SEC Commissioner Gives Corporate Boards a Cybersecurity Wake-up Call

by Smith Anderson

“Given the significant cyber-attacks that are occurring with disturbing frequency, and the mounting evidence that companies of all shapes and sizes are increasingly under a constant threat of potentially disastrous cyber-attacks, ensuring the adequacy of a company’s cybersecurity measures needs to be a critical part of a board of director’s risk oversight responsibilities.”  

This is one of many strong statements made by U.S. Securities and Exchange Commissioner Luis A. Aguilar at last month’s “Cyber Risks and the Boardroom” conference held at the New York Stock Exchange, where Commissioner Aguilar urged corporate boards to more effectively manage data breach and cybersecurity risks. To read Commissioner Aguilar’s full statement, CLICK HERE.   

Noting that the views he expressed were his own and not necessarily those of the U.S. Securities and Exchange Commission (SEC), Commissioner Aguilar’s comments revealed a heightened awareness of the regulatory landscape surrounding data breaches and cyber risks.  

The Commissioner’s comments may signal that the SEC intends to join the growing number of state and federal regulators already policing corporate data protection matters. In addition to the SEC’s expectation that companies cover cybersecurity risks in their public disclosures, the SEC has in recent months opened investigations of multiple public companies to examine their responses to and disclosures of data breaches. 

The mounting operational and reputational risks of cyber-attacks are creating questions about what boards can and should be doing to oversee risk in this area. 

The Risk to Boards

Commissioner Aguilar noted the increasing risk boards face for failing to adequately address cybersecurity threats. A few additional noteworthy comments from Commissioner Aguilar’s speech: 

  • “The recent announcement that a prominent proxy advisory firm is urging the ouster of most of the Target Corporation directors because of the perceived ‘failure…to ensure appropriate management of [the] risks’ as to Target’s December 2013 cyber-attack is another driver that should put directors on notice to proactively address the risks associated with cyber-attacks.”
  • “…evidence suggests that there may be a gap that exists between the magnitude of the exposure presented by cyber-risks and the steps, or lack thereof, that many corporate boards have taken to address these risks…Even when boards do pay attention to these risks, some have questioned the extent to which boards rely too much on the very personnel who implement these measures. In light of these observations, directors should be asking themselves what they can, and should, be doing to effectively oversee cyber-risk management.”
  • Acknowledging recent shareholder derivative lawsuits brought against companies, their officers and directors in the aftermath of several data breaches, Commissioner Aguilar warned that "boards who choose to ignore, or minimize, the importance of cybersecurity oversight responsibility, do so at their own peril."

The Costs to Companies

Noting that the average cost of cyber-crime to a sample of U.S. companies was $11.6 million per year (a 78% increase since 2009), Commissioner Aguilar expressed concerns over the widespread and severe impact that cyber-attacks could have on the integrity of the capital markets infrastructure, public companies and investors.  

SEC Disclosure Requirements

In 2009, the SEC amended its disclosure rules to specifically require public companies to make disclosures about the board’s general role in risk oversight. They have since made comments specific to the disclosure of cybersecurity risks in company filings.

In 2011, the SEC issued guidance to assist public companies in assessing what disclosures should be made in the face of cybersecurity risks and incidents. In a speech earlier this year, Shelley Parratt, a deputy director at the SEC, outlined themes the SEC expects to see covered in public company disclosures relating to cybersecurity. She emphasized, however, that a roadmap of cyber-vulnerabilities is not required.  

At present, there is no explicit SEC rule requiring a company to disclose a cyber-attack. Public companies are required to disclose in certain company filings “material” events that would affect operational results, liquidity, and financial condition, or that would cause company financial information not to be indicative of future operating results.

Companies often find themselves weighing the impact on the company in determining whether an event is “material.“ Commissioner Aguilar, however, encourages companies “to go beyond the impact on the company and to also consider the impact on others” when making decisions about disclosing cyber-attacks. He suggests that the impact of a data breach on individuals may become a key piece of the analysis in a company’s decision to disclose a data breach matter in company filings, which is a more aggressive position than the commonly held view.   

What Boards can do to Address Data and Cyber-Risks

Although a board of directors cannot anticipate every possible cyber event that could negatively impact a company, there are several things a board can do to proactively manage data protection risks in light of the company’s operations and objectives.

  • Consider the appropriate board entity to oversee enterprise risk management. Many boards and executives have taken an ad hoc approach to risk management. Enterprise risk management (ERM) involves identifying and managing key risks under a holistic, top-down approach. Cybersecurity should be a part of a board’s ongoing ERM evaluation process. If ERM oversight is delegated to a committee, the committee should report regularly to the full board as the entity ultimately responsible for risk oversight. 
  • Review annual budgets and plans for data protection and cyber-security programs. A designated board committee should evaluate the company’s annual budget for data protection and cyber-security matters. The board committee should evaluate currency of cybersecurity plans and receive regular reports on breaches and IT risks to evaluate cybersecurity program effectiveness.

  • Recognize the need for board education.  Boards should consider mandatory board of director education on cyber-risks and data protection. This issue will be new to many board members, and an introduction to technology and data protection concepts and risks is a good starting point.

  • Evaluate company awareness of industry standards and best practices for managing cybersecurity risks. Commissioner Aguilar points to the National Institute of Standards and Technology (NIST) Framework for Improving Critical Infrastructure Cybersecurity as a benchmark for assessing a company’s cybersecurity measures. For more information about the Cybersecurity Framework, see our alert entitled, Will the Cybersecurity Framework Create a New Standard Operating Procedure for Businesses?

  • Recruit directors who understand the data and technology landscape from a business and legal perspective. These members can help direct appropriate attention to oversight of the company’s IT infrastructure, the types of information maintained by the company, and the applicable regulatory landscape.

  • Increase transparency. Review existing public disclosures regarding cyber-risks in company reports to evaluate whether shareholders are being adequately informed.

  • Evaluate insurance coverage. As part of the company’s annual insurance coverage review, consider whether the company has appropriate coverage for data breaches and cyber risks and whether the company’s operations dictate that such a policy should be considered.

  • Review outside vendors. Many companies use third parties to perform functions that involve access to sensitive information assets, including, for example, IT and cloud hosting vendors, payment processors, and marketing and customer relations functions. Consider whether the company has an appropriate vendor management program in place to guide vendor selection and contracting. Also consider requiring management to provide an overview of existing vendor arrangements, so that controls, policies and risk allocation (including indemnification, liability limits and insurance provisions) can be evaluated for alignment with company objectives. 


A board that effectively oversees risks will better protect shareholder assets. Board members are now expected to prepare, deliberate and engage on cybersecurity issues on behalf of their company. Smith Anderson’s team of Securities lawyers and Data Use, Privacy and Security lawyers strategically collaborate to assist private and public company boards on data and cyber-risk matters.

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.

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