessment

ojCorporation Finance's Confidential Treatment Processes andProcedures.

Report Nu. 479

Thank you for the opportunity to review and respond to the Office ofInspector

. General's Draft Report No. 479 entitled Assessment ojCorporation Finance's Confidential

Treatment Processes andProcedures. The review your office conducted is helpful to us in

improving the Division ofCorporation Finance'sprogram to better fulfill the Commission's

investor protection mission. In addition, I want to thank you for the courtesy your staff

extended to us during the course ofyour audit and for the opportunity you have given us to

present the Division's views on your findings. As described below, the Division will

implement procedural·changes in response to your recommendations.

General Observations

While we respond to your individual recommendations on how we can improve our

processes and procedures below, we would first like to provide some general observations

about your assessment ofour confidential treatment program, which I believe are important

to place your report and our response in context.

The report suggests that the Division's processes and procedures under which only a

portion of confidt,mtial treatment requests receive some substantive staffreview increases the

risk that a company requesting confidential treatment will not disclose material information

to investors. However, we note that, without regard to whether we review a confidential

treatment request, a company is subject to. the provisions in the federal securities laws and

well-established case law precedent that specify what information a company must disclose

in its filings. I disagree with the Assessment's conclusion that we must, in determining

whether to grant confidential treatment for amaterial contract, judge whether the terms of

that contract are immaterial to an investor. Rather, the Division must evaluate whether it can

object to the company's assertion that the infonnation is not necessary for the protection of

investors in the context ofthe company's overall disclosures, including whether that

information is necessary to make the information the company has already disclosed, in light

ofthe circumstances under which it was disclosed, not misleading. Thus, for example, while

the detaile(1, commercially-sensitive terms of an agreement may appear important in
Appendix V 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

Report No. 479 

Page 35 

isolation, disclosure may not be necessary in light ofthe infonnation a company otherwise

provides.

Given our resources and our program responsibilities, we are not able to undertake a

d~tailed review ofevery confidential treatment request. Therefore, I believe a process

through which we evaluate whether a request, on its face, conflicts with Commission rules

and warrants further review is consistent with the full disclosure mandate. While the

Assessment describes, in great detail, the role ofthe Research Specialists in the Division's

Office ofDisclosure SuPPOrt. it does not equally describe the role oCthe Division's legal staff

in this evaluati,ve process. I believe this is because, in this process, we currently place greater

documentation requirements on our Research Specialists than we do on our legal staff. I

want to make clear that the review recommendations ofthe Office of Disclosure Support are

only one element our legal staffconsiders in making review detenninations and processing

confidential treatment requests. You recommend that we improve the documentation

associated with this legal review role in the screening process evaluation ofmateriality and

competitive hann, and, as noted below, we concur with your recommendations and will do

so.

In stating that you found only one instance where we denied a confidential treatment

request, I believe that the Assessment provides an erroneous impression that we granted all

other requests as submitted. While it is true that we rarely deny a confidential treatment

request, it is important to understand that we conduct a robust evaluation and comment

process on 8 substantial number ofrequests. and that this review frequently results in a

narrowing ofthe infonnation subject to the request or, in some cases, in the withdrawal ofthe

request. Absent the oppo~unity to engage in this evaluation and comment process, we would

certainly expect to deny more requests. We note that you recommend in Recommendation 8

that we improve our tracking ofthis "narrowing" activity, and, as noted below, we concur

with this recommendation and will do so.

Finally, I am concerned about the conclusion a reader ofyour report might reach

regarding our processing of a confidential treatment request relating to an exhibit filed by

American International Group, Inc. with a Fonn 8-K in December 2008. In your most recent

draft ofthe report. you state that you elected to commence your audit ofthe Division's

confidential treabnent processes and procedures "[c]onsidering the Congressional efforts to

provide the public with greater transparency surrounding the Federal assistance to AIG along

with statements rendered by the FRBNY pertaining to the SEC's confidential treatment

process," As you note in your report, you did not provide any conclusions regarding our

processing ofthe AIG confidential treatment request. While I appreciate your explanation

that you did not reach any conclusion with regard to the' AIG request, I remain concerned that

a reader of your report might conclude that the concerns you express about our confidential

treatment program in general were present in our review ofthe AIG request. Therefore, I

want to emphasize my understanding that your report does not reflect any concern ahout our

review and processing ofthis particular confidential treatment request.

