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The Equifax data breach, along with problems at Intel, has spurred the Securities and Exchange Commission to update its rules about the disclosing of cybersecurity incidents that now puts greater responsibility on CEOs and other company officers.

Larry Loeb

February 23, 2018

4 Min Read

An outcry from investors about the recent breaches of Equifax, as well as the problems happening at Intel, have caused the US Securities and Exchange Commission to update its 2011-era guidelines on how public companies should be handling any cybersecurity incidents.

Released this week, the updated SEC guidance actually emphasizes what sort of incidents should be treated as insider information.

The new rules state that security flaws and incidents are to be considered as non-public insider information, if they are not announced to the public. This means that information may not be used in management decisions about buying or selling stock in the company.

(Source: iStock)

(Source: iStock)

The SEC put it this way in a statement:

"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 … 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."

This takes all the wiggle room out of what the C-level or company officers can do if they know something the public does not. They can't sell company stock while they think the price will be elevated.

This was exactly what the CEO of Intel Corp. (Nasdaq: INTC) was accused of doing when he sold $39 million of stock before the recent security problems were announced to the public. (See Intel Offering New Microcode to Fix Spectre & Meltdown.)

Additionally, four Equifax executives sold $1.8 million in stock just after their own breach, and months before the public was informed. The Justice Department has an ongoing investigation on that sale. (See Equifax Hacked: Profit Before Protection?)

Not only that, the SEC says they will be watching this with an attentive eye: "The Commission, and the staff through its filing review process, continues to monitor cybersecurity disclosures carefully," according to the agency.

This differs from the SEC guidance of 2011, which totally ducked the question of cybersecurity incident effects and how it related to inside trading. But more than that, they also make sure companies understand that they are required to establish and maintain "appropriate and effective disclosure controls and procedures," which will result in the accurate and timely disclosures of material events, including those related to cybersecurity.

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The SEC hammered home the point that these robust disclosure controls and procedures assist companies in satisfying their disclosure obligations under the federal securities laws. This means that if they have not been implemented by a company, they may find themselves afoul of these same laws.

Omitting information in the regulatory filings a company makes will be a real problem as well.

The SEC considers omitted information to be material if the omitted information would have been viewed by the reasonable investor as having significantly altered the total mix of information available. That's a pretty wide criteria to be applied and really closes the barn door shut.

The commission goes on to state that the materiality of cybersecurity risks and incidents will depend on the range of harm that an incident could cause. That includes the harm to a company's reputation, financial performance, and customer and vendor relationships, not to mention the possibility of litigation or regulatory investigations or action.

The SEC did it for real, this time.

It has made it very clear just what companies will have to do to avoid being hammered by them in the future. The SEC may have been forced into this by the vagueness of their guidance in the past, but with this document has made up for that.

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— Larry Loeb has written for many of the last century's major "dead tree" computer magazines, having been, among other things, a consulting editor for BYTE magazine and senior editor for the launch of WebWeek.

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About the Author(s)

Larry Loeb

Blogger, Informationweek

Larry Loeb has written for many of the last century's major "dead tree" computer magazines, having been, among other things, a consulting editor for BYTE magazine and senior editor for the launch of WebWeek. He has written a book on the Secure Electronic Transaction Internet protocol. His latest book has the commercially obligatory title of Hack Proofing XML. He's been online since uucp "bang" addressing (where the world existed relative to !decvax), serving as editor of the Macintosh Exchange on BIX and the VARBusiness Exchange. His first Mac had 128 KB of memory, which was a big step up from his first 1130, which had 4 KB, as did his first 1401. You can e-mail him at [email protected].

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