United States: SEC Guidance Focuses On Cybersecurity Procedures And Disclosure Issues

On Feb. 21, the Securities and Exchange Commission (SEC) released interpretive guidance on public companies' disclosure practices regarding cybersecurity breaches and risks to the public.

The guidance reinforces and expands upon the SEC Division of Corporation Finance's October 2011 guidance, which stated that although no disclosure requirement explicitly referring to cybersecurity risks and cyber incidents existed at that time, companies nonetheless may be obligated to disclose such risks and incidents. The SEC's latest guidance addresses in greater detail two additional topics: the importance of cybersecurity policies and procedures and the application of insider trading prohibitions in the cybersecurity context.  

Generally, the guidance states that – given the "frequency, magnitude and cost of cybersecurity incidents" – companies should inform investors about material cybersecurity risks, even if the company has not yet been the victim or target of a cyberattack. It states that firms should have policies and procedures in place to publicly disclose breaches in a timely fashion and to prevent corporate insiders from exploiting their knowledge of a cybersecurity incident by trading on material non-public information before the breach is publicly disclosed. It also recommends that the most effective cybersecurity disclosure controls and procedures result when a company's directors, officers and others are informed about the risks and incidents that the company has faced or is likely to face.

Disclosure Rules

The first section of the guidance outlines the existing rules requiring disclosure of cybersecurity-related issues and provides guidance on the timing, nature and amount of disclosure expected. It reminds issuers that they are required to establish "appropriate and effective disclosure controls and procedures that enable them to make accurate and timely disclosures of material events, including those related to cybersecurity" to assist in meeting their disclosure obligations under federal securities laws. It recommends firms consider the materiality of cybersecurity risks and incidents to investors when preparing disclosure in registration statements, current reports and periodic reports, while also considering the adequacy of their cybersecurity-related disclosure to avoid omitting any information that could result in a misleading disclosure.

Despite the need for adequate disclosure, the guidance clarified that a company need not make disclosures so detailed that they could compromise cybersecurity efforts and that the SEC does "not expect companies to publicly disclose specific, technical information about their cybersecurity systems, the related networks and devices, or potential system vulnerabilities in such detail" that it would make them more susceptible to a cybersecurity incident.

In relation to the disclosure of a company's risk factors, the guidance provides several factors to be considered in evaluating the level of risk, such as the occurrence of prior cybersecurity incidents, the probability and potential magnitude of cybersecurity incidents, the adequacy of preventive actions taken to reduce cybersecurity risks, and the associated cost, as well as the risk of reputational harm, litigation or regulatory investigation as a result of a cybersecurity incident. In addition, the SEC expects a company's financial statements will include information regarding the range and magnitude of the financial impact of a cybersecurity event "on a timely basis as the information becomes available."

Policies and Procedures

The guidance then expands on existing SEC statements to emphasize the importance of creating and maintaining comprehensive risk management policies and procedures specifically related to cybersecurity risks and incidents. It encourages firms to assess disclosure controls and procedures to ensure that relevant cybersecurity information "is processed and reported to the appropriate personnel, including up the corporate ladder, to enable senior management to make disclosure decisions and certifications." It also calls for the creation of policies and procedures that prohibit directors, officers and others from making trades based on non-public material information.

Further, the guidance states that disclosure controls and procedures should "ensure timely collection and evaluation of information potentially subject to required disclosure, or relevant to an assessment of the need to disclose developments and risks that pertain to the company's businesses." The guidance encourages companies, when designing and evaluating disclosure controls and procedures, to consider whether they will appropriately record, process, summarize and report the cybersecurity-related information they are required to disclose in filings. Disclosure controls and procedures should also enable companies to "identify cybersecurity risks and incidents, assess and analyze their impact on a company'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

Significantly, the guidelines include an emphasis on considerations related to insider trading. In the interests of safeguarding against officials trading on non-public information before a cyber incident is disclosed, the guidance suggests companies consider adding the specific context of a cyber event to any preventive measures they may have already adopted to address the appearance of improper trading. This inclusion comes after several high-profile hacking incidents – including at the SEC itself – implicating trading on non-public information. The guidance underscores that non-public information, regarding a company's cybersecurity risks or breaches may constitute material, non-public information and corporate insiders would violate anti-fraud provisions should they use any such knowledge to trade the company's securities.

As a result, the SEC encourages companies to review their codes of ethics and insider trading policies through a cybersecurity lens in order to prevent such activity. In addition, it suggests that firms investigating cyber incidents should consider "whether and when it may be appropriate to implement restrictions on insider trading in their securities." The guidance states that such a measure could protect against corporate insiders engaging in such activities and help affected companies "avoid the appearance of improper trading" in the wake of a cybersecurity breach.  The guidance also emphasizes that in disclosing cybersecurity events, issuers need to be mindful of the prohibitions against selective disclosure embodied in Reg FD and ensure that when a disclosure is made to an enumerated Reg FD person (such as a broker, investment adviser or holder likely to trade in company shares), disclosure is simultaneously made to the public.

The guidelines remain "guidance," rather than any formal rule change. In a statement released with these guidelines, Chairman Jay Clayton noted that the guidelines reflect "the Commission's views on this matter to promote clearer and more robust disclosure," so that investors receive more complete information. Clayton reminded companies that investors may find fault with a company's actions even when the SEC does not. "In particular, I urge public companies to examine their controls and procedures, with not only their securities law disclosure obligations in mind, but also reputational considerations around sales of securities by executives," he said, a reminder that other considerations exist beyond regulatory requirements when it comes to cybersecurity.  Clayton also emphasized that the SEC would continue to evaluate and monitor developments concerning cyber disclosure and consider whether additional guidance or rules may be needed.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Cadwalader, Wickersham & Taft LLP
Shearman & Sterling LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Cadwalader, Wickersham & Taft LLP
Shearman & Sterling LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions