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Will Big Cyber Hacks Cause the SEC to Issue New Guidelines?
Following a change of heart from a top Securities and Exchange Commission regulator, public companies will likely soon face new guidelines for how they report cybersecurity breaches to investors. SEC Corporate Finance Division Director Bill Hinman was quoted as saying that when Chairman Jay Clayton first asked him if the existing SEC guidance needed to be refreshed, he did not think so. Hinman changed his mind, however, after considering the disclosure (or lack thereof) surrounding recent data hacks.
Companies are advised to get ahead of the curve and take the necessary steps to evaluate their own breach response procedures. While these guidelines do not carry the full force of regulations, companies should not ignore them because the SEC has the authority to bring an enforcement action against a company that provides misleading information to investors about a material cybersecurity risk or hack.
The current SEC cybersecurity guidelines were issued in October 2011 and can best be described as “principles-based.” These guidelines do not explicitly say when a cyber-intrusion requires disclosure to the public. For many companies, this ambiguity has created tension between their desire to cooperate discreetly with the SEC and their obligation to inform investors and the markets. New guidance from the SEC will provide much-needed clarity.
The SEC’s concern with disclosure likely stems as much from the delay in disclosing its own 2016 data breach as from the disclosure delays of major companies since its 2011 guidance was issued. The SEC hack in 2016 appeared to be limited to the SEC’s database of corporate filings, but the agency acknowledged the hackers could have profited by trading on the corporate data they gleaned. More troubling, however, was that the SEC did not notify the public, or even all of its commissioners, until the hack was discovered during a 2017 review. Equifax’s data breach affected approximately 143 million American consumers, but the company waited six seeks to disclose to the public that sensitive information had been stolen. In Yahoo’s case, the company confirmed two years after the fact that 3 million user accounts were affected by a state-sponsored actor who was able to infiltrate their network.
Hinman has said that he believes the 2011 guidelines are still relevant, but his staff is working on providing updated information regarding disclosure controls and escalation procedures after a cyberattack. Ideally, Hinman reported, a company’s cybersecurity procedure would ensure that the management and IT department are communicating with each other when a cyber event occurs. He said that the new norms should assure that “when an event happens that they are looked at by the right levels of management with an eye toward how . . . (it) impacts the business.” The new guidance will also remind companies that with escalation procedures in place, a cyber incident could rise to the level of a “material” event, Hinman said. As a result, companies should review their insider trading policies and re-emphasize the restrictions related to these policies.
By all appearances, SEC Chairman Clayton supports the move. In September, Clayton told a Senate banking committee that he wants to see more companies disclosing more cybersecurity information to investors more quickly. “As I look across the landscape of disclosure, companies should be providing better disclosure about their risk profile,” Clayton told the Senate Banking Committee. “Companies should be providing sooner disclosure about intrusions if it may affect shareholder disclosure decisions.”
The SEC guidelines, if they are indeed revised, may prove a watershed moment in the creation of national standards for data protection requirements. United States federal law does not have a national standard but instead only imposes standards in certain industry sectors such as financial services and healthcare. A move to institute a national standard would streamline and simplify the currently piecemeal landscape of breach notification legislation, which is largely dictated by state legislatures. Indeed, the states vary in their approaches to the timing of data breach disclosures. Most states, including the District of Columbia, do not put a timeline on how quickly companies must notify customers after discovering a breach, though they generally require companies to disclose as soon as possible. Other states establish timelines ranging from 30 days to 90 days.
In addition, the revised guidelines would be significant in that the SEC may bring an enforcement action against a public company for failing to comply whether or not consumers can show actual injury or harm from the breach. Those same companies are not necessarily goaded into action by the threat of private lawsuits since under Spokeo v. Robins, they may defend by arguing that while a breach has occurred, no actual harm or injury can be shown. In Spokeo, the United States Supreme Court held that a plaintiff must suffer an injury in fact that is both particularized and concrete to have standing to sue, and that “a bare procedural violation, divorced from any concrete harm” to the plaintiff, cannot satisfy this injury-in-fact requirement. This holding has made it difficult for consumers to bring lawsuits against companies for failing to safeguard their information or failing to disclose a breach when the consumers have not yet experienced actual harm, such as having their identities stolen. Thus, what could not be achieved by private consumer lawsuits may be achieved under the SEC’s watchful eye.