[Federal Register Volume 83, Number 38 (Monday, February 26, 2018)]
[Rules and Regulations]
[Pages 8166-8172]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-03858]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 229 and 249

[Release Nos. 33-10459; 34-82746]


Commission Statement and Guidance on Public Company Cybersecurity 
Disclosures

AGENCY: Securities and Exchange Commission.

ACTION: Interpretation.

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SUMMARY: The Securities and Exchange Commission (the ``Commission'') is 
publishing interpretive guidance to assist public companies in 
preparing disclosures about cybersecurity risks and incidents.

DATES: Applicable February 26, 2018.

FOR FURTHER INFORMATION CONTACT: Questions about specific filings 
should be directed to staff members responsible for reviewing the 
documents the company files with the Commission. For general questions 
about this release, contact the Office of the Chief Counsel at (202) 
551-3500 in the Division of Corporation Finance, U.S. Securities and 
Exchange Commission, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

I. Introduction

A. Cybersecurity

    Cybersecurity risks pose grave threats to investors, our capital 
markets, and our country.\1\ Whether it is the companies in which 
investors invest, their accounts with financial services firms, the 
markets through which they trade, or the infrastructure they count on 
daily, the investing public and the U.S. economy depend on the security 
and reliability of information and communications technology, systems, 
and networks. Companies today rely on digital technology to conduct 
their business operations and engage with their customers, business 
partners, and other constituencies. In a digitally connected world, 
cybersecurity presents ongoing risks and threats to our capital markets 
and to companies operating in all industries, including public 
companies regulated by the Commission.
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    \1\ The U.S. Computer Emergency Readiness Team defines 
cybersecurity as ``[t]he activity or process, ability or capability, 
or state whereby information and communications systems and the 
information contained therein are protected from and/or defended 
against damage, unauthorized use or modification, or exploitation.'' 
U.S. Computer Emergency Readiness Team website, available at https://niccs.us-cert.gov/glossary#C (Adapted from: CNSSI 4009, NIST SP 
800-53 Rev 4, NIPP, DHS National Preparedness Goal; White House 
Cyberspace Policy Review, May 2009).
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    As companies' exposure to and reliance on networked systems and the 
internet have increased, the attendant risks and frequency of 
cybersecurity incidents also have increased.\2\ Today, the importance 
of data management and technology to business is analogous to the 
importance of electricity and other forms of power in the past century. 
Cybersecurity incidents \3\ can result from unintentional events or 
deliberate attacks by insiders or third parties, including 
cybercriminals, competitors, nation-states, and ``hacktivists.'' \4\ 
Companies face an evolving landscape of cybersecurity threats in which 
hackers use a complex array of means to perpetrate cyber-attacks, 
including the use of stolen access credentials, malware, ransomware, 
phishing, structured query language injection attacks, and distributed 
denial-of-service attacks, among other means. The objectives of cyber-
attacks vary widely and may include the theft or destruction of 
financial assets, intellectual property, or other sensitive information 
belonging to companies, their customers, or their business partners. 
Cyber-attacks may also be directed at disrupting the operations of 
public companies or their business partners. This includes targeting 
companies that operate in industries responsible for critical 
infrastructure.
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    \2\ See World Economic Forum, Global Risks Report 2017, 12th Ed. 
(Jan. 2017), available at https://www.weforum.org/reports/the-global-risks-report-2017 (concluding that ``greater interdependence 
among different infrastructure networks is increasing the scope for 
systemic failures--whether from cyber-attacks, software glitches, 
natural disasters or other causes--to cascade across networks and 
affect society in unanticipated ways.''). See also PwC, ``Turnaround 
and Transformation in Cybersecurity: Key Findings from the Global 
State of Information Security Survey 2016'' (Oct. 2015), available 
at https://www.pwccn.com/en/retail-and-consumer/rcs-info-security-2016.pdf. (finding that in 2015 there was a reported 38% increase in 
detected information security incidents from 2014).
    \3\ A ``cybersecurity incident'' is ``[a]n occurrence that 
actually or potentially results in adverse consequences to . . . an 
information system or the information that the system processes, 
stores, or transmits and that may require a response action to 
mitigate the consequences.'' U.S. Computer Emergency Readiness Team 
website, available at https://niccs.us-cert.gov/glossary#I.
    \4\ One study using a sample of 419 companies in 13 countries 
and regions noted that 47 percent of data breach incidents in 2016 
involved a malicious or criminal attack, 25 percent were due to 
negligent employees or contractors (human factor) and 28 percent 
involved system glitches, including both IT and business process 
failures. See Ponemon Institute and IBM Security, 2017 Cost of Data 
Breach Study: Global Overview (Jun. 2017), available at https://www.ponemon.org/library/2017-cost-of-data-breach-study-united-states.
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    Companies that fall victim to successful cyber-attacks or 
experience

