A Cyber Incident Moves Pretty Fast, If You Aren't Ready To Respond, You Might Blow It

by Bracewell LLP

Bracewell LLP

The Securities and Exchange Commission (SEC) expanded its warnings to public companies that generic disclosures identifying cybersecurity risk factors may be insufficient. Rather, the SEC seems to expect companies to conduct careful inward assessments that identify unique strengths and weaknesses, and that disclosures should be tailored to that assessment.  Additionally, senior leadership should be included in developing response plans that go well beyond addressing technology risks.  An effective response plan should include internal directions for managing incident disclosure and trigger internal controls to prevent the violation of other securities laws like those against insider trading. This advice comes in a new “Commission Statement and Guidance on Public Company Cybersecurity Disclosures,” (“Guidance”) issued on February 21, 2018, that expands on staff-level guidance from 2011. While not itself a rule or regulation, the Guidance represents the Commission’s interpretation of federal securities laws and regulations as applied to cybersecurity risks and incidents.1

One of the most basic points in the Guidance is that cyber-related risks and incidents should be promptly disclosed. The Commission says it is “critical that public companies take all required actions to inform investors about material cybersecurity risks and incidents in a timely fashion, including those companies that are subject to material cybersecurity risks but may not yet have been the target of a cyber-attack.”2 It also stresses the importance of establishing effective disclosure controls and procedures to ensure an accurate and timely response after a company learns of an incident. In particular, the Commission believes that the development of controls and procedures is “best achieved” when a company’s leadership “are informed about the cybersecurity risks and incidents that the company has faced or is likely to face.”3

To determine what cybersecurity risks and incidents must be disclosed, companies should consider the potential materiality of any identified risk and, in the case of incidents, the importance of compromised information and the impact of the incident on company operations. The materiality of cybersecurity risks or incidents generally depends upon their nature, extent, potential magnitude, and range of harm that such incidents could cause. And while the SEC recognizes that ongoing investigation of an incident may affect the scope of disclosure, an ongoing internal or external investigation does “not on its own provide a basis for avoiding disclosures of a material cybersecurity incident.”4 Further, when cybersecurity-related disclosure is warranted, the SEC expects companies to avoid generic disclosure and instead provide specific information tailored to their particular risks and incidents.

The Commission also underscored the applicability of insider trading prohibitions to cybersecurity incidents and encouraged companies to consider preventative measures. Directors, officers, and other corporate insiders “must not trade a public company’s securities while in possession of material nonpublic information,” including knowledge of a significant cybersecurity incident experienced by the company.5 Companies and their leaders are encouraged to consider, before an incident occurs, how internal policies and procedures might prevent trading—or even the appearance of trading—on the basis of material nonpublic information related to cybersecurity risks and incidents.

Some commissioners suggested that the Guidance should be more detailed and include additional expectations, including potential disclosure requirements about (1) a company’s protocols relating to cybersecurity risks and its capacity, and any measures taken, to respond to cybersecurity incidents; (2) whether a particular cybersecurity incident is likely to occur or recur; or (3) how a company is prioritizing cybersecurity risks, incidents, and defense.6 Voluntary disclosures along those lines may be prudent, and subsequent guidance is likely forthcoming, but for now the Commission’s message is clear: companies and their leaders should not wait until a cyber-related incident occurs to plan their response. A bungled response can turn even a minor cyber incident into a major liability. To reduce regulatory and market risks, public companies should assesse their unique cybersecurity risks, involve leaders in developing post-incident policies and procedures to comply with securities laws; and promptly make tailored disclosures when warranted. ______________________________________________________

1 SEC Interpretive Releases, Sec. & Exch. Comm’n, https://www.sec.gov/rules/interp.shtml (“The Commission occasionally provides guidance on topics of general interest to the business and investment communities by issuing ‘interpretive’ releases, in which we publish our views and interpret the federal securities laws and SEC regulations.”).

2 Guidance at 4.

3Guidance at 4.

4 Guidance at 12.

5 Guidance at 4-5.

Statement on Commission Statement and Guidance on Public Company Cybersecurity Disclosures, Sec. & Exch. Comm’n (Feb. 21, 2018), https://www.sec.gov/news/public-statement/statement-stein-2018-02-21.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Bracewell LLP | Attorney Advertising

Written by:

Bracewell LLP

Bracewell LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.