Besides clarifying disclosure requirements, the agency is prompting companies to take proactive steps.
Cybersecurity threats have reached a point where they cannot go ignored by any government agency, even the U.S. Securities and Exchange Commission. Although an agency that is tasked with protecting investors is not one that typically comes to mind in the battle against cyber threats, the SEC does maintain jurisdiction over cybersecurity issues for public companies, broker dealers and investment advisers, due to its responsibilities for ensuring the disclosure of material information, integrity of market systems and customer data protection.
The SEC began focusing on cybersecurity issues in October 2011 by issuing guidance for public companies on disclosing risks and incidents within the already existing framework of public company disclosure requirements. The SEC’s guidance clarified the material information regarding cybersecurity risks and incidents that requires disclosure. Since then, the number of disclosures about data breach incidents, risk factors, trends and uncertainties, and legal proceedings related to cybersecurity threats has grown.
Although requiring this enhanced disclosure regarding cybersecurity issues is intended to protect investors and provide greater information to those with national security responsibilities, it is providing collateral benefits as well. In order to avoid securities law liability for material omissions or misstatements in their public filings, public companies are finding that they must pay closer attention to their policies, procedures and compliance systems in the area ofcybersecurity. One area public companies should revisit is their disclosure controls and procedures to ensure that those procedures adequately address reporting up cybersecurity risks and incidents. In edition, many public company boards of directors are starting to rethink risk oversight in this area and, as companies seek new directors to join their boards,experience in overseeing cybersecurity risks may become a highly sought attribute. Companies that want to ensure better cybersecurity risk oversight at the board level should consider revising their annual board evaluations and director questionnaires in this regard.
The SEC rules, like many other federal and state laws, mandate the disclosure of past failures to protect data. Forty-seven states require notification to consumers if there is a reason to believe that their personal information has been the subject of an unauthorized breach. The federal Health Information Technology for Economic and Clinical Health (HITECH) Act requires similar notifications for the breach of personal health related information. The trend, however, has moved away from the emphasis on the reactive response to data breaches to proactive measures to protect data in the first instance. This proactive approach is embodied in a compliance program consistent with the Federal Sentencing Guidelines requiring computer security policies, the appointment of a security coordinator, training the workforce on protecting company data, periodic auditing of the viability of the program, enforcing its policies,and promptly responding to policy violations.
Compliance programs, if designed properly, can be used to protect shareholder value. The loss of competitively sensitive data can obviously have an adverse impact on shareholder value. The breach of personal customer information that can be used to perpetrate identity theft can be just as harmful. Press reports surrounding the theft of personal data, as recently occurred with Target Corp., can result in devastating publicity undermining customer and shareholder confidence.
The trend is clearly in the direction of making data protection an integral part of a company compliance program. For example, in 2010 Massachusetts began requiring any company that owns, licenses, stores or maintains personal information of a Massachusetts resident to implement a comprehensive written security program for personal information. While there is no foolproof means of stopping cyberattacks, a well-designed compliance program can minimize the potential risks.
Cyberattacks on the infrastructure underlying capital markets have been on the rise too and, as a result, the SEC is paying close attention to cybersecurity for self-regulated organizations and large alternative trading systems. The SEC has issued proposed rules on regulation systems, compliance and integrity, which would require stock exchanges and the like to test their automated systems for vulnerabilities, test their business continuity and disaster recovery plans, notify the SEC of computer intrusions and recover their clearing and trading operations within specified time frames.
Stock exchanges also have begun taking their own steps to ensure listed companies have cybersecurity protections in place. The New York Stock Exchange has compliance rules that require listed companies to “adopt and disclose a code of business conduct” that includes the protection of confidential information “that might be of use to competitors, or harmful to the company or its customers, if disclosed.”
As cyberattacks on financial institutions have become more frequent and sophisticated, the SEC also has focused on cybersecurity risk issues for broker dealers and investment advisors. In April 2013, the SEC adopted Regulation S-ID, which requires certain regulated financial institutions and creditors to adopt and implement identity theft programs and which builds upon the SEC’s existing rules for protecting customer data such as Regulation S-P.
In light of the risks posed by cyberthreats, all public companies should do the following: Review the corporate compliance program to ensure it adequately covers the prevention and detection of cyberthreats; if one doesn’t exist, create a compliance program for the protection of data; update company policies and agreements to adequately protect competitively sensitive and personal data; and institute procedures for effectively reporting to the public cybersecurity risks and breaches.
