There are times when companies that have Securities Exchange Commission (SEC) reporting requirements AND that perform classified work for the U.S. federal government find themselves in a quandary because…

The SEC requires companies to file financial reports in certain instances so the public has the information it needs to make decisions about investing in the company. Those reports require detailed information about the reporting company’s business – for example contracts that are material to the company’s financial position.  

Meanwhile, under national security laws, a company that performs classified contracts is prohibited from disclosing information about its classified contracts, even if it has SEC reporting requirements.

So what is a law abiding company to do?

  • File the legally required SEC financial reports and disclose the classified contracts?

OR

  • Adhere to its legal obligations to not disclose the classified contract and possibly violate its SEC disclosure requirements?

Thankfully – U.S. defense and intelligence agencies thought through this dilemma and provide a clear answer in the NISPOM (National Industrial Security Program Operating Manual). The NISPOM provides the regulatory requirements for federal government contractors who perform classified work. These regulations implement the statutes that control and protect classified information. 

The NISPOM says that federal government contractors that perform classified contracts may only disclose classified information to authorized persons which generally means persons who hold a clearance; and there is no exception for disclosing to other federal agencies – like the SEC. 

The NISPOM prohibits federal government contractors from disclosing classified information received or generated under a classified contract to any other Federal agency. The only way classified information may be disclosed to a Federal agency is if the agency that has authority over the classified contract specifically authorizes the contractor to disclose the classified information to another federal agency. 

Contractors cannot disclose classified information to any other entity unless it is necessary to do so in order to perform the contract; to perform a subcontract; or for any other government required contracting activity.  

Contractors cannot even disclose unclassified information about a classified contract without prior government review and approval.

To help contractors implement the NISPOM requirements, most classified contracts include security clauses that direct contractors about how to protect the classified information, to include what information the contractor may disclose and what may not be disclosed along with the approval process for obtaining government approval to make disclosures about the classified contract.

Each request for approval to disclose information about a classified contract must indicate the approximate date the contractor intends to release the information and identify the media to be used for the release.   If the government approves the contractor’s request to release information about a classified contract, the contractor must keep a copy of the approved request so the federal security officer assigned to manage the contractor may review the request and the approval.

Even if a contractor obtains approval to release information about a classified contract, it must continue to seek new approvals for any information it developed while performing the contract after the initial approval.

There is some information that may be disclosed about a classified contract that does not require government approval to make the disclosure:

  • The fact that a contract has been received, including the subject matter of the contract, provided the name or description of the subject matter is not classified.
  • The method or type of contract that the contractor received – that is, for example, was it bid, negotiated, or letter.
  • The total dollar amount of the contract unless that information would reveal:
    • Information about a level of effort contract in a sensitive research area, or
    • Quantities of certain weapons and equipment that are classified.
  • Whether the contract will require the hiring or termination of employees.
  • Information the government previously approved for disclosure.

The NISPOM specifically states that the procedures for seeking approval to disclose information about classified contracts applies to information the contractor intends to disclose in unclassified brochures, promotional sales literature, reports to stockholders, or similar material.

Federal government contractors performing classified contracts may not disclose information about a classified contract even if the information has been declassified.  That is, just because the government has declassified information about a classified contract, a contractor is still not automatically authorized to publicly disclosure the declassified information.  Rather, contractors must still request approval to disclose “declassified” information.

Last, please note that providing information on a classified contract material to a company’s financials to the SEC and in doing so asking the SEC to protect classified information from public disclosure will not protect a federal government contractor who performs classified contracts from violating the laws (some of which are criminal) for disclosing classified materials. 

For the government appreciates Ben Franklin’s observation’s on keeping secrets:

“Three may keep a secret, if two of them are dead.” 

The intersection of law, business, criminal activity crime and ethics: why do some companies violate the law? what happens when they do? what is ethical? how do we get corporations to follow the law? can lawyers help and, if so, what is the lawyer’s role? Stay tuned, we’re going to address all of these issues and more in When the Writ Hits the Fan.
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