SEC Adopts Interpretive Guidance on Cybersecurity Disclosures

On February 21, 2018, the Securities and Exchange Commission released new interpretive guidance on public company disclosures regarding cybersecurity risks and incidents.

The new interpretive guidance outlines the SEC’s views regarding disclosures by public companies relating to cybersecurity risks, events and incidents under existing securities laws. It also outlines the SEC’s views regarding the importance of appropriate disclosure controls and procedures, insider trading policies and selective disclosure safeguards in the context of cybersecurity incidents.

Our Take

Although the interpretive guidance makes clear that the SEC views cybersecurity as a key disclosure matter, it does little to provide public companies with specific guidance on SEC expectations for what is required to be disclosed and when.  

The interpretive guidance, however, does provide a useful review of the existing disclosure obligations related to cybersecurity matters and the disclosures that may be triggered upon the occurrence of cybersecurity incidents or events. In much the same way as the interpretive guidance issued by the SEC staff in 2011, the new interpretive guidance provides a framework for thinking about the various areas where cybersecurity-related disclosures may need to be made, such as risk factors, business description, MD&A, legal proceedings and financial statement disclosures.

More importantly, the interpretive guidance outlines, for the first time, the SEC view that:

  • public companies should be describing the role that boards of directors have in cybersecurity-related risk management to the extent those risks are material to their businesses;
  • public companies should maintain adequate disclosure controls and procedures so that those individuals responsible for disclosures are promptly alerted of cybersecurity incidents and a timely materiality and disclosure assessment can be made; and
  • public companies should have policies and procedures that restrict the ability of officers, directors and other insiders from trading before a decision has been made regarding the materiality and the disclosure necessary for a cyber incident.

Finally, although the Commission was unanimous in its approval of the interpretive guidance, Commissioners Kara Stein and Robert Jackson both expressed reservations and advocated for the SEC to do more. Commissioner Stein acknowledged that further action in this area may require formal SEC rule-making rather than interpretation of existing rules, and the interpretive guidance itself states that the Commission “continues to consider other means of promoting appropriate disclosure of cyber incidents.” This could mean that the Commission may consider new rules that specifically mandate the content and the timing of cybersecurity-related disclosures. It may also mean that the SEC now is considering bringing the first enforcement cases against public companies related to inadequate cybersecurity disclosures or ineffective disclosure controls and procedures.


On October 13, 2011, the staff of the Division of Corporation Finance of the SEC released interpretive guidance regarding public company disclosure obligations relating to cybersecurity risks and incidents. The existing interpretive guidance largely directs public companies to consider the materiality of cybersecurity risks and incidents when preparing public disclosures, when complying with periodic and current reporting requirements and in connection with a securities offering.

New Cybersecurity Interpretive Guidance

In contrast to the 2011 guidance, the new interpretive guidance is a statement from the SEC itself and not the staff of the Division of Corporation Finance. The SEC sets the tone for the interpretive guidance in the beginning by declaring that “cybersecurity risks pose a grave threat to investors, our capital markets, and our country.”
In the interpretive guidance the SEC states that it believes that:

  • it is critical for public companies to take all required actions to timely inform investors of material cybersecurity risks and incidents;
  • it is important for effective disclosure controls and procedures to ensure that those responsible for developing those controls are informed of cybersecurity risks and incidents; and
  • companies should be aware of the risks posed by officers, directors and other insiders trading before disclosures are made of cybersecurity incidents that are determined to be material.
The SEC’s intent with the new guidance is to reinforce and expand the existing guidance by reviewing the rules requiring disclosure of cybersecurity issues and outlining the SEC’s views on the appropriate policies and procedures and insider trading prohibitions.

Disclosure Requirements

The new guidance reminds companies to consider the materiality of cybersecurity risks and incidents when preparing disclosures for periodic reports and registration statements. It also recognizes that, when assessing whether a particular risk or incident should be disclosed, companies weigh, among other things, the potential materiality of the risk and the importance of the compromised information.  Companies consider the “nature, extent, and potential magnitude” of the risk or incident as they relate to the company’s operations and the range of harms the risk or incident could cause. The potential “harms” include financial and reputational effects, impact on customer and vendor relationships and litigation or regulatory investigations by governmental authorities.