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other cybersecurity incidents may incur substantial costs \5\ and 
suffer other negative consequences, which may include:
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    \5\ The average organizational cost of a data breach in the 
United States in 2016 was $7.35 million based on the sample in the 
study. Id. However, the total costs a company may incur in 
connection with a particular cyber-attack or incident could be much 
higher.
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     Remediation costs, such as liability for stolen assets or 
information, repairs of system damage, and incentives to customers or 
business partners in an effort to maintain relationships after an 
attack; \6\
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    \6\ A company's costs may also include payments to perpetrators 
of ransomware attacks in order to attempt to restore operations or 
protect customer data or other proprietary information. But see 
Federal Bureau of Investigation, ``How To Protect your Network from 
Ransomware,'' Ransomware Prevention and Response for CISOs, 
available at https://www.justice.gov/criminal-ccips/file/872771/download.
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     increased cybersecurity protection costs, which may 
include the costs of making organizational changes, deploying 
additional personnel and protection technologies, training employees, 
and engaging third party experts and consultants;
     lost revenues resulting from the unauthorized use of 
proprietary information or the failure to retain or attract customers 
following an attack;
     litigation and legal risks, including regulatory actions 
by state and federal governmental authorities and non-U.S. authorities; 
\7\
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    \7\ See, e.g., New York State Department of Financial Services, 
23 NYCRR 500, Cybersecurity Requirements for Financial Services 
Companies; European Union General Data Protection Regulation, 
Council Regulation 2016/679, 2016 O.J. (L 119) 1.
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     increased insurance premiums;
     reputational damage that adversely affects customer or 
investor confidence; and
     damage to the company's competitiveness, stock price, and 
long-term shareholder value.
    Given the frequency, magnitude and cost of cybersecurity incidents, 
the Commission believes that it is critical that public companies take 
all required actions to inform investors about material cybersecurity 
risks and incidents in a timely fashion, including those companies that 
are subject to material cybersecurity risks but may not yet have been 
the target of a cyber-attack. Crucial to a public company's ability to 
make any required disclosure of cybersecurity risks and incidents in 
the appropriate timeframe are disclosure controls and procedures that 
provide an appropriate method of discerning the impact that such 
matters may have on the company and its business, financial condition, 
and results of operations, as well as a protocol to determine the 
potential materiality of such risks and incidents.\8\ In addition, the 
Commission believes that the development of effective disclosure 
controls and procedures is best achieved when a company's directors, 
officers, and other persons responsible for developing and overseeing 
such controls and procedures are informed about the cybersecurity risks 
and incidents that the company has faced or is likely to face.
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    \8\ See Section II.B.1 below for further discussion of 
disclosure controls and procedures.
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    Additionally, directors, officers, and other corporate insiders 
must not trade a public company's securities while in possession of 
material nonpublic information, which may include knowledge regarding a 
significant cybersecurity incident experienced by the company. Public 
companies should have policies and procedures in place to (1) guard 
against directors, officers, and other corporate insiders taking 
advantage of the period between the company's discovery of a 
cybersecurity incident and public disclosure of the incident to trade 
on material nonpublic information about the incident, and (2) help 
ensure that the company makes timely disclosure of any related material 
nonpublic information.\9\ In addition, we believe that companies are 
well served by considering the ramifications of directors, officers, 
and other corporate insiders trading in advance of disclosures 
regarding cyber incidents that prove to be material. We recognize that 
many companies have adopted preventative measures to address the 
appearance of improper trading and we encourage companies to consider 
such preventative measures in the context of a cyber event.
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    \9\ See Section II.B.2 below for further discussion of insider 
trading.
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B. CF Disclosure Guidance: Topic No. 2

    In October 2011, the Division of Corporation Finance (the 
``Division'') issued guidance that provided the Division's views 
regarding disclosure obligations relating to cybersecurity risks and 
incidents.\10\ The guidance explains that, although no existing 
disclosure requirement explicitly refers to cybersecurity risks and 
cyber incidents, companies nonetheless may be obligated to disclose 
such risks and incidents.\11\ After the issuance of the guidance, many 
companies included additional cybersecurity disclosure, typically in 
the form of risk factors.\12\
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    \10\ See CF Disclosure Guidance: Topic No. 2--Cybersecurity 
(Oct. 13, 2011), available at https://www.sec.gov/divisions/corpfin/guidance/cfguidance-topic2.htm.
    \11\ Id.
    \12\ For example, Willis North America released a 2013 report 
that found that approximately 88% of the public Fortune 500 
companies and about 78% of the Fortune 501-1000 companies included 
risk factor disclosure regarding cybersecurity in their annual 
reports filed in 2012. See Willis Fortune 1000 Cyber Disclosure 
Report (Aug. 2013), available at http://blog.willis.com/wp-content/uploads/2013/08/Willis-Fortune-1000-Cyber-Report_09-13.pdf. In 2015, 
over 88% of Russell 3000 companies disclosed cybersecurity as a 
risk. See Audit Analytics, ``Cybersecurity Disclosure in Risk 
Factors,'' (Jan. 14, 2016), available at http://www.auditanalytics.com/blog/cybersecurity-disclosures-in-risk-factors/.
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C. Purpose of Release

    In light of the increasing significance of cybersecurity incidents, 
the Commission believes it is necessary to provide further Commission 
guidance. This interpretive release outlines the Commission's views 
with respect to cybersecurity disclosure requirements under the federal 
securities laws as they apply to public operating companies.\13\ While 
the Commission continues to consider other means of promoting 
appropriate disclosure of cyber incidents, we are reinforcing and 
expanding upon the staff's 2011 guidance. In addition, we address two 
topics not developed in the staff's 2011 guidance, namely the 
importance of cybersecurity policies and procedures and the application 
of insider trading prohibitions in the cybersecurity context.
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    \13\ This release does not address the specific implications of 
cybersecurity to other regulated entities under the federal 
securities laws, such as registered investment companies, investment 
advisers, brokers, dealers, exchanges, and self-regulatory 
organizations. For example, in 2014 the Commission adopted 
Regulation Systems Compliance and Integrity, applicable to certain 
self-regulatory organizations, to strengthen the technology 
infrastructure of the U.S. securities markets. Final Rule: 
Regulation Systems Compliance and Integrity, Release No. 34-73639 
(Nov. 19, 2014) [79 FR. 72252 (Dec. 5, 2014)], available at https://www.sec.gov/rules/final/2014/34-73639.pdf. For additional 
cybersecurity regulations and resources, see the Commission's 
website page devoted to cybersecurity issues, available at https://www.sec.gov/spotlight/cybersecurity; see also Cybersecurity 
Guidance; IM Guidance Update (April 2015), available at https://www.sec.gov/investment/im-guidance-2015-02.pdf (staff guidance on 
cybersecurity measures for registered investment companies and 
investment advisers).
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    First, this release stresses the importance of maintaining 
comprehensive policies and procedures related to cybersecurity risks 
and incidents. Companies are required to establish and maintain 
appropriate and effective disclosure controls and procedures that 
enable them to make accurate and timely disclosures of material events, 
including those related to cybersecurity. Such robust disclosure

