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Potential Legal Pitfalls for Public Companies Due to SEC's New Cybersecurity Rules
The Security and Exchange Commission's (SEC) march toward putting stringent cybersecurity disclosure requirements in place for public companies and covered entities reached its endpoint last month. Some 16 months after first proposing rules for public companies and investment advisors, the SEC adopted new rules, chief among them that public companies disclose material cybersecurity breaches to investors within four days.
As SEC Chair Gary Gensler explained in a press release, "Whether a company loses a factory in a fire — or millions of files in a cybersecurity incident — it may be material to investors. Currently, many public companies provide cybersecurity disclosure to investors. I think companies and investors alike, however, would benefit if this disclosure were made in a more consistent, comparable, and decision-useful way." But as John Loyal and Jerry Bessette explain, the reporting rule carries with it potential plusses and minuses — among the latter, the potential to misinform investors and hinder the process of containing the breach.
Incident Disclosure and Timing
One of the standout elements of the new rules is an amendment to Form 8-K, which is used to notify investors of specific events—think a departing CEO or bankruptcy filing—that are too time-sensitive to be held until quarterly or annual reports. The discovery of a material cybersecurity incident will now be an event that requires an Item 1.05 Form 8-K filing within four business days of a public company determining the cybersecurity incident was material (as opposed to when it was first discovered). The one exception permitted is if the United States Attorney General notifies the SEC that such an immediate disclosure would pose a substantial risk to national security or public safety.
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