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The New SEC Disclosure Rule Will Impact Nearly Every U.S. Business

FTC Safeguards Rule Compliance Deadline Is June 9, 2023

The new Securities and Exchange Commission (SEC )disclosure rule for cyber incidents represents the most sweeping attempt to date to mandate cyber security by the United States government. If you own or work at a publicly traded company, if you handle data provided by a publicly traded company or if you simply supply a publicly traded company, this new rule will impact your business.The New SEC Disclosure Rule Will Impact Nearly Every U.S. Business

What Is the New SEC Disclosure Rule?

As reported by the Federal Bureau of Investigation, the new SEC Disclosure Rule goes into effect on September 5, 2023. In broad terms, it requires the following:

  • Every publicly traded company in the United States must file form 8K to the EDGAR database within 4 days of the discovery or awareness of any cybersecurity incident that has a “material impact” on their business.
  • The United States Attorney General may allow a reporting delay of up to 30 days, with a possible renewal for an additional 30 days, if the cybersecurity incident presents a danger to public safety or national security.
  • The United States Attorney General may allow an additional 60-day delay in reporting only if there is a significant risk to national security.

Publicly traded businesses have the ability to determine whether or not a cybersecurity incident has a material impact on their operations or valuation. In the event that it does, they must report the nature, scope and timing of the incident, as well as its impact or potential impact.

How Does the SEC Rule Apply to Me If I Do Not Own a Publicly Traded Business?

This rule will be enforced by the SEC, which has extensive investigative capabilities and the ability to determine the penalties that violators will face. Unlike the FTC Safeguards Rule, which has defined penalties and regulations, the SEC disclosure rule is open, both in terms of what defines a “material impact” and in terms of how the agency will follow up. In the worst-case scenario, Federal investigators could arrive at your door to seize documents and devices, if they believe you are responsible for a cybersecurity incident that impacted a publicly traded company, or if the company identifies your business as the source of the data breach.

Here are a few examples of ways a company could inadvertently be swept up in an SEC investigation:

  • A franchisee of a national company suffers a data breach that exposes the personal financial information of its clients.
  • A shipping company receives a fraudulent order through a pretexting attack that diverts money or materials of significant value to criminal actors.
  • A conference planner suffers a data breach, exposing the email addresses, usernames and login credentials of all conference attendees.
  • A marketing agency’s servers are breached, revealing the embargoed technical specifications of a client’s new product.
  • A law firm’s email is breached, revealing details of a client’s patent filings or lawsuits.
  • A doctor’s office wireless network is compromised, allowing hackers to steal the personal health information of corporate executives.
  • A mortgage broker’s file transfer system is compromised, exposing the property valuations of individuals referred by a client.
  • A company website is hacked, revealing administrative usernames and credentials.

These examples fall into three broad categories:

  1. Data breaches that expose data belonging to a client’s customers.
  2. Hacking attacks that uncover a client’s future business plans, internal information or intellectual property.
  3. Credential theft or protected personal data theft that compromises a client’s leadership or employees.

Something as simple as a phishing attack that exposes your email contacts could be material, if hackers then use that information to launch a targeted attack on your client or sell the information to others. Pretexting attacks that divert payments, materials or finished goods that a client needs to operate could be material if they have a significant impact on a client’s sales. Ransomware attacks that lock your clients out of needed services, disrupting their operations, could also qualify as a material impact.

What Do I Need to Do to Comply?

Only publicly traded businesses are required to report cyber incidents under the disclosure rule, but their ability to report depends on support from their vendors, franchisees, service providers and partners. Remember that if your business is the source of a cyber incident that compromises a client’s business, you may be investigated, and your cyber security policies will be scrutinized. The publicly traded company will face SEC penalties. You will lose the client, and your reputation will take a significant hit.

No business wants to deal with the SEC. Investigations can be lengthy, disruptive and expensive. It is very likely that publicly traded companies will demand some accountability from vendors and partners, as well as assurances, possibly legally binding assurances, that cybersecurity incidents will be reported. For companies that are not publicly traded, compliance requests will likely include the following:

  1. Documentation of current cyber security standards, including incident monitoring and security updates.
  2. Documentation of cyber security employee training practices.
  3. Written plans to report cyber security incidents to impacted clients as soon as these incidents are known.
  4. Written plans to respond to and stop cyber attacks, along with an evaluation of data loss or potential third-party compromises.

Do not be surprised if clients ask for this documentation. Clients may also want to execute additional nondisclosure agreements (NDAs) that include specific language around cyber incidents, or ask for these protections to be outlined in service contracts or contract amendments.

How Will the SEC Enforce the Cyber Incident Disclosure Rule?

It is impossible to know what enforcement will look like, as the SEC tends to treat violations on a case-by-case basis. Based on past behavior around new regulations, the SEC is likely to issue warnings for a period of time for first-time offenders or minor breaches. If a significant breach occurs, or if a publicly traded company repeatedly violates the rule, an extensive investigation with significant penalties will follow. This will trigger a stampede for services that will leave providers struggling to keep up with demand, and companies scrambling to find providers who can help them. It is better to take this matter seriously now, evaluate your needs and get professional cyber security support if you need it.

Note that the new disclosure rule does not require an experienced or certified professional to oversee or report cybersecurity incidents. Most small businesses should be able to manage compliance on their own, or with the help of a VCISO.

Why Did the FTC Add This Reporting Rule?

The SEC outlined two needs that drove the new disclosure rule. First, the SEC believed, as do many law-enforcement organizations, that cyber crime is underreported. By bringing their authority to this area, the SEC seeks to compel a greater level of reporting compliance, eliminating the tendency of some businesses to quietly pay ransoms or overlook seemingly minor cyber intrusions.

Second, the SEC felt that current reporting, which lumps cyber security incidents in with other business challenges, did not provide enough information to shareholders. The standard report will allow shareholders to see how often a business suffers cybersecurity incidents and how severe they are, providing another data point investors can use to evaluate opportunities.

As a final, broader goal that was unstated, the disclosure rule puts anyone who works with a publicly traded company on notice that their clients’ interactions are under Federal scrutiny. This is likely meant to compel greater adoption of cyber security best practices across all U.S. businesses, which will make it harder for criminals to carry out attacks. In that regard, it is the most significant effort to date by the U.S. government to establish and require cyber security as a basic element of business operations.

If you have questions about the SEC disclosure rule, how it could impact you, how you can comply or how you can improve your cyber security employee training, please contact us online or call us at 1-800-658-8311.

 

 

 

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