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controls and procedures assist companies in satisfying their disclosure 
obligations under the federal securities laws.
    Second, we also remind companies and their directors, officers, and 
other corporate insiders of the applicable insider trading prohibitions 
under the general antifraud provisions of the federal securities laws 
and also of their obligation to refrain from making selective 
disclosures of material nonpublic information about cybersecurity risks 
or incidents.\14\
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    \14\ See Final Rule: Selective Disclosure and Insider Trading, 
Release No. 33-7881 (Aug. 15, 2000) [65 FR 51715 (Aug. 24, 2000)], 
available at https://www.sec.gov/rules/final/3-7881.htm.
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    The Commission, and the staff through its filing review process, 
continues to monitor cybersecurity disclosures carefully.

II. Commission Guidance

A. Overview of Rules Requiring Disclosure of Cybersecurity Issues

1. Disclosure Obligations Generally; Materiality
    Companies should consider the materiality of cybersecurity risks 
and incidents when preparing the disclosure that is required in 
registration statements under the Securities Act of 1933 (``Securities 
Act'') and the Securities Exchange Act of 1934 (``Exchange Act''), and 
periodic and current reports under the Exchange Act.\15\ When a company 
is required to file a disclosure document with the Commission, the 
requisite form generally refers to the disclosure requirements of 
Regulation S-K \16\ and Regulation S-X.\17\ Although these disclosure 
requirements do not specifically refer to cybersecurity risks and 
incidents, a number of the requirements impose an obligation to 
disclose such risks and incidents depending on a company's particular 
circumstances. For example:
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    \15\ Listed companies also should consider any obligations that 
may be imposed by exchange listing requirements. For example, the 
NYSE requires listed companies to ``release quickly to the public 
any news or information which might reasonably be expected to 
materially affect the market for its securities.'' See NYSE Listed 
Company Manual Rule 202.05--Timely Disclosure of Material News 
Developments. In addition, in 2015, the NYSE, in partnership with 
Palo Alto Networks, published a summary of information about legal 
and regulatory aspects of cybersecurity governance for directors and 
officers of public companies. See Navigating the Digital Age: The 
Definitive Cybersecurity Guide for Directors and Officers. Chicago: 
Caxton Business & Legal, Inc., 2015, available at https://www.securityroundtable.org/wp-content/uploads/2015/09/Cybersecurity-9780996498203-no_marks.pdf. Similarly, Nasdaq requires listed 
companies to ``make prompt disclosure to the public of any material 
information that would reasonably be expected to affect the value of 
its securities or influence investors' decisions.'' See Nasdaq 
Listing Rule 5250(b)(1).
    \16\ 17 CFR part 229.
    \17\ 17 CFR part 210.
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     Periodic Reports: Companies are required to file periodic 
reports \18\ to disclose specified information on a regular and ongoing 
basis.\19\ These periodic reports include annual reports on Form 10-
K,\20\ which require companies to make disclosure regarding their 
business and operations, risk factors, legal proceedings, management's 
discussion and analysis of financial condition and results of 
operations (``MD&A''), financial statements, disclosure controls and 
procedures, and corporate governance.\21\ Periodic reports also include 
quarterly reports on Form 10-Q,\22\ which require companies to make 
disclosure regarding their financial statements, MD&A, and updated risk 
factors.\23\ Likewise, foreign private issuers are required to make 
many of these same disclosures in their periodic reports on Form 20-
F.\24\ Companies must provide timely and ongoing information in these 
periodic reports regarding material cybersecurity risks and incidents 
that trigger disclosure obligations.
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    \18\ An issuer with a class of securities registered under 
Section 12 or subject to Section 15(d) of the Exchange Act is 
subject to the periodic and current reporting requirements of 
Section 13 and 15(d), respectively, of the Exchange Act.
    \19\ ``Congress recognized that the ongoing dissemination of 
accurate information by companies about themselves and their 
securities is essential to effective operation of the trading 
