According to the SEC in issuing the guidelines, "[w]e have observed an increased level of attention focused on cyber attacks that include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption." And while the guidelines do not make it a legal requirement for organizations to disclose data breach issues, the guidelines lay the groundwork for shareholders suits based on failure to disclose such attacks.
The guidelines come on the heels of number of recent high-profile, large-scale data security breaches including those involving Citicorp, Sony, NBC and others – many of which have affected organizations around the world. A catalyst for the regulations is found in part in many organizations failure to timely report, or complete failure to report, their breaches. To curb any future disclosure issues, the SEC released the guidelines ordering companies to reveal their data security breaches.
As stated in the guidance notes, “[c]yber incidents may result in losses from asserted and unasserted claims, including those related to warranties, breach of contract, product recall and replacement, and indemnification of counterparty losses from their remediation efforts.”
“Cyber incidents may also result in diminished future cash flows, thereby requiring consideration of impairment of certain assets including goodwill, customer-related intangible assets, trademarks, patents, capitalized software or other long-lived assets associated with hardware or software, and inventory.”
Consistent with other SEC forms and regulations, organizations are not being advised to report every cyber incident. To the contrary, registrants should disclose only the risk of cyber incidents “if these issues are among the most significant factors that make an investment in the company speculative or risky.” If an organization determines in their evaluation that the incident is material, they should “describe the nature of the material risks and specify how each risk affects the registrant,” avoiding generic disclosures.
The SEC indicated that in evaluating the risks associated with cyber incidents and determining whether those incidents should be reported, organizations should consider:
-- prior cyber incidents and the severity and frequency of those incidents;
-- the probability of cyber incidents occurring and the quantitative and qualitative magnitude of those risks, including the potential costs and other consequences resulting from misappropriation of assets or sensitive information, corruption of data or operational disruption; and
-- the adequacy of preventative actions taken to reduce cyber security risks in the context of the industry in which they operate and risks to that security, including threatened attacks of which they are aware.
Rather than exposing new obligations for organizations, the SEC guidance highlights what company executives already knew about their obligations to report cyber incidents but may not have fully appreciated. The true lynch pin for every organization will be the determination of materiality and making the decision on which breaches gets reported and which do not. As such, public companies will also need to weigh real-world business risks specific to their particular market associated with incidents. For example, “if material intellectual property is stolen in a cyber attack, and the effects of the theft are reasonably likely to be material, the registrant should describe the property that was stolen and the effect of the attack on its results of operations, liquidity, and financial condition and whether the attack would cause reported financial information not to be indicative of future operating results or financial condition," the statement says.
Given the sophistication and success of recent attacks, forensic response has taken center stage when it comes to exposing unknown threats, assessing potential risks to sensitive data and decreasing the overall time it takes to successfully determine the source and scope of any given incident and the risk it may present.
Cybersecurity threats will continue to proliferate for companies of all sizes around the world. Failing to protect sensitive company data will pose an even greater risk going forward, so too will the legal implications for failing to disclose those material cyber incidents. A proactive, timely approach to prevention of cyber incidents represents the best case scenario for all organizations. Guidance Software’s Professional Services team and partners can help. Our consultants can help expose unknown risks in your environment, remediation of those risks, as well as provide prevention techniques designed to give your organization an active defense and knowledge against possible attacks unique to your organization.
Chad McManamy is assistant general counsel for Guidance Software, and Anthony Di Bello is product marketing manager for Guidance Software.