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Applicability of Public Records Act to Certain Investment Documents

June 6, 2006 

The Honorable Richard H. Moore
State Treasurer
Department of State Treasurer
325 North Salisbury Street
Raleigh, NC 27603-1385

Re: Advisory Opinion – Applicability of Public Records Act to Certain Investment Documents

Dear Mr. Moore:

You have requested the opinion of this Office concerning the application of the Public Records Act (N.C.G.S. § 132-1 et seq.) to requests your office receives for certain information relating to the State’s investments in private equity, hedge funds and real estate funds. You advise that the most common requests are for disclosure of: (1) the names of the funds in which the Treasurer has invested; (2) the amounts of such investments, and (3) the annual financial return provided by such funds (collectively referenced as the "Basic Fund Information"). Your office also receives requests for records reflecting the fees paid to fund managers ("Management Fee Information") and, for records containing information about the portfolio companies in which the various funds have made investments ("Portfolio Company Information"). Your specific question is whether the Basic Fund Information, the Management Fee Information and, the Portfolio Company Information, respectively, are public records and if so, whether they are confidential under an exception in the Public Records Act. You advise that you have generally released the Basic Fund Information and Management Fee Information upon request, but question the status of the Portfolio Company Information. 

N.C.G.S. §132-1 defines "public records" as "all documents, papers, letters, maps, books, photographs, films, sound recordings, magnetic or other tapes, electronic data-processing records, artifacts or other documentary material, regardless of physical form or characteristics, made or received pursuant to law, or ordinance in connection with the transaction of public business by any agency of North Carolina government or its subdivisions." Your letter states that the Department of State Treasurer receives and maintains the records in question in connection with its investments of state funds. The Treasurer is authorized to make such investments by Chapter 147, Article 6 of the North Carolina General Statutes. The Basic Fund Information, the Management Fee Information and the Portfolio Company Information are therefore public records required to be disclosed absent an express exemption in the General Statutes. 

N.C.G.S. § 132-1.2 provides an exemption for certain categories of public records which the legislature has determined should remain confidential. Of specific relevance to the financial information you describe is an exemption for certain records containing a "trade secret" as defined in N.C.G.S. § 66-152(3). This provision defines "trade secret" as business or technical information, including but not limited to a formula, pattern, program, device, compilation of information, method, technique, or process that: 

a. Derives independent, actual or potential commercial value from not being generally known or readily ascertainable through independent development or reverse engineering by persons who can obtain economic value from its disclosure or use; and 

b. Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. 

We have reviewed the case law respecting the exemption for confidential trade secrets. These cases reflect that our courts, in considering whether a public record contains confidential trade secrets which cannot be disclosed, have generally first reviewed the threshold question of whether the information received by the public agency meets the definition in N.C.G.S. § 66-152(3). In interpreting this statutory definition, courts have fashioned six factors which are to be considered when determining whether information is a trade secret: 

(1) The extent to which the information is known outside the business; 

(2) The extent to which it is known to employees and others involved in the business; 

(3) The extent of measures taken to guard the secrecy of the information; 

(4) The value of the information to the business and its competitors; 

(5) The amount of effort or money expended in developing the information; and 

(6) The ease or difficulty with which the information could properly be acquired or duplicated by others. 

See State ex rel. Utilities Comm’n v. MCI, 132 N.C. App. 625, 634, 514 S.E.2d 276, 282 (1999); Wilmington Star News v. New Hanover Regional Medical Center, 125 N.C. App. 174, 480 S.E.2d 53, 56, appeal dismissed, 346 N.C. 557, 488 S.E.2d 826 (1997); Combs & Assocs. v. Kennedy, 147 N.C. App. 362, 369-70, 555 S.E.2d 634, 640 (2001). 

You have provided information potentially relevant to each of these six considerations for the Portfolio Company Information. Specifically, you have advised us that the Portfolio Company Information is known outside the portfolio manager or partnership only to investors who have signed a non-disclosure agreement, prior to receiving any information. Access to the information within the portfolio manager or partnership is limited to (a) the researchers, analysts, and senior management of the general partner who put the information together for the limited partners and (b) the limited partners and the persons in their financial operations who have signed the non-disclosure agreement. The general partners guard the secrecy and confidentiality of the information in their proprietary databases during all phases of their work, including research, analysis, marketing, and dissemination. A non-disclosure agreement must be signed by participants in the investment, and breach of confidentiality by the investors is grounds for terminating the investment contract between the investor and the portfolio manager. Valuable information is collected, requiring specialized expertise and experience to research companies in which the portfolio invests, the market for those companies, and their competitors. Additional value is added with analysis, assessment, and conclusions, which serve as the basis for the Treasurer’s decision to invest in a portfolio. The portfolio manager has its own proprietary means of selecting companies in which to invest and for packaging portfolios for the limited partners. Research processes, methodologies and qualitative analysis of the data are unique and specialized in each portfolio manager’s organization. 

Based upon the information provided, it is our opinion that the Portfolio Company Information described meets the tests in Combs and in Wilmington Star News of "trade secret" as defined by N.C.G.S. § 66-152(3). We concur in your conclusion that the Basic Fund Information and Management Fee Information are not trade secrets and are not exempt from disclosure under the Public Records Act. 

It should also be noted that the exemption for trade secrets extends only to records that also meet certain additional statutory conditions prescribed by N.C.G.S. § 132-1.2: 

Each record must be the property of the portfolio company, a private "person" as defined in N.C.G.S. § 66-152(2); 

Each record must be designated or indicated as "confidential" or as a "trade secret" at the time of its initial disclosure to the State Treasurer; and 

Each record must be disclosed or furnished to the State Treasurer only in connection with the portfolio company’s performance of its contract for investment services. 

We hope that this opinion is responsive to your request. Should you have further questions regarding this issue, please do not hesitate to contact us. 

Ann Reed
Senior Deputy Attorney General

Douglas A. Johnston
Special Deputy Attorney General