SEC Commissioner Gives Corporate Boards a Cybersecurity Wake-up Call
“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 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.
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.
For more information on our Firm's services and keeping proprietary information secure and safeguarded, visit SafeguardingBusiness.com. For general information on data breach matters, see our Data Breach Checklist and for more information about this alert, please contact Alicia Gilleskie.