2
Appendix V 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

Report No. 479 

Page 36 

Division Responses to your Recommendations

Recommendation 1:

The Division ofCorporation Finance should recommend to the Commission that the

substantive requirements for confidential treatment requests that are currently described in

StaffLegal Bulletin No. I as well as any additional substantive requirements deemed

appropriate, be codified as formal guidance for confidential treatment request applicants.

Division Response to Recommendation 1:

The Division does not concur with your recommendation that we should recommend to the

Commission that it should codify the substantive requirements for confidential treatment

requests described in StaffLegal Bulletin No. I. We note that StaffLegal Bulletin No.1

does not represent the substantive requirements that a company must meet in order to request

confidential treatment under Rules 406 and 24b-2. Instead, the StaffLegal Bulletin is a

method by which the staff can provide public guidance (contrary to the report, it is not an

"internal" document) to assist the public in understanding how the staffinterprets the

Freedom ofInformation Act and Commission rules that apply to a request for confidential

treatment. We believe that providing this type ofguidance through StaffLegal Bulletins

posted on the Commission's website is helpful to the public and promotes better compliance

with the federal securities laws, without burdening the Commission with additional

rulemaking initiatives.

Recommendation 2:

The Division ofCorporation Finance should revise its internal procedures for processing

confidential treatment requests to require additional documentation ofthe substantive review

ofthe materiality and competitive harm application-specific requirements. Such additional

documentation should dewl the specific qualitative and/or quantitative factors considered in

assessing the materiality and competitive harm ofthe confidential treatment subject matter.

Division Response to Recommendation 2:

As We noted above, we evaluate whether a request, on its face, conflicts with Commission

rules and warrants further review and we agree that we can enhance our documentation of

that consideration. We therefore concur with your recommendation that we revise our

internal procedures to require additional documentation ofthe review our legal staff

undertakes ofthe materiality and competitive harm application-specific requirements in the

screening process.

We do not concur with your recommendation that this documentation should detail the

specific qualitative and/or quantitative factors considered in assessing the materiality and

3
Appendix V 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

Report No. 479 

Page 37 

competitive harm ofthe confidential treatment subject matter. We believe that to do so

would require a full evaluation ofmateriality and competitive hann as it relates to each

company's specific facts and circwnstances which would, in tum, require a full evaluation of

that infonnation in the context ofthe company's overall disclosure. Given limited staff

resources and our program responsibilities, we are not able to undertake this level ofreview

on each confidential treatment request. We believe that our revised screening process

documentation, as we describe in our response to Recommendation 3, should identify those

requests that warrant a more robust review and appropriately balance our resources and

responsibilities.

Recommendation 3:

The Division ofCorporation Finance should revise its internal procedures to require

additional documentation ofthe Assistant Director Office's review ofthe Office of

Disclosure Support'srecommendations of"No Review" to document factors considered in

making the detennination that no review is required.

Division Response to Recommendation 3:

We concur and plan to implement this recommendation by revising our screening process

documentation to make clear that all review decisions are made by the Assistant Director

Office, to document whether the company materiality and competitive hann discussions

appear to warrant further evaluation by lbe Assistant Director Office legal staff, and to

require an affmnation ofthe Office ofDisclosure Support's review recommendation by the

Assistant Director Office.

Recommendation 4:

The Division ofCorporation Finance should perfoon periodic intemal audits ofthe

confidential treatment process for continuous monitoring. As part ofthese periodic internal

audits, the Division ofCorporation Finance should verify on a periodic basis that the

infonnation lbat has been granted confidential treannent has not been publicly disclosed. If

the Division ofCorporation Finance determines that information previously granted

confidential treannent bas beeo publicly disclosed, it should take steps, as appropriate, to

revoke lbe confidential treatment grant.

DtviJion Response to Recommendation 4:

With regard to the recommendation that we periodically audit the confidential treatment

process, we concur and will develop a procedure through"which the Division will

periodically audit the confidential treatment processto conf1C11l that we are following our

documented procedures.

4
Appendix V 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

Report No. 479 

Page 38 

With regard to the recommendation that the Division should implement a program to

periodically evaluate whether information subject to a grant ofconfidential treatment has

remained confidential, we do not concur. The Division believes that such a program

represents a significant commitment ofresources without a corresponding benefit to

investors. The amount ofwork necessary to implement a meaningful program to monitor

whether information has been publicly disclosed would be very significant. Presumably, this

would entail comprehensive searches of publicly available infonnation (not limited to the

EDGAR database) to attempt to locate specific information relevant to a specific grant of

confidential treatment (e.g., the pricing terms in a purchase agreement). For such a program

to be meaningful, presumably some significant number ofthese searches would need to be

undertaken each year. In light ofthe large number ofdocuments subject to confidential

treatment orders at any given time, this would be extremely time intensive, and we do not

believe it would be a cost-effective use ofstaffresources. As noted in the "General

Observations" section above, receiving a grant ofconfidential treatment does not excuse a

company from complying with its disclosure obligations under the federal securities laws.

