Parsing the SEC’s New Public Company Cybersecurity Disclosures Statement and Guidance

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SEC Cybersecurity

New SEC guidance demonstrates the publicly traded company regulator will continue to focus on cybersecurity and provides insights on the seriousness of cyberthreats, the safeguards policies and procedures a company should have in place, and potential insider trading issues in the wake of data breaches, the author writes.

Andrew B. Serwin

By Andrew Serwin

Andrew Serwin is a partner in Morrison & Foerster LLP’s global privacy and data security practice group in San Diego.

By Andrew Serwin

The Securities and Exchange Commission recently released Guidance regarding cybersecurity issues that provides further clarity regarding the Commission’s Guidance on cybersecurity and public companies. The Commission essentially provided additional guidance regarding four topics:

  •  the nature and seriousness of the cybersecurity threat;
  •  the potential areas of disclosure for a public company;
  •  the importance of policies and procedures; and
  •  insider trading issues.
The Commission started by noting the importance of cybersecurity in its view. It stated:
  • Cybersecurity risks pose grave threats to investors, our capital markets, and our country. …
  • Companies today rely upon digital technology to conduct their business operations and engage with their customers, business partners, and other constituencies. In a digitally connected world, cybersecurity presents ongoing risks and threats to our capital markets and to companies operating in all industries, including public companies regulated by the Commission. …
  • Today, the importance of data management and technology to business is analogous to the importance of electricity and other forms of power in the past century. …
  • Given the frequency, magnitude and cost of cybersecurity incidents, the Commission believes that it is critical that public companies take all required actions to inform investors about material cybersecurity risks and incidents in a timely fashion, including those companies that are subject to material cybersecurity risks but may not yet have been the target of a cyberattack.
In light of this view, the Commission then concluded:
  • Given the frequency, magnitude and cost of cybersecurity incidents, the Commission believes that it is critical that public companies take all required actions to inform investors about material cybersecurity risks and incidents in a timely fashion, including those companies that are subject to material cybersecurity risks but may not yet have been the target of a cyberattack.
It should be noted that the Commission built this Guidance on the prior Guidance it issued in 2011, CF Disclosure Guidance: Topic No. 2 – Cybersecurity (Oct. 13, 2011), and also noted that it was specifically addressing two additional topics—the importance of cybersecurity policies, as well as insider trading prohibitions in the cybersecurity context.

The Commission then provided an overview of the rules it believed required disclosure of cybersecurity issues, and a summary of the Commission’s statements follows.

The Commission first noted its view that companies need to consider whether they have an obligation to make disclosures as part of companies’ required registration statements under the Securities Act of 1933 and the Securities Exchange Act of 1934, as well as the periodic and current reports under the Securities Exchange Act of 1934. In the periodic report context, the Commission noted its view that companies should provide “timely and ongoing information” regarding cybersecurity—specifically material cybersecurity risks and incidents that “trigger disclosure obligations” in these reports, which include Forms 10-K and 10-Q. The Commission also noted its view that cybersecurity is a relevant factor for the disclosure requirements that result from a company’s obligations under the Securities Act and the Exchange Act to “disclose all material facts” so as not to make the statements misleading. The Commission also noted its view that Form 8-K and Form 6-K can be used to provide current reports regarding the “occurrence and consequences of cybersecurity incidents.”

While noting areas where disclosures should be made, in the Commission’s view, was the focus of this Guidance, the Commission recognized some of the inherent limitations on companies that are faced with disclosure obligations—notably the problem of disclosing information that could compromise security. The Commission specifically stated that a company should not “make detailed disclosures that could compromise its cybersecurity efforts…”, so companies must try to walk the line of make sufficient disclosures, but not disclose information that could ultimately harm the company.

The Commission also noted that the timing of disclosures may be impacted by the time it takes a company to understand the implications of an incident, as well as the fact that a company may cooperate with law enforcement and that cooperation may impact the timing of disclosures. However, it appears that the Commission’s view is that the mere existence of an investigation would not necessarily justify delaying disclosure once the incident is understood. The Commission also noted that companies have, in its view, a duty to correct prior disclosures when there are developments that make the prior disclosures untrue, or that are missing a material fact that is necessary to make the disclosures not misleading. This obligation caused the Commission to state that companies should consider whether new facts require a refresh of prior disclosures. These disclosures, the Commission said, should be “tailored” to the company’s particular cybersecurity risks and incidents.

The Commission also addressed companies’ disclosure obligations for risk factors, including in the context of acquisitions. The Commission suggested that it would be “helpful” for companies to consider certain issues when making risk factor disclosures:

  •  the occurrence of prior cybersecurity incidents, including their severity and frequency;
  •  the probability of the occurrence and potential magnitude of cybersecurity incidents;
  •  the adequacy of preventative actions taken to reduce cybersecurity risks and the associated costs, including, if appropriate, discussing the limits of the individual company’s ability to prevent or mitigate certain cybersecurity risks;
  •  the aspects of the company’s business and operations that give rise to material cybersecurity risks and the potential costs and consequences of such risks, including industry-specific risks and third party supplier and service provider risks;
  •  the costs associated with maintaining cybersecurity protections, including, if applicable, insurance coverage relating to cybersecurity incidents or payments to service providers;
  •  the potential for reputational harm;
  •  the existing or pending laws and regulations that may affect the requirements to which companies are subject relating to cybersecurity and the associated costs to companies; and
  •  the litigation, regulatory investigation, and remediation costs associated with cybersecurity incidents.
The Commission also noted several other areas where it viewed disclosure as potentially relevant, including: management discussion and analysis (MD&A) of financial condition and results of operations; description of business; legal proceedings; financial statement disclosures; and board risk oversight.

One of the main conclusions the Commission drew based upon these disclosures, as well as the risks it perceived regarding cybersecurity was that policies and procedures regarding cybersecurity are “key elements of enterprise-wide risk management….” This includes disclosure policies, but in the Commission’s view it goes beyond that and includes escalation criteria, among other issues.

The Commission also addressed issues regarding insider trading, noting that it had particular concerns in this context.

Ultimately, the new Guidance demonstrates that the Commission continues to be focused on cybersecurity and this focus will not wane in the near term. The Guidance provides further details regarding the Commission’s thinking in prior Guidance, and provides further thoughts from the Commission regarding the seriousness of the threat, the policies and procedures a company should have, in the Commission’s view, as well as the issues associated with insider trading.

To contact the editor responsible for this story: Donald Aplin at

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