SEC Denies 13(f) Request for an Exemptive Order

April 16, 2010

The SEC declined to issue an exemptive order to Wynnefield Capital Management LLC and Wynnefield Capital, Inc. (Wynnefield), which are investment managers of certain private investment companies, that would have kept certain information filed in a Form 13F filing confidential.

Section 13(f)(1) of the 1934 Act and Rule 13f-1 thereunder require every "institutional investment manager," as defined in Section 13(f)(5)(A) of the 1934 Act (Institutional Manager), that exercises investment discretion with respect to "section 13(f) securities," as defined in Rule 13f-1, having an aggregate fair market value of at least $100 million and the securities (Reportable Securities) to file with the SEC quarterly reports on Form 13F setting forth:

  • each Reportable Security's name,
  • CUSIP number,
  • the number of shares held, and
  • the market value of the position.

Under Section 13(f)(3) of the 1934 Act, information filed on Form 13F must be made publicly available, "except that the Commission, as it determines to be necessary or appropriate in the public interest or for the protection of investors, may delay or prevent public disclosure of any such information in accordance with [the Freedom of Information Act ("FOIA")]." Rule 200.80(b)(4) of the Freedom of Information Act rules provides that the SEC generally will not publish or make available to any person matters that "[d]isclose trade secrets and commercial or financial information obtained from a person and privileged or confidential." An Institutional Manager seeking to delay or prevent public disclosure of any such information provided on Form 13F must submit a written confidential treatment request following the procedures set forth in rule 24b-2 under the 1934 Act and the SEC's Instructions to Form 13F ("Instructions").

Under Section 13(f)(2) of the 1934 Act, the SEC may by order exempt an Institutional Manager from Section 13(f)(1) of the 1934 Act or the rules thereunder.  In this case, the exemptive application filed by Wynnefield stated that "exemptive relief under Section 13(f)(2) of the Exchange Act is consistent with Congressional intent in situations where disclosure would otherwise be harmful to reporting companies or their investors." The exemptive application went on to state that the CT Request process under Section 13(f)(3) of the 1934 Act "is insufficient to prevent harm to [Wynnefield] "because it is (i) unduly burdensome, as Wynnefield would "have to continually file new [CT Requests] annually to keep sensitive information confidential," and (ii) uncertain, so as to "adversely affect [Wynnefield's] investment strategies," "because there can be no assurance that the Commission will grant, or continue to grant, confidential treatment." The Exemptive Application also stated that Wynnefield's "investment strategies are trade secrets protected by the Takings Clause of the Fifth Amendment [of the U.S. Constitution]."  The Exemptive Application went on to argue that "an exemption pursuant to Section 13(f)(2) is necessary to avoid a 'taking' without just compensation in violation of the Fifth Amendment."

The SEC declined to issue the order.  While it noted that Congress, in Section 13(f)(3) of the Exchange Act, specifically provided protection from public disclosure for an Institutional Manager's trade secrets and similar sensitive business information, the SEC stated that it has established an administrative process, detailed in Rule 24b-2 under the 1934 Act and the Instructions, for institutional managers to submit CT Requests to protect such information from public disclosure.  For the calendar quarters ended December 31, 2006 through and including September 30, 2009, Wynnefield submitted CT Requests for its entire portfolio of Reportable Securities (Wynnefield CT Requests) in accordance with the established administrative procedures for CT Requests.

It is the SEC's view that Congress generally did not intend for the SEC to exempt an Institutional Manager from disclosing its Reportable Securities pursuant to Section 13(f)(2) when the SEC's authority to delay or prevent public disclosure of certain Reportable Securities pursuant to Section 13(f)(3) could adequately protect the proprietary interests of an Institutional Manager.  Therefore, absent extraordinary circumstances, the SEC stated that an Institutional Manager seeking protection on grounds provided for under Section 13(f)(3) must make a good faith effort to obtain that protection through the CT Request process.  Because the Fifth Amendment argument in the Exemptive Application seeks to protect from public disclosure information that is trade secrets, such protection in the SEC's view is more properly addressed pursuant to the CT Request process.  The SEC further stated that the fact that Wynnefield in good faith pursued the CT Request process and failed to obtain the requested protection does not in and of itself amount to an extraordinary circumstance that justifies an exemption pursuant to Section 13(f)(2) of the 1934 Act.

Click to access the administrative action.


Investment Advisers, Regulatory