Thus, on balance, we do not believe that the incremental benefit that might arise from such

an undertaking supports the use ofstaffresources for that effort.

Recommendation 5:

The Division ofCorporation Finance should revise its internal procedures for handling the

initial screening of confidential treatment requests to ensure that the materiality and

competitive harm criteria are not met by simply making conclusory statements or including

boilerplate language in the requests by requiring additional documentation of how the

screening and review process identified specific and concrete representations to support each

criteria.

Division Response to Recommendation 5:

We concur with your recommendation in that where a confidential treatment request presents

conciusory or boilerplate materiality and competitive harm statements, the request warrants

consideration for further review. Therefore, we will revise our processes and procedures to

identify these requests for further consideration by the Assistant Director Office.

We do not concur with your recommendation that we should further document how our

processes and procedures identified specific and concrete representations to support each

criterion and do not require further evaluation in the review and comment process. To do so

would require a full evaluation ofthe materiality and competitive harm as it relates to each

company's specific facts and circumstances. Given limited staffresources and our program

responsibilities, we are not able to undertake this level ofreview on each confidential

treatment request. We believe that the revisions we will make to our screening process in

response to Recommendation 3 should be helpful in addressing your concerns.

5
Appendix V 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

Report No. 479 

Page 39 

Recommendation 6:

The Assistant Director offices with the highest percentage of confidential treatment requests

(Le., Assistant Director office No. 1 and Assistant Director office No. 10) should provide

training to the other Assistant Directors' offices' staffin order to share knowledge about

specific industry matters with those that will be performing reviews ofconfidential treatment

requests for companies in industries outside oftheir assigned industry.

Division Response to Recommendation 6:

We concur and will implement this recommendation.

Recommendation 7:

The Division ofCorporation Finance should implement controls into the confidential

treatment request database to perform validity checks for fields and to ensure that all

information for each record has been completely populated.

Division Response to Recommendation 7:

We concur and will implement this recommendation.

Recommendation 8:

The Division ofCorporation Finance should add functionality to the confidential treatment

request tracking database to be able to identify confidential treatment requests that were

modified from their initial state.

Division Response to Recommendation 8:

We concur and will implement this recommendation.

6
Appendix VI 

OIG Response to Management’s Comments 

CF concurred with four of our eight recommendations, partially concurred with 

three recommendations, and did not concur with one recommendation. We feel 

these recommendations if fully implemented will strengthen CF’s ability to 

improve its internal policies and procedures for the confidential treatment request 

program and further improve CF’s review of companies’ confidential treatment 

requests. Therefore, we implore CF to reconsider fully implementing 

Recommendation Nos. 2, 4, and 5 because doing so will enhance the 

transparency around the decision making to grant confidential treatment 

requests. Further, the OIG believes CF should reconsider fully implementing 

Recommendation No. 1 due to the fact that Staff Legal Bulletin No.1 expresses 

the requirements that CF expects companies to adhere to when submitting 

confidential treatment request and is intricately woven into its internal policies 

and procedures. Codification of these requirements would benefit companies as 

well as CF. 

Once all of the recommendations are fully implemented, we believe that the 

improvements will greatly assist CF to better monitor its performance of the 

confidential treatment program. 

Assessment of CF’s Confidential Treatment Processes and Procedures September 28, 2010 

Report No. 479 

Page 40 
Audit Requests and Ideas 

The Office of Inspector General welcomes your input. If you would like to 

request an audit in the future or have an audit idea, please contact us at: 

U.S. Securities and Exchange Commission 

Office of Inspector General 

Attn: Assistant Inspector General, Audits (Audit Request/Idea) 

100 F Street, N.E. 

Washington D.C. 20549-2736 

Tel. #: 202-551-6061 

Fax #: 202-772-9265 

Email: oig@sec.gov 

Hotline 

To report fraud, waste, abuse, and mismanagement at SEC, 

contact the Office of Inspector General at: 

Phone: 877.442.0854 

Web-Based Hotline Complaint Form: 

www.reportlineweb.com/sec_oig