How Should CISOