On February 21, the Securities and Exchange Commission (SEC) published interpretive guidance concerning cybersecurity disclosures for public companies. The new guidance reinforces companies’ existing obligations to disclose material cybersecurity incidents, as well as potential threats, placing additional focus on obligations to implement policies and procedures that facilitate disclosure and risk prevention, and that minimize the risk of insider trading on the basis of cyber-attacks and related incidents.
In 2011, the SEC’s Division of Corporation Finance provided initial guidelines on cybersecurity disclosures. Those earlier guidelines emphasized that numerous existing requirements may obligate public companies to disclose cybersecurity risks in their filings under both the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. The SEC’s new guidelines provide additional details on those obligations, especially in the risk factors and management discussion and analysis sections of such filings:
- Risk Factors. Companies are advised to provide detailed disclosure of their risks associated with cybersecurity, including the occurrence of any prior incidents, the probability and possible magnitude of future occurrences, and the preventive actions taken. In disclosing a prior occurrence, companies should place the incident in the context of a broader discussion of the types of incidents that could potentially face the company going forward. It is not enough to include generic language indicating that a cybersecurity incident may occur in the future.
- Management Discussion & Analysis. The new guidance states that companies should discuss cybersecurity events, trends, and uncertainties that will likely affect their operations, liquidity, financial condition, and accuracy of financial information. The costs of ongoing prevention efforts are especially important here, as well as both the short- and long-term costs that may follow a potential cybersecurity incident.
The guidelines additionally reinforce the SEC’s stance that public companies should focus on providing tailored cybersecurity disclosures in the following areas:
- Description of Business
- Legal Proceedings
- Financial Statement Disclosures
- Board Risk Oversight
Notably, the new guidance emphasizes that companies need not make disclosures in such specific, technical detail as to provide a roadmap for those who might seek to compromise their cybersecurity. This emphasis should help alleviate any concern that compliance with a company’s disclosure obligations concerning cybersecurity might actually increase its cybersecurity risk.
The SEC also addresses the importance of developing ongoing disclosure controls and procedures relating to cybersecurity — a topic not addressed in depth within the Division of Corporation Finance’s prior guidelines. Companies are advised to develop comprehensive policies and procedures on cybersecurity, and to assess their compliance regularly. In much the same fashion as obligations relating to disclosure controls and procedures generally, companies’ policies should provide an effective mechanism to ensure that material cybersecurity risks are reported up the corporate ladder, allowing senior management to make decisions on policy updates and disclosure requirements — all with an ultimate objective of having companies’ principal executive and financial officers certify the design and effectiveness of those controls and procedures.
The new guidelines also emphasize companies’ responsibilities to curtail the risk that directors, officers and other corporate insiders may trade on material nonpublic information related to cybersecurity risks. The SEC reminds public companies that trading on such information, including vulnerabilities and breaches, would violate both federal antifraud provisions and many exchanges’ conduct requirements. Companies’ policies and procedures should include prophylactic measures to prevent insider trading on cybersecurity incidents between the time they occur and their public disclosure, and the SEC recommends that companies consider whether and when they should implement insider trading restrictions in this context.