On February 21, 2018, the United States Securities and Exchange Commission (“SEC”) issued interpretive guidance on cybersecurity disclosure obligations for public companies subject to U.S. securities laws (the "Guidance"). The Guidance underscores that public companies should inform investors about material cybersecurity risks and incidents in a timely fashion, including where companies have not yet been the target of a cyber-attack. This requires that those persons responsible for developing and overseeing disclosure controls and procedures are informed about the related material cyber risks and incidents their company faces. The guidance further draws attention to insider trading prohibitions equally applying to knowledge about a material cybersecurity incident being experienced by a company before it is publicly disclosed.
The Guidance elaborates on earlier guidance released in 2011 by the Division of Corporate Finance. That earlier guidance noted that although there is no existing disclosure requirement referring explicitly to cybersecurity risk and incidents, companies are nonetheless required to disclose such risks and incidents where they are material (i.e. where there is a substantial likelihood that a reasonable investor would consider the information important in making an investment decision or that disclosure of the omitted information would have been viewed by the reasonable investor as having significantly altered the total mix of information available).
In assessing materiality, the Guidance comments that public companies should weigh, among other things, the potential materiality of any identified risk and, in the case of incidents, the importance of any compromised information and of the impact of the incident on the company’s operations. Hence, the nature, extent and potential magnitude, as well as the range of harm that an incident could cause, are factors to be considered in assessing the materiality of cybersecurity risks or incidents. Harm from a cybersecurity incident will include harm to a company’s reputation, financial performance, customer and vendor relationships, civil litigation, and regulatory investigations and actions by domestic and foreign government authorities.
Disclosure During Investigations
The Guidance states that an ongoing internal or external investigation is not, on its own, a basis for not making disclosure of a material cybersecurity incident. In taking this position, the SEC acknowledges that a company may require time to discern the implications of a cybersecurity incident and may not have some material facts at the time of the initial disclosure. Furthermore, the scope of the disclosure may be affected by an ongoing investigation by law enforcement authorities.
Scope of Disclosure
In making disclosure, the Guidance reflects an expectation that the disclosure will be tailored to the particular cybersecurity risks and incidents, and not be boilerplate language or generic cybersecurity-related disclosure. Where a company has become aware of a material cybersecurity risk or incident, disclosure should include the concomitant financial, legal and/or reputation consequences.
The Guidance reminds companies that they may have to correct prior disclosure that was untrue at the time it was made where subsequently contradictory information is learned that existed at the time of the initial disclosure, or update disclosure that has become materially inaccurate after it has been made, but where the original statement is still being relied on by reasonable investors.
The details included within disclosure can be curtailed to protect against making a company’s system more susceptible to further cyber-attacks.
The Guidance outlines the following non-exclusive list of factors public companies should consider in evaluating cybersecurity risk factor disclosure:
- the occurrence of prior cyber incidents, including their severity and frequency;
- the probability of the occurrence and potential magnitude of cyber incidents;
- the adequacy of preventative actions taken to reduce cybersecurity risks and the associated costs, including, if appropriate, discussing the limits of the registrant’s ability to prevent or mitigate certain cybersecurity risks;
- the aspects of the registrant’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 cyber incidents or payments to service providers;
- the potential for reputational harm;
- existing or proposed laws and regulations that may affect the requirements to which the registrant is subject relating to cybersecurity and the associated costs of compliance; and
- litigation, regulatory investigation and remediation costs associated with cyber incidents.
It may further require that registrants disclose previous or ongoing cyber incidents or other past events in order to place discussions of these risks in the appropriate context, including prior incidents involving suppliers, customers, competitors and others.
The SEC views cybersecurity risk and incidents also forming part of a registrant’s:
- MD&A disclosure (e.g. as it relates to the costs of ongoing cybersecurity efforts and costs and other consequences of cyber incidents);
- description of the registrant’s business where cyber incidents or risks materially affect a company’s business;
- legal proceedings disclosures;
- financial statement disclosures (e.g. in relation to costs from investigations, remediation, notice of breaches, litigation, loss of revenue, warranty claims, increases in insurance premiums, impairment of assets and diminished cash flows); and
- the oversight role of the board.
Disclosure Controls and Procedures
The Guidance reflects an expectation that companies will assess whether they have sufficient disclosure controls and procedures in place to ensure that relevant information about cybersecurity risks and incidents is processed and reported to the appropriate personnel to enable senior management to make disclosure decisions and certifications and to facilitate policies and procedures designed to prohibit directors, officers and other corporate insiders from trading on the basis of material nonpublic information about cybersecurity risks and incidents.
Controls and procedures should enable registrants to identify cybersecurity risks and incidents, assess and analyze their impact on a registrant’s business, evaluate the significance associated with such risks and incidents, provide for open communications between technical experts and disclosure advisors, and make timely disclosures regarding such risks and incidents.
Insider Trading & Selective Disclosure
The Guidance underscores that prohibitions against trading in material nonpublic information and selective disclosure equally apply to cybersecurity risks and incidents. Registrants should consider how their code of ethics and insider trading policies take into account and prevent trading on the basis of material non-public information related to cybersecurity risks and incidents. In the case of cyber incidents, the SEC comments that companies would be well served by considering how to avoid the appearance of improper trading during the period following an incident and prior to public disclosure of the incident.
The Guidance elaborates on the SEC’s expectations around public disclosure of material cybersecurity risks and incidents. It shares many similarities with the guidance released in January 2017 by Staff from the British Columbia Securities Commission, the Ontario Securities Commission and the Autorité des marchés financiers du Québec in CSA Multilateral Staff Notice 51-347: Disclosure of cyber security risks and incidents. Canadian issuers are similarly expected to disclosure material cybersecurity risks and incidents as part of their disclosure obligations, to avoid boilerplate disclosures, and to ensure appropriate disclosure controls and procedures to encompass cybersecurity incidents.