The new interpretive guidance reiterates that the disclosure requirements related to cybersecurity risks and incidents are based on the relevant disclosure considerations that arise in connection with any business risk, with no specific disclosure requirement that explicitly refers to cybersecurity matters. The SEC, consistent with the existing interpretive guidance, identifies a number of general disclosure requirements that would mandate a consideration of cybersecurity matters. These disclosure requirements include (a) risk factors, (b) MD&A, (c) description of the business, (d) legal proceedings, (e) financial statements and (f) disclosures of boards of directors’ role in risk management.
The guidance makes clear that companies are not required to make disclosures that compromise their own cybersecurity efforts or those of law enforcement that are investigating an incident, but the SEC does expect companies to nevertheless make disclosures of cybersecurity risks and incidents that are material to investors in a timely manner. This tension is exacerbated by the related duty to correct prior disclosures that a company determines to be untrue when made. The guidance also notes that some courts have found a duty to update disclosures that, although true when made, later become materially inaccurate. All of this is particularly relevant in the cybersecurity context as companies struggle with assessing the materiality of a risk or incident with information that is changing rapidly, while having to consider what, how and when to disclose the risk or incident to shareholders without being misleading or making a material omission.

Disclosure Controls and Procedures

The new guidance encourages companies to adopt “comprehensive policies and procedures related to cybersecurity and to assess their compliance regularly, including the sufficiency of their disclosure controls and procedures as they relate to cybersecurity disclosure.” The Exchange Act requires that companies maintain disclosure controls and procedures and that management evaluates their effectiveness. The SEC believes that to have effective disclosure controls and procedures, public companies must put in place adequate processes so that the appropriate personnel, including senior management, that are responsible for making disclosure decisions receive timely reporting on cybersecurity-related risks and incidents. Companies should ensure they have controls and procedures that allow them to (a) identify cybersecurity risks and incidents, (b) assess and analyze the impact on a company’s business, (c) evaluate the significance of the risk or incident and (d) make timely disclosures regarding such risks and incidents. The SEC expects the certifications that companies make related to disclosure controls and procedures should take into account the adequacy of the controls and procedures related to identifying, assessing, evaluating and disclosing cybersecurity risks and incidents.

Insider Trading

The new guidance reminds companies, directors, officers and other insiders that trading on the basis of material non-public information related to a cybersecurity risk or incident is illegal. The SEC notes that “information about a company’s cybersecurity risks and incidents may be material non-public information, and directors, officers and other corporate insiders would violate the antifraud provisions if they trade the company’s securities in breach of their duty of trust or confidence while in possession of that material non-public information.” To protect against this conduct, the SEC advises that companies establish comprehensive policies and procedures that restrict trading on information related to cybersecurity risks or incidents. The SEC points out that during the assessment and investigative stage of a cybersecurity incident, where information and, more importantly, materiality of the incident is uncertain, is the most important time to impose “prophylactic measures” to protect against directors, officers and insiders from trading on the basis of information that is later determined to be material.

Regulation FD

The new guidance reminds public companies to ensure they have policies and procedures in place to comply with a central Regulation FD requirement that when disclosures of material nonpublic information are made to certain individuals or entities, such as shareholders, broker dealers or investment advisors, simultaneous disclosure is made to the public.

What Do Companies Need to Do Now?

Although every company has a different cybersecurity risk profile that demands a level of focus and attention appropriate to its profile and the materiality of cybersecurity matters to its business, the following are things most companies should consider now:

  • Risk Factor Disclosures. Review your risk factor disclosures to ensure that your disclosures do not give the impression that your company has never been the target of, or subject to, a cybersecurity incident. You do not have to provide the details, but the risk described should not be written as if it is a theoretical one if it has happened before.
  • MD&A Disclosures. If ongoing cybersecurity spending, whether defensive or responsive to an actual incident, is material, it should be disclosed. These costs include implementation of preventive measures, maintenance of insurance, complying with legislative and regulatory requirements and responding to litigation and regulatory investigations.
  • Disclosure Controls and Procedures. Ensure that your Disclosure Committee is directly connected to those responsible for evaluating and reporting on cybersecurity risks, incidents and events. Consider a regular update for the Disclosure Committee on known incidents and threats from those focused on cybersecurity matters.  Use this as an opportunity to review Regulation FD practices as they relate to disclosures related to cybersecurity matters. 
  • Insider Trading. Review your insider trading policy to ensure that cybersecurity incidents are specifically identified. Additionally, ensure that a process is in place whereby those with the responsibility for establishing trading blackout periods are promptly informed of the occurrence of a cybersecurity event or incident. Given the uncertain nature, scope and materiality of most cybersecurity incidents, consider imposing trading restrictions for persons with knowledge of the incident as soon as the incident occurs until a comprehensive materiality assessment can be made.
  • Engaging with the Board. Review a summary of the SEC’s new guidance with the board. Review the board’s role in oversight of cybersecurity matters and implement, if not already occurring, regular updates to the board of cybersecurity preparedness and threats. Review proxy statement disclosures related to the board’s oversight to ensure cybersecurity risks are appropriately reflected.


Written by:

Shearman & Sterling LLP

Shearman & Sterling LLP on:

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