markets. The Exchange Act rules require public companies to make 
periodic disclosures at annual and quarterly intervals, with other 
important information reported on a more current basis. The Exchange 
Act specifically provides for current disclosure to maintain the 
currency and adequacy of information disclosed by companies.'' 
Proposed Rule: Additional Form 8-K Disclosure Requirements and 
Acceleration of Filing Date, Release No. 33-8106, 3-4 (Jun. 17, 
2002) [67 FR 42914 (Jun. 25, 2002)].
    \20\ 17 CFR 249.310.
    \21\ See Part I, Items 1, 1A and 3 of Form 10-K; Part II, Items 
7, 8 and 9A of Form 10-K; and Part III, Item 10 of Form 10-K [17 CFR 
249.310].
    \22\ 17 CFR 249.308a.
    \23\ See Part I, Items 1 and 2 of Form 10-Q; Part II, Item 1A of 
Form 10-Q [17 CFR 249.308a].
    \24\ See Part I, Items 3.D, 4, 5 and 8 of Form 20-F; Part II, 
Items 15 and 16G of Form 20-F; Part III, Items 17 and 18 of Form 20-
F [17 CFR 249.220f].
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     Securities Act and Exchange Act Obligations: Securities 
Act and Exchange Act registration statements must disclose all material 
facts required to be stated therein or necessary to make the statements 
therein not misleading. Companies should consider the adequacy of their 
cybersecurity-related disclosure, among other things, in the context of 
Sections 11, 12, and 17 of the Securities Act, as well as Section 10(b) 
and Rule 10b-5 of the Exchange Act.\25\
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    \25\ 15 U.S.C. 77k; 15 U.S.C. 77l; 15 U.S.C. 77q; 15 U.S.C 
78j(b); 17 CFR 240.10b-5.
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     Current Reports: In order to maintain the accuracy and 
completeness of effective shelf registration statements with respect to 
the costs and other consequences of material cybersecurity 
incidents,\26\ companies can provide current reports on Form 8-K \27\ 
or Form 6-K.\28\ Companies also frequently provide current reports on 
Form 8-K or Form 6-K to report the occurrence and consequences of 
cybersecurity incidents.\29\ The Commission encourages companies to 
continue to use Form 8-K or Form 6-K to disclose material information 
promptly, including disclosure pertaining to cybersecurity matters. 
This practice reduces the risk of selective disclosure, as well as the 
risk that trading in their securities on the basis of material non-
public information may occur.\30\
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    \26\ See Item 11(a) of Form S-3 [17 CFR 239.13] and Item 5(a) of 
Form F-3 [17 CFR 239.33].
    \27\ 17 CFR 249.308.
    \28\ 17 CFR 249.306.
    \29\ ``The registrant may, at its option, disclose under this 
Item 8.01 [of Form 8-K] any events, with respect to which 
information is not otherwise called for by this form, that the 
registrant deems of importance to security holders.'' 17 CFR 308.
    \30\ See Sections II.B.2 and II.B.3 below for further discussion 
of insider trading and Regulation FD.
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    In addition to the information expressly required by Commission 
regulation, a company is required to disclose ``such further material 
information, if any, as may be necessary to make the required 
statements, in light of the circumstances under which they are made, 
not misleading.'' \31\ The Commission considers omitted information to 
be material if there is a substantial likelihood that a reasonable 
investor would consider the information important in making an 
investment decision or that disclosure of the omitted information would 
have been viewed by the reasonable investor as having significantly 
altered the total mix of information available.\32\
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    \31\ Rule 408 of the Securities Act [17 CFR 230.408]; Rule 12b-
20 of the Exchange Act [17 CFR 240.12b-20]; and Rule 14a-9 of the 
Exchange Act [17 CFR 240.14a-9].
    \32\ This approach is consistent with the standard of 
materiality articulated by the U.S. Supreme Court in TSC Industries 
v. Northway, 426 U.S. 438, 449 (1976) (a fact is material ``if there 
is a substantial likelihood that a reasonable shareholder would 
consider it important'' in making an investment decision or if it 
``would have been viewed by the reasonable investor as having 
significantly altered the `total mix' of information made 
available'' to the shareholder).
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    In determining their disclosure obligations regarding cybersecurity 
risks and incidents, companies generally weigh, among other things, the 
potential

