On February 20, 2018, the Securities and Exchange Commission (SEC) issued interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents. This guidance indicates that the SEC is expecting more robust cybersecurity-related disclosures in the filings of public companies and encourages companies to implement comprehensive cybersecurity policies and procedures.
Overview of Rules Requiring Disclosure of Cybersecurity Issues
The guidance states that companies should consider the following in disclosing cybersecurity-related risk factors:
- 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 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;
- 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
- Litigation, regulatory investigation, and remediation costs associated with cybersecurity incidents.
The guidance suggests that companies in their MD&A disclosures should discuss cybersecurity efforts and the consequences, costs and risks of current and potential cybersecurity incidents, which may include the loss of intellectual property, maintenance of insurance, responses to litigation and regulatory actions, compliance with applicable legislation and implementation of remediation efforts.
Policies and Procedures
The guidance encourages companies to implement comprehensive cybersecurity policies and procedures and to evaluate compliance with applicable SEC and exchange regulations on a regular basis, including with respect to adequate disclosures. These procedures should enable senior management to make informed disclosure decisions including with respect to Regulation FD compliance, while at the same time prevent insider trading based on cybersecurity-related information. Furthermore, the procedures should not be entirely focused on required disclosures but should also allow for timely collection and review of all information that may be relevant to a cybersecurity-related disclosure.
The SEC has identified as a major concern insider trading on the basis of nonpublic information related to a company’s cybersecurity risk and incidents. In light of this increased awareness by the SEC, the guidance encourages companies to review their codes of ethics and insider trading policies to ensure insider trading on cybersecurity-related information is taken into account. These policies should include specific measures that prevent insider trading before disclosure of a cybersecurity-related incident.
The new SEC release can be found here.
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Allison Westfall practices in the firm's Business Representation & Transactions Group concentrating in the areas of securities, mergers and acquisitions and business planning. Her practice includes representing ...
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