SEC Says Companies Should Disclose Cyber-Incidents, Risks to Investors

 
 
By Fahmida Y. Rashid  |  Posted 2011-10-15 Email Print this article Print
 
 
 
 
 
 
 

The latest guidance from the SEC explicitly states that companies should discuss their cyber-security measures to investors and disclose "material" security incidents.

The Securities and Exchange Commission issued some guidelines suggesting that companies should report cyber-incidents that may affect the bottom line.

The SEC's Corporate Finance Division issued the guidance on Oct. 12, explaining how organizations should report any cyber-incidents that could have an adverse effect on their finances or operations. Under current SEC guidelines, companies have to report incidents that have an unfavorable impact on corporate financial performance, but this is the first time cyber-security issues were explicitly mentioned.

The guidance is a strong recommendation, and the SEC can't enforce it the way it can with a regulation. The goal is to give investors information about the risks. Even though it isn't a regulation and is just a guidance, this is "very good news for cyber-security," according to Chris Wysopal, CTO and co-founder of Veracode.

"They don't have to disclose what happened or how, but they have to say something, which will make people start asking questions," Wysopal told eWEEK.

People will ask how long the company knew about the incident and what had happened, forcing the company to eventually disclose more details, he said.

The SEC guidelines stopped short of recommending that companies divulge everything. Instead, companies should "take into account all available relevant information, including prior cyber incidents and the severity and frequency of those incidents," the guidance said. Cyber-risks should be disclosed if they are significant enough to make investing in the company speculative or risky, or if the consequences of the incident would have a "material effect" on operations and finances.

Any theft of intellectual property "almost automatically" means the effect is material and should be disclosed, according to Wysopal. He noted that Intel had recently listed in its SEC filings an attack on its networks that resulted in some lost source code and intellectual property.

Organizations should also disclose cyber-incidents that could affect their products, services, or relationships with customers and partners, or that could result in significant legal proceedings, the SEC recommended. They also need to consider the probability of an incident occurring and measure the potential costs and other consequences that may arise as a result of compromised assets, loss of sensitive data or operational disruption.

"As with other operational and financial risks," the guidance states, "registrants should review, on an ongoing basis, the adequacy of their disclosure relating to cyber-security risks and cyber-incidents."

In the event of a breach, public companies must provide "certain disclosures of losses" both during and after a breach. However, if the incident is discovered after the quarter ends but before financial statements have been filed, the company can decide whether or not it is "necessary" to disclose it.

"We are mindful of potential concerns that detailed disclosures could compromise cyber-security efforts-for example, by providing a 'roadmap' for those who seek to infiltrate a registrant's network security-and we emphasize that disclosures of that nature are not required under the federal securities laws," the guidelines read.

Sen. John Rockefeller, D-W.Va., praised the SEC guidance in a statement to journalists, saying it changes "everything." Investors will be able to evaluate companies based on the ability to keep networks secure. "Intellectual property worth billions of dollars has been stolen by cyber criminals, and investors have been kept completely in the dark," Rockefeller's statement said, adding, "We want an informed market and informed consumers, and this is how we do it."


 
 
 
 
 
 
 
 
 
 
 

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