United States: SEC May Leverage Investigation Of Yahoo! Data Breaches To Clarify Prior Guidance

Last Updated: February 6 2017
Article by Brian H. Lam and Cynthia J. Larose

The Securities and Exchange Commission (SEC) is investigating whether Yahoo! should have reported the two massive data breaches it experienced earlier to investors, according to individuals with knowledge. The SEC will probably question Yahoo as to why it took two years, until September of 2016, to disclose a 2014 data breach that Yahoo has said affected at least 500 million users. The September 2016 disclosure came to light while Verizon Communications was in the process of acquiring Yahoo. As of now, Yahoo has not confirmed publically the reason for the two year gap. In December of 2016, Yahoo also disclosed that it had recently discovered a breach of around 1 billion Yahoo user accounts. As Yahoo appears to have disclosed that breach near in time to discovery, commentators believe that it is less likely that the SEC will be less concerned with it.

After a company discovers that it has experienced an adverse cyber incidents, it faces a potentially Faustian choice: attempt to remediate the issue quietly and avoid reputational harm, or disclose it publically in a way that complies with SEC guidance, knowing that public knowledge could reduce public confidence in the company's business and could even prove to be the impetus for additional litigation.

Part of the issue may be that while the SEC has various different mechanisms to compel publically traded companies to disclose relevant adverse cyber events, including its 2011 guidance, exactly what and when companies are required to disclose has been seen as vague. Commentators have argued that companies may have a legitimate interest in delaying disclosure of significant adverse cyber incidents to give law enforcement and cyber security personnel a chance to investigate, and that disclosing too soon would hamper those efforts, putting affected individuals at more risk.

Even so, many see the two year gap period between Yahoo's 2014 breach and its September 2016 disclosure as a potential vehicle for the SEC to clarify its guidance, due to the unusually long time period and large number of compromised accounts. As a result of its investigation, it is possible that the SEC could release further direction for companies as to what constitutes justifiable reasons for delaying disclosure, as well as acceptable periods of delay. As cybersecurity is one of the SEC's 2017 Examination Priorities, at a minimum, companies should expect the SEC to increase enforcement of its existing cybersecurity guidance and corresponding mechanisms. Whatever the SEC decides during its investigation of Yahoo, implementing a comprehensive Cybersecurity Risk Management program will help keep companies out of this quagmire to begin with.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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