Should Advisers Seek FOIA Confidential Treatment of Documents Handed Over to SEC Examiners?
The SEC examiners have come and gone. Theyíve carted stacks and stacks of paper ó your paper! ó back to their government offices, where it sits, vulnerable to requests under the Freedom of Information Act.
You worry. Might an investigative reporter try to FOIA copies of your firmís annual review report? Could a competitor seek to get its hands on your client list? What if an activist group tries to obtain information about your clientsí portfolio holdings?
Such things do happen. OCIE chief counsel John Walsh confirmed that "from time to time," the SEC receives FOIA requests for information provided in SEC examinations. "We maybe get one or two a month," he said.
The good news, however, is that FOIA rules allow the SEC to deny such requests. FOIA Rule 80(b)(3) states that the SEC does not have to produce records that are specifically exempted from disclosure by statute. And it just so happens that Section 210(b) of the Advisers Act generally prohibits the SEC staff from disclosing to anyone outside the SEC any information obtained as a result of an examination, "except with the approval of the Commission."
Under another exemption, FOIA Rule 80(b)(8), the SEC is not required to produce records related to examination reports prepared by the Commission.
Technically speaking, those exemptions are optional; the SEC does not have to apply them. As a practical matter, however, it does. In fact, the SEC has a policy of citing those exemptions as a basis for not handing over documents and information obtained during exams. "Our FOIA office never releases information we receive from firms during exams, at any time, even after the exam is closed," said OCIE director Lori Richards in a statement.
"I can understand why people are concerned about confidentiality," said Walsh. "We are very concerned about it too. We recognize that confidentiality plays a critical role in the effectiveness of our examination program." SEC exams, he explained, are most effective when there is a free and open dialogue. Ensuring the confidentiality of exam records serves this purpose by allowing examiners to conduct a candid assessment of the firmís compliance program, he said.
When you think about it, it makes sense: SEC examiners have an interest in keeping exam records confidential and protected from FOIA requests because they know that registrants will be more willing to hand over information to SEC examiners if they are not concerned about proprietary information falling into the wrong hands via a FOIA request. Indeed, that very policy consideration underlies FOIA Rule 80(b)(8), which allows the SEC to deny requests for information obtained during exams.
Still, some industry lawyers worry about inadvertent disclosures. "Think about how sensitive some of the stuff is that you give them," said Richard Marshall of Kirkpatrick & Lockhart Nicholson Graham. "If a mistake was made" and that information is publicly released, he said, a firmís business could be damaged. "Iím not saying they are bad people," added Marshall, but SEC employees could make an "innocent mistake that can really matter."
If such an innocent mistake has ever actually happened, itís news to Walsh. "I am not aware of any inadvertent disclosures of examination records," he said.
How is OCIE so sure that exam documents wonít be mistakenly provided in response to a FOIA request? While declining to describe the specifics, Walsh did confirm that OCIE has controls in place to ensure that examination records are not inadvertently disclosed. "We work very hard to preserve the confidentiality of examination records," he said. "We carefully control them."
In any event, an adviser that remains concerned about inadvertent disclosure is certainly permitted to request FOIA confidential treatment under Rule 83, which provides an additional procedural check before documents are released pursuant to a FOIA request.
Marshall, for one, said that he typically advises his clients to seek FOIA confidential treatment. The extra cost of seeking confidential treatment is minimal, he said, since Bates stamping can be done by computer or even on a photocopy machine itself. And, he noted, firms need to make copies anyway. "Nobody produces originals," he said. "If somebody said they were going to produce originals, Iíd tell them to produce copies."
The process of seeking confidential treatment is relatively straightforward. Under FOIA Rule 83, to request that information handed over to the SEC not be disclosed pursuant to a FOIA request, a firm needs to do three things:
First, the firm must prepare the documents to be handed over. Each page of each document for which confidential treatment is being requested should be marked as follows: "Confidential Treatment Requested by [Name]." Each page must reference the documentís unique document number ("Document No. 4") and Bates stamp ("1 of 54," "2 of 54," etc.).
