Thursday, September 28 2023

The U.S. Securities and Exchange Commission is intensifying cybersecurity regulations with new rules adopted on Wednesday. They require public companies to report cybersecurity incidents in a timely manner and submit annual reports detailing risk management practices.

The new rules require companies to report on new Item 1.05 of Form-8K any cybersecurity incident which they deem to be significant to investors. It requires them to describe the incident, including its type and financial impact. Companies have four days to do so unless the U.S. Attorney General grants an exception due to a substantial risk to national security or public safety.

The measures also require companies to describe their cybersecurity risk management practices in their annual report on Form 10-K. Companies must detail the material effects and likely material effects of previous and future cybersecurity incidents. Registrants must include the board of directors’ oversight of risks and their expertise in dealing with material risks.

The move builds on the SEC’s 2018 Interpretive Release and guidance issued by staff in 2011, which included cyber incident disclosure protocols. The adopted rules were initially proposed in February 2022. That proposal mirrors the final regulations, with the exception being that it would have mandated cyber incident disclosures within 48 hours instead of four days.

In discussing the need for further regulation, the final rules document noted that the previous regulations allowed for shallow and inconsistent levels of specificity in disclosure reports. The document also discussed the trends necessitating the need for new rules: increasing shares of economic activity depending on electronic systems, a rise in cybersecurity incidents, increasing costs of such incidents, and recent cybersecurity laws passed during the Biden-Harris administration.

The new measures were passed in a narrow 3-2 party line vote. Some objections to the development include concerns over excessive regulation, the brief reporting period, premature harm to companies, and compliance costs.

Commissioner Mark T. Uyeda, a Republican tapped by President Biden, feared the rules could foster instability, saying in a dissenting statement, “Premature public disclosure of a cybersecurity incident at one company could result in uncertainty of vulnerabilities at other companies, especially if it involves a commonly used technology provider, resulting in widespread panic in the market and financial contagion. Early information is often incomplete and not correct. One only need to look at the regional banking crisis to see how speculation can destabilize entire sectors, or even the markets as a whole.”

Commissioner Hester M. Pierce, appointed by former President Trump, argued that the regulations would benefit hackers. She said, “The 8-K disclosures, which are unprecedented in nature, could then tell successful attackers when the company finds out about the attack, what the company knows about it, and what the financial fallout is likely to be (i.e., how much ransom the attacker can get).”

Biden-appointee Commissioner Mark Lizàrraga responded to this concern in a statement of his own. He said, “Some commenters raised concerns that providing detailed disclosures of cyber incidents could provide a roadmap for future attacks. But the final rule does not require specific, technical information that would serve that harmful purpose. Instead, it is focused on what the material impacts, or reasonably likely material impacts, of the incident will be.”

Comparable rules will apply to foreign entities. The adopted regulations will take effect 30 days after their publication in the federal register.


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