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materiality of any identified risk and, in the case of incidents, the 
importance of any compromised information and of the impact of the 
incident on the company's operations. The materiality of cybersecurity 
risks or incidents depends upon their nature, extent, and potential 
magnitude, particularly as they relate to any compromised information 
or the business and scope of company operations.\33\ The materiality of 
cybersecurity risks and incidents also depends on the range of harm 
that such incidents could cause.\34\ This includes harm to a company's 
reputation, financial performance, and customer and vendor 
relationships, as well as the possibility of litigation or regulatory 
investigations or actions, including regulatory actions by state and 
federal governmental authorities and non-U.S. authorities.
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    \33\ For example, the compromised information might include 
personally identifiable information, trade secrets or other 
confidential business information, the materiality of which may 
depend on the nature of the company's business, as well as the scope 
of the compromised information.
    \34\ As part of a materiality analysis, a company should 
consider the indicated probability that an event will occur and the 
anticipated magnitude of the event in light of the totality of 
company activity. Basic v. Levinson, 485 U.S. 224, 238 (1988) 
(citing SEC v. Texas Gulf Sulphur Co., 401 F. 2d 833, 849 (2d Cir. 
1968)). Moreover, no ``single fact or occurrence'' is determinative 
as to materiality, which requires an inherently fact-specific 
inquiry. Basic, 485 U.S. at 236.
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    This guidance is not intended to suggest that a company should make 
detailed disclosures that could compromise its cybersecurity efforts--
for example, by providing a ``roadmap'' for those who seek to penetrate 
a company's security protections. We do not expect companies to 
publicly disclose specific, technical information about their 
cybersecurity systems, the related networks and devices, or potential 
system vulnerabilities in such detail as would make such systems, 
networks, and devices more susceptible to a cybersecurity incident. 
Nevertheless, we expect companies to disclose cybersecurity risks and 
incidents that are material to investors, including the concomitant 
financial, legal, or reputational consequences. Where a company has 
become aware of a cybersecurity incident or risk that would be material 
to its investors, we would expect it to make appropriate disclosure 
timely and sufficiently prior to the offer and sale of securities and 
to take steps to prevent directors and officers (and other corporate 
insiders who were aware of these matters) from trading its securities 
until investors have been appropriately informed about the incident or 
risk.\35\
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    \35\ See Sections 7 and 10 of the Securities Act; Sections 
10(b), 13(a) and 15(d) of the Exchange Act; and Rule 10b-5 under the 
Exchange Act [15 U.S.C 78j(b); 15 U.S.C. 78m(a); 15. U.S.C. 78o(d); 
17 CFR 240.10b-5].
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    Understanding that some material facts may be not available at the 
time of the initial disclosure, we recognize that a company may require 
time to discern the implications of a cybersecurity incident. We also 
recognize that it may be necessary to cooperate with law enforcement 
and that ongoing investigation of a cybersecurity incident may affect 
the scope of disclosure regarding the incident. However, an ongoing 
internal or external investigation--which often can be lengthy--would 
not on its own provide a basis for avoiding disclosures of a material 
cybersecurity incident.
    We remind companies that they may have a duty to correct prior 
disclosure that the company determines was untrue (or omitted a 
material fact necessary to make the disclosure not misleading) at the 
time it was made \36\ (for example, if the company subsequently 
discovers contradictory information that existed at the time of the 
initial disclosure), or a duty to update disclosure that becomes 
materially inaccurate after it is made \37\ (for example, when the 
original statement is still being relied on by reasonable investors). 
Companies should consider whether they need to revisit or refresh 
previous disclosure, including during the process of investigating a 
cybersecurity incident.
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    \36\ See Backman v. Polaroid Corp., 910 F.2d 10, 16-17 (1st Cir. 
1990) (en banc) (finding that the duty to correct applies ``if a 
disclosure is in fact misleading when made, and the speaker 
thereafter learns of this.'').
    \37\ See id. at 17 (describing the duty to update as potentially 
applying ``if a prior disclosure `becomes materially misleading in 
light of subsequent events''' (quoting Greenfield v. Heublein, Inc., 
742 F.2d 751, 758 (3d Cir. 1984))). But see Higginbotham v. Baxter 
Intern., Inc., 495 F.3d 753, 760 (7th Cir. 2007) (rejecting duty to 
update before next quarterly report); Gallagher v. Abbott 
Laboratories, 269 F.3d 806, 808-11 (7th Cir. 2001) (explaining that 
securities laws do not require continuous disclosure).
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    We expect companies to provide disclosure that is tailored to their 
particular cybersecurity risks and incidents. As the Commission has 
previously stated, we ``emphasize a company-by-company approach [to 
disclosure] that allows relevant and material information to be 
disseminated to investors without boilerplate language or static 
requirements while preserving completeness and comparability of 
information across companies.'' \38\ Companies should avoid generic 
cybersecurity-related disclosure and provide specific information that 
is useful to investors.
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    \38\ See Business and Financial Disclosure Required by 
Regulation S-K, Release No. 33-10064 (Apr. 13, 2016) [81 FR 23915 
(Apr. 22, 2016)]. See also Plain English Disclosure, Release No. 33-
7497 (Jan. 28, 1998) [63 FR 6370 (Feb. 6, 1998)]; and Updated Staff 
Legal Bulletin No. 7: Plain English Disclosure (Jun. 7, 1999) 
available at https://www.sec.gov/interps/legal/cfslb7a.htm.
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2. Risk Factors
    Item 503(c) of Regulation S-K and Item 3.D of Form 20-F require 
companies to disclose the most significant factors that make 
investments in the company's securities speculative or risky.\39\ 
Companies should disclose the risks associated with cybersecurity and 
cybersecurity incidents if these risks are among such factors, 
including risks that arise in connection with acquisitions.\40\
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    \39\ 17 CFR 229.503(c); 17 CFR 249.220f.
    \40\ See Final Rule: Business Combination Transactions, Release 
No. 33-6578 (Apr. 23, 1985) [50 FR 18990 (May 6, 1985)].
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    It would be helpful for companies to consider the following issues, 
among others, in evaluating cybersecurity risk factor disclosure:
     The occurrence of prior cybersecurity incidents, including 
their severity and frequency;
     the probability of the occurrence and potential magnitude 
of cybersecurity incidents;
     the adequacy of preventative actions taken to reduce 
cybersecurity risks and the associated costs, including, if 
appropriate, discussing the limits of the company's ability to prevent 
or mitigate certain cybersecurity risks;
     the aspects of the company's business and operations that 
give rise to material cybersecurity risks and the potential costs and 
consequences of such risks, including industry-specific risks and third 
party supplier and service provider risks;
     the costs associated with maintaining cybersecurity 
protections, including, if applicable, insurance coverage relating to 
cybersecurity incidents or payments to service providers;
     the potential for reputational harm;
     existing or pending laws and regulations that may affect 
the requirements to which companies are subject relating to 
cybersecurity and the associated costs to companies; and
     litigation, regulatory investigation, and remediation 
costs associated with cybersecurity incidents.
    In meeting their disclosure obligations, companies may need to

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disclose previous or ongoing cybersecurity incidents or other past 
events in order to place discussions of these risks in the appropriate 
context. For example, if a company previously experienced a material 
cybersecurity incident involving denial-of-service, it likely would not 
be sufficient for the company to disclose that there is a risk that a 
denial-of-service incident may occur. Instead, the company may need to 
discuss the occurrence of that cybersecurity incident and its 
consequences as part of a broader discussion of the types of potential 
cybersecurity incidents that pose particular risks to the company's 
business and operations. Past incidents involving suppliers, customers, 
competitors, and others may be relevant when crafting risk factor 
disclosure. In certain circumstances, this type of contextual 
disclosure may be necessary to effectively communicate cybersecurity 
risks to investors.
3. MD&A of Financial Condition and Results of Operations
    Item 303 of Regulation S-K and Item 5 of Form 20-F require a 
company to discuss its financial condition, changes in financial 
condition, and results of operations. These items require a discussion 
of events, trends, or uncertainties that are reasonably likely to have 
a material effect on its results of operations, liquidity, or financial 
condition, or that would cause reported financial information not to be 
necessarily indicative of future operating results or financial 
condition and such other information that the company believes to be 
necessary to an understanding of its financial condition, changes in 
financial condition, and results of operations.\41\ In this context, 
the cost of ongoing cybersecurity efforts (including enhancements to 
existing efforts), the costs and other consequences of cybersecurity 
incidents, and the risks of potential cybersecurity incidents, among 
other matters, could inform a company's analysis. In addition, 
companies may consider the array of costs associated with cybersecurity 
issues, including, but not limited to, loss of intellectual property, 
the immediate costs of the incident, as well as the costs associated 
with implementing preventative measures, maintaining insurance, 
responding to litigation and regulatory investigations, preparing for 
and complying with proposed or current legislation, engaging in 
remediation efforts, addressing harm to reputation, and the loss of 
competitive advantage that may result.\42\ Finally, the Commission 
expects companies to consider the impact of such incidents on each of 
their reportable segments.\43\
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    \41\ 17 CFR 229.303; 17 CFR 249.220f.
    \42\ A number of past Commission releases provide general 
interpretive guidance on these disclosure requirements. See, e.g., 
Commission Guidance Regarding Management's Discussion and Analysis 
of Financial Condition and Results of Operations, Release No. 33-
8350 (Dec. 19, 2003) [68 FR 75056 (Dec. 29, 2003)]; Commission 
Statement About Management's Discussion and Analysis of Financial 
Condition and Results of Operations, Release No. 33-8056 (Jan. 22, 
2002) [67 FR 3746 (Jan. 25, 2002)]; Management's Discussion and 
Analysis of Financial Condition and Results of Operations; Certain 
Investment Company Disclosures, Release No. 33-6835 (May 18, 1989) 
[54 FR 22427 (May 24, 1989)].
    \43\ 17 CFR 229.303(a).
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4. Description of Business
    Item 101 of Regulation S-K and Item 4.B of Form 20-F require 
companies to discuss their products, services, relationships with 
customers and suppliers, and competitive conditions.\44\ If 
cybersecurity incidents or risks materially affect a company's 
products, services, relationships with customers or suppliers, or 
competitive conditions, the company must provide appropriate 
disclosure.
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    \44\ 17 CFR 229.101; 17 CFR 249.220f.
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5. Legal Proceedings
    Item 103 of Regulation S-K requires companies to disclose 
information relating to material pending legal proceedings to which 
they or their subsidiaries are a party.\45\ Companies should note that 
this requirement includes any such proceedings that relate to 
cybersecurity issues. For example, if a company experiences a 
cybersecurity incident involving the theft of customer information and 
the incident results in material litigation by customers against the 
company, the company should describe the litigation, including the name 
of the court in which the proceedings are pending, the date the 
proceedings are instituted, the principal parties thereto, a 
description of the factual basis alleged to underlie the litigation, 
and the relief sought.
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    \45\ 17 CFR 229.103.
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6. Financial Statement Disclosures
    Cybersecurity incidents and the risks that result therefrom may 
affect a company's financial statements. For example, cybersecurity 
incidents may result in:
     Expenses related to investigation, breach notification, 
remediation and litigation, including the costs of legal and other 
professional services;
     loss of revenue, providing customers with incentives or a 
loss of customer relationship assets value;
     claims related to warranties, breach of contract, product 
recall/replacement, indemnification of counterparties, and insurance 
premium increases; and
     diminished future cash flows, impairment of intellectual, 
intangible or other assets; recognition of liabilities; or increased 
financing costs.
    The Commission expects that a company's financial reporting and 
control systems would be designed to provide reasonable assurance that 
information about the range and magnitude of the financial impacts of a 
cybersecurity incident would be incorporated into its financial 
statements on a timely basis as the information becomes available.\46\
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    \46\ See Section 13(b)(2)(B) of the Exchange Act [15 
U.S.C.78m(b)(2)(B)].
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7. Board Risk Oversight
    Item 407(h) of Regulation S-K and Item 7 of Schedule 14A require a 
company to disclose the extent of its board of directors' role in the 
risk oversight of the company, such as how the board administers its 
oversight function and the effect this has on the board's leadership 
structure.\47\ The Commission has previously said that ``disclosure 
about the board's involvement in the oversight of the risk management 
process should provide important information to investors about how a 
company perceives the role of its board and the relationship between 
the board and senior management in managing the material risks facing 
the company.'' \48\ A company must include a description of how the 
board administers its risk oversight function.\49\ To the extent 
cybersecurity risks are material to a company's business, we believe 
this discussion should include the nature of the board's role in 
overseeing the management of that risk.
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    \47\ 17 CFR 229.407(h); 17 CFR 240.14a-101--Schedule 14A.
    \48\ Final Rule: Proxy Disclosure Enhancements, Release No. 33-
9089 (Dec. 16, 2009) [74 FR 68334 (Dec. 23, 2009)], available at 
http://www.sec.gov/rules/final/2009/33-9089.pdf.
    \49\ See Item 407(h) of Regulation S-K [17 CFR 229.407(h)].
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    In addition, we believe disclosures regarding a company's 
cybersecurity risk management program and how the board of directors 
engages with management on cybersecurity issues allow investors to 
assess how a board of directors is discharging its risk oversight 
responsibility in this increasingly important area.

[[Page 8171]]

B. Policies and Procedures

1. Disclosure Controls and Procedures
    Cybersecurity risk management policies and procedures are key 
elements of enterprise-wide risk management, including as it relates to 
compliance with the federal securities laws. We encourage companies to 
adopt comprehensive policies and procedures related to cybersecurity 
and to assess their compliance regularly, including the sufficiency of 
their disclosure controls and procedures as they relate to 
cybersecurity disclosure. Companies should assess whether they have 
sufficient disclosure controls and procedures in place to ensure that 
relevant information about cybersecurity risks and incidents is 
processed and reported to the appropriate personnel, including up the 
corporate ladder, to enable senior management to make disclosure 
decisions and certifications and to facilitate policies and procedures 
designed to prohibit directors, officers, and other corporate insiders 
from trading on the basis of material nonpublic information about 
cybersecurity risks and incidents.\50\
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    \50\ See Final Rule: Certification of Disclosure in Companies' 
Quarterly and Annual Reports, Release No. 33-8124 (Aug. 28, 2002) 
[67 FR 57276 (Sept. 9, 2002)], available at https://www.sec.gov/rules/final/33-8124.htm (``We believe that, to assist principal 
executive and financial officers in the discharge of their 
responsibilities in making the required certifications, as well as 
to discharge their responsibilities in providing accurate and 
complete information to security holders, it is necessary for 
companies to ensure that their internal communications and other 
procedures operate so that important information flows to the 
appropriate collection and disclosure points in a timely manner.''); 
see also Section 10(b) of the Exchange Act and Rule 10b-5 thereunder 
[15 U.S.C. 78j(b); 17 CFR 240.10b-5].
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    Pursuant to Exchange Act Rules 13a-15 and 15d-15, companies must 
maintain disclosure controls and procedures, and management must 
evaluate their effectiveness.\51\ These rules define ``disclosure 
controls and procedures'' as those controls and other procedures 
designed to ensure that information required to be disclosed by the 
company in the reports that it files or submits under the Exchange Act 
is (1) ``recorded, processed, summarized and reported, within the time 
periods specified in the Commission's rules and forms,'' and (2) 
``accumulated and communicated to the company's management . . . as 
appropriate to allow timely decisions regarding required disclosure.'' 
\52\
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    \51\ 17 CFR 240.13a-15; 17 CFR 240.15d-15.
    \52\ Id.
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    A company's disclosure controls and procedures should not be 
limited to disclosure specifically required, but should also ensure 
timely collection and evaluation of information potentially subject to 
required disclosure, or relevant to an assessment of the need to 
disclose developments and risks that pertain to the company's 
businesses.\53\ Information also must be evaluated in the context of 
the disclosure requirement of Exchange Act Rule 12b-20.\54\ When 
designing and evaluating disclosure controls and procedures, companies 
should consider whether such controls and procedures will appropriately 
record, process, summarize, and report the information related to 
cybersecurity risks and incidents that is required to be disclosed in 
filings. Controls and procedures should enable companies to identify 
cybersecurity risks and incidents, assess and analyze their impact on a 
company's business, evaluate the significance associated with such 
risks and incidents, provide for open communications between technical 
experts and disclosure advisors, and make timely disclosures regarding 
such risks and incidents.
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    \53\ See Final Rule: Certification of Disclosure in Companies' 
Quarterly and Annual Reports, Release No. 33-8124 (Aug. 28, 2002) 
[67 FR 57276 (Sept. 9, 2002)], available at https://www.sec.gov/rules/final/33-8124.htm (``We believe that the new rules will help 
to ensure that an issuer's systems grow and evolve with its business 
and are capable of producing Exchange Act reports that are timely, 
accurate and reliable.'').
    \54\ 17 CFR 240.12b-20.
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    Exchange Act Rules 13a-14 and 15d-14 \55\ require a company's 
principal executive officer and principal financial officer to make 
certifications regarding the design and effectiveness of disclosure 
controls and procedures,\56\ and Item 307 of Regulation S-K and Item 
15(a) of Exchange Act Form 20-F require companies to disclose 
conclusions on the effectiveness of disclosure controls and 
procedures.\57\ These certifications and disclosures should take into 
account the adequacy of controls and procedures for identifying 
cybersecurity risks and incidents and for assessing and analyzing their 
impact. In addition, to the extent cybersecurity risks or incidents 
pose a risk to a company's ability to record, process, summarize, and 
report information that is required to be disclosed in filings, 
management should consider whether there are deficiencies in disclosure 
controls and procedures that would render them ineffective.
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    \55\ 17 CFR 240.13a-14; 17 CFR 240.15d-14.
    \56\ Section 302 of the Sarbanes-Oxley Act of 2002 required the 
Commission to adopt final rules under which the principal executive 
officer or officers and the principal financial officer or officers, 
or persons providing similar functions, of an issuer each must 
certify the information contained in the issuer's quarterly and 
annual reports. Public Law 107-204, 116 Stat. 745 (2002).
    \57\ 17 CFR 229.307; 17 CFR 249.220f.
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2. Insider Trading
    Companies and their directors, officers, and other corporate 
insiders should be mindful of complying with the laws related to 
insider trading in connection with information about cybersecurity 
risks and incidents, including vulnerabilities and breaches.\58\ It is 
illegal to trade a security ``on the basis of material nonpublic 
information about that security or issuer, in breach of a duty of trust 
or confidence that is owed directly, indirectly, or derivatively, to 
the issuer of that security or the shareholders of that issuer, or to 
any other person who is the source of the material nonpublic 
information.'' \59\ As noted above, information about a company's 
cybersecurity risks and incidents may be material nonpublic 
information, and directors, officers, and other corporate insiders 
would violate the antifraud provisions if they trade the company's 
securities in breach of their duty of trust or confidence while in 
possession of that material nonpublic information.\60\
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    \58\ In addition to promoting full and fair disclosure, the 
antifraud provisions of the federal securities laws prohibit insider 
trading, which harms not only individual investors but also the very 
foundations of our markets by undermining investor confidence in the 
integrity of those markets. 17 CFR 243.100. Final Rule: Selective 
Disclosure and Insider Trading, Release No. 34-43154 (Aug. 15, 2000) 
[65 FR 51716 (Aug. 24, 2000)].
    \59\ Rule 10b5-1(a) of the Exchange Act [17 CFR 240.10b-5-1(a)].
    \60\ This would not preclude directors, officers, and other 
corporate insiders from relying on Exchange Act Rule 10b5-1 if all 
conditions of that rule are met.
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    Beyond the antifraud provisions of the federal securities laws, 
companies and their directors, officers, and other corporate insiders 
must comply with all other applicable insider trading related rules. 
Many exchanges require listed companies to adopt codes of conduct and 
policies that promote compliance with applicable laws, rules, and 
regulations, including those prohibiting insider trading.\61\ We 
encourage companies to consider how their codes of ethics \62\ and 
insider trading policies take into account and prevent trading on

[[Page 8172]]

the basis of material nonpublic information related to cybersecurity 
risks and incidents. The Commission believes that it is important to 
have well designed policies and procedures to prevent trading on the 
basis of all types of material non-public information, including 
information relating to cybersecurity risks and incidents.
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    \61\ See e.g., NYSE Listed Company Manual Section 303A.10, which 
states in relevant part that every NYSE ``listed company should 
proactively promote compliance with laws, rules and regulations, 
including insider trading laws. Insider trading is both unethical 
and illegal, and should be dealt with decisively.'' See also NASDAQ 
Listing Rule 5610 and Section 406(c) of the Sarbanes-Oxley Act of 
2002.
    \62\ Item 406 of Regulation S-K [17 CFR 229.406].
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    In addition, while companies are investigating and assessing 
significant cybersecurity incidents, and determining the underlying 
facts, ramifications and materiality of these incidents, they should 
consider whether and when it may be appropriate to implement 
restrictions on insider trading in their securities. Company insider 
trading policies and procedures that include prophylactic measures can 
protect against directors, officers, and other corporate insiders 
trading on the basis of material nonpublic information before public 
disclosure of the cybersecurity incident. As noted above, we believe 
that companies would be well served by considering how to avoid the 
appearance of improper trading during the period following an incident 
and prior to the dissemination of disclosure.
3. Regulation FD and Selective Disclosure
    Companies also may have disclosure obligations under Regulation FD 
in connection with cybersecurity matters. Under Regulation FD, ``when 
an issuer, or person acting on its behalf, discloses material nonpublic 
information to certain enumerated persons it must make public 
disclosure of that information.'' \63\ The Commission adopted 
Regulation FD owing to concerns about companies making selective 
disclosure of material nonpublic information to certain persons before 
making full disclosure of that same information to the general 
public.\64\
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    \63\ 17 CFR 243.100. Final Rule: Selective Disclosure and 
Insider Trading, Release No. 34-43154 (Aug. 15, 2000) [65 FR 51716 
(Aug. 24, 2000)].
    \64\ Id.
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    In cases of selective disclosure of material nonpublic information 
related to cybersecurity, companies should ensure compliance with 
Regulation FD. Companies and persons acting on their behalf should not 
selectively disclose material, nonpublic information regarding 
cybersecurity risks and incidents to Regulation FD enumerated persons 
\65\ before disclosing that same information to the public.\66\ We 
expect companies to have policies and procedures to ensure that any 
disclosures of material nonpublic information related to cybersecurity 
risks and incidents are not made selectively, and that any Regulation 
FD required public disclosure is made simultaneously (in the case of an 
intentional disclosure as defined in the rule) or promptly (in the case 
of a non-intentional disclosure) and is otherwise compliant with the 
requirements of that regulation.\67\
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    \65\ Regulation FD applies generally to selective disclosures 
made to persons outside the issuer who are (1) a broker or dealer or 
persons associated with a broker or dealer; (2) an investment 
advisor or persons associated with an investment advisor; (3) an 
investment company or persons affiliated with an investment company; 
or (4) a holder of the issuer's securities under circumstances in 
which it is reasonably foreseeable that the person will trade in the 
issuer's securities on the basis of the information. 17 CFR 
243.100(b)(1).
    \66\ Final Rule: Selective Disclosure and Insider Trading, 
Release No. 34-43154 (Aug. 15, 2000) [65 FR 51716 (Aug. 24, 2000)].
    \67\ ``Under the regulation, the required public disclosure may 
be made by filing or furnishing a Form 8-K, or by another method or 
combination of methods that is reasonably designed to effect broad, 
non-exclusionary distribution of the information to the public.'' 
Id. at 3.

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    By the Commission.

    Dated: February 21, 2018.
Brent J. Fields,
Secretary.
[FR Doc. 2018-03858 Filed 2-23-18; 8:45 am]
 BILLING CODE 8011-01-P