Weíll leave it to you and your favorite lawyer to figure out how to go about Bates-stamping CDs. Do you put an electronic header on the records contained on the CD? Or do you simply label the outside of the CD? ("1 of 1"?)
Inquiring minds want to know.
Keep in mind that a firm does not need to seek confidential treatment of all documents handed over during an exam. For example, a firm may seek to protect only a few highly-sensitive documents. Along the same lines, a firm can request confidential treatment of only a few pages within a document. However, for a variety of reasons, that may not be a wise approach. Perhaps most obviously, there may be confusion as to whether the document as a whole is protected if the confidential header appears on only a few pages.
Second, the firm needs to submit a letter to the SEC requesting confidential treatment. The letter must describe the records for which confidential treatment is being requested, including a reference to the document numbers and the range of Bates stamps.
Of course, at the beginning of an exam, a firm may not know which documents will be requested, and therefore may not be able to prepare an official letter identifying all of the documents for which confidential treatment is requested. Rule 83 addresses this issue, noting that it may be impracticable to submit a confidentiality request at the time the document is handed to the SEC. In such a case, the firm should inform the SEC examiner, at the time the documents are handed over (or as soon as possible thereafter), that the firm is requesting confidential treatment of those documents. A formal written confidential treatment request must be submitted within 30 days.
Third, the firm needs to send a copy of the letter (but not a copy of the records themselves) to the SECís FOIA office.
A few other FOIA confidential treatment request odds and ends:
The fact that a confidential treatment request has been submitted will be kept non-public.
Confidential treatment may be sought for any document, regardless of whether it was required to be provided to examiners or whether it was handed over voluntarily (this is relevant for registered investment companies, where SEC examinersí inspection authority legally extends only to records that the fund is required to keep by rule).
Documents for which confidential treatment is sought should be submitted separately from other information.
Lastly, keep in mind that SEC examiners expect all documents requested in an examination to be produced promptly ó including those for which confidential treatment is being requested. In fact, Rule 83 states that "in no circumstances can the need to comply with the requirements [of FOIA Rule 83] justify or excuse any delay in submitting any record to the Commission."
If examiners would like to see a document immediately, a firm might consider providing an informal review copy, with the understanding that a formal, Bates-stamped copy will be provided to examiners to take back to their office. For example, if a document is discussed during an interview, the firm can provide a copy of the document immediately, rather than holding up the interview while the document is Bates stamped. Just be careful, of course, to keep track of which "informal" copies need to be replaced with Bates-stamped copies.
Elizabeth Knoblock of Mayer Brown takes a slightly different approach to requesting confidential treatment of exam records. Unlike other lawyers, she does not routinely advise clients to seek confidential treatment of every document handed over to SEC examiners. "I guess it depends on what youíre submitting it for," she said. "If itís incredibly, incredibly important to you," then confidential treatment pursuant to Rule 83 should be sought. "Dot every Ďií and cross every Ďtí."
However, she said that she has "taken a more relaxed approach" to seeking confidential treatment by advising her clients to submit an up-front letter asserting FOIA confidential treatment over all documents handed over to examiners. Even if a firm does not Bates stamp every document handed over, the letter may give you "some colorable argument" that "for those documents for which a privilege might be available, you did something to preserve it." When an inspection starts, said Knoblock, "I always tell them from the very get go" to provide examiners with a letter stating that the firm seeks FOIA confidential treatment for all documents submitted during the examination. "Iíve drafted that letter dozens of times."
She acknowledged that such an approach doesnít necessarily comply with Rule 83. "The SEC doesnít have to accept this," she said. "I canít tell you that it really works." But, she added, "we know for a fact that itís not going to work if you donít."
Lastly, Knoblock cautioned that if an adviser suspects that its examination may lead to an enforcement referral, the adviser should seek expert guidance on privilege and production issues. "Thatís where you want to talk to a securities litigator," someone who has "real, on-the-ground experience in duking it out with the agency." Of course, she acknowledged, "you never know when an inspection issue is going to turn into an enforcement issue."