by Christine Mazor and Sandra Herrygers, Deloitte & Touche LLP
On February 21, 2018, the SEC issued interpretive guidance (the “release”)1 in response to the
pervasive increase in digital technology as well as the severity and frequency of cybersecurity
threats and incidents. The release largely refreshes existing SEC staff guidance related to
cybersecurity and, like that guidance, does not establish any new disclosure obligations but
rather presents the SEC’s views on how its existing rules should be interpreted in connection
with cybersecurity threats and incidents.
The release will become effective on the date of its publication in the Federal Register. In a
public statement about the release, SEC Chairman Jay Clayton noted that he has asked the
Division of Corporation Finance to continue to closely monitor cybersecurity disclosures as
part of its filing review process and that the SEC will continue to evaluate whether further
guidance is needed. In light of the SEC’s focus on cybersecurity matters, companies may want
to revisit their disclosures and their disclosure controls and procedures (DCPs), including
controls over the sales of securities by executives.
Cyberattacks can vary widely from company to company. They can include the theft of a company’s
(or its customers’ or vendors’) financial assets, intellectual property, or sensitive information,
the disruption of a company’s operations, or the targeting of entities that operate in industries
responsible for critical infrastructure, such as the energy and public utility industries. Costs and
consequences of a cybersecurity incident may include remediation expenses, lost revenues,
litigation, increased insurance premiums, reputational damage, and erosion of shareholder value.
In 2011, the SEC’s Division of Corporation Finance issued principles-based guidance2 that
provided the SEC’s views on cybersecurity disclosure obligations, including those related to risk
factors, MD&A, and the financial statements. The release expands on the concepts discussed
in that guidance and concentrates more heavily on cybersecurity policies and controls, most
notably those related to cybersecurity escalation procedures and the application of insider
trading prohibitions. It also addresses the importance of avoiding selective disclosure as well
as considering the role of the board of directors in risk oversight.
The release applies to public operating companies, including foreign private issuers, but
does not address the specific implications of cybersecurity for other regulated entities under
the federal securities laws, such as registered investment companies, investment advisers,
brokers, dealers, exchanges, and self-regulatory organizations.
Overview of the SEC’s Guidance on Cybersecurity Disclosures and
The tables below provide an overview of the SEC’s views on cybersecurity disclosure
requirements and procedures under the federal securities laws as articulated in the release.
They also note how the release affects the SEC staff guidance issued in 2011.
Guidance in the Release
Provide timely, current, and tailored information regarding material
cybersecurity risks and incidents in SEC filings, including current and
periodic reports as well as registration statements. For example, if
a company identifies a cybersecurity risk or incident that would be
material to investors, it should disclose the appropriate information
before any offer or sale of securities. A materiality3 determination about
cybersecurity risks and incidents depends on their nature, extent,
and potential magnitude as well as on the harm that incidents could
cause. The SEC notes that “companies generally weigh, among other
things, the potential materiality of any identified risk and, in the case of
incidents, the importance of any compromised information and of the
impact of the incident on the company’s operations.” Companies should
consider whether they need to revisit or refresh their prior disclosure
about incidents as investigations develop.
Consider the following in determining risks to disclose in connection
with cybersecurity and related incidents:
Aspects of the business that are subject to material cybersecurity
Adequacy and costs of preventative and mitigating measures.
Frequency and severity of past incidents.
Probability and significance of future incidents.
Costs to protect or remediate (or both), including insurance (if
Potential for reputational harm.
Regulatory requirements and compliance costs.
Costs of litigation, investigation, and remediation.
It may not be sufficient for a company that had a previous material
cybersecurity breach to disclose simply that there is a risk that a breach
could occur. The company also may need to discuss the cybersecurity
incident and its consequences to provide context for its cybersecurity risks.
Discuss cybersecurity events, trends, or uncertainties that are
reasonably likely to have a material effect on the company’s results
of operations, liquidity, or financial condition, including the potential
impact on each reportable segment, if applicable. Consider the
myriad costs associated with a cybersecurity event when evaluating
the transparency of MD&A disclosures, including, but not limited to,
the direct costs of the event, costs associated with implementing
preventative measures, and the effect of any possible reputational
Provide appropriate disclosure when any cybersecurity risks or
incidents materially affect a company’s products, services, relationships
with customers or suppliers, or competitive environment.
The requirement to disclose information related to material pending
legal proceedings that involve the company or its subsidiaries also
extends to litigation related to cybersecurity.
A company’s financial reporting and control systems should be
designed to provide reasonable assurance that information about the
range and magnitude of the financial effects of a cybersecurity incident
would be incorporated into its financial statements on a timely basis
as the information becomes available. Financial statement disclosures
related to the impact of material cybersecurity incidents may include,
but are not limited to, information about:
If cybersecurity risks are material to a company’s business, the
discussion of the board of directors’ role in the risk oversight function
should include the nature of its responsibilities for overseeing the
management of this risk. The SEC believes that “disclosures regarding
a company’s cybersecurity risk management program and how the
board of directors engages with management on cybersecurity issues
allow investors to assess how a board of directors is discharging its risk
oversight responsibility in this increasingly important area.”
Connecting the Dots
The SEC acknowledged that it does not expect a company’s disclosures to provide
a level of detail that could compromise its cybersecurity efforts and that there
may be limited information available in the early stages of a cybersecurity incident
investigation. Nevertheless, the SEC emphasized that as information becomes
available, registrants are responsible for disclosing appropriate information to
keep investors informed and must balance the need for timely disclosure with the
level of detail they can provide about such incidents. While cooperation with law
enforcement during an ongoing investigation of a material cybersecurity incident
may be necessary and may affect the scope of disclosure, it would not alone provide
a basis for omitting material disclosures.
Guidance in the Release
DCPs should address the identification and escalation of a
cybersecurity incident to the appropriate levels within an
organization, which would include ensuring that all relevant parties,
including a company’s IT and business functions, are involved in
assessing the potential effect of the breach and related disclosure
requirements. The release significantly expands the guidance
on consideration of DCPs related to cybersecurity risks. The SEC
emphasized that “[c]ybersecurity risk management policies and
procedures are key elements of enterprise-wide risk management,
including as it relates to compliance with the federal securities laws.”
The principal executive officer’s and principal financial officer’s
certifications6 and a company’s disclosures regarding the design
and effectiveness of DCPs should take into account the adequacy of
controls and procedures for identifying and assessing the impact of
cybersecurity risks and incidents. If cybersecurity risks or incidents
give rise to deficiencies in DCPs, companies should take that into
account when disclosing conclusions about the effectiveness of
Because cybersecurity risks or incidents can constitute material
nonpublic information, companies should consider how their
codes of ethics and insider trading policies address, prevent, and
deter trading that is based on material nonpublic cybersecurity related
information. Companies should also consider whether and,
if so, when to implement trading restrictions while assessing and
investigating cybersecurity incidents.
Companies should ensure that they do not violate Regulation
FD by selectively disclosing material, nonpublic information
regarding cybersecurity risks or incidents. They should consider the
appropriate policies and procedures to ensure that cybersecurity
incidents are not selectively disclosed.
As calls for greater transparency related to cybersecurity risks have increased, resources such
as the following have been developed to help companies both assess their approach to such
risk and consider related disclosures:
The release indicates that the SEC considers omitted information to be material as articulated by the U.S. Supreme Court in TSC
Industries v. Northway, 426 U.S. 438, 449 (1976) if (1) “there is a substantial likelihood that a reasonable investor would consider
the information important” in making an investment decision or (2) disclosure of the information “would have been viewed by the
reasonable investor as having significantly altered the ‘total mix’ of information made available.”
Section 302 of the Sarbanes-Oxley Act of 2002 required the SEC to adopt final rules under which the principal executive officer
or officers and the principal financial officer or officers, or persons providing similar functions, of an issuer each must certify the
information contained in the issuer’s quarterly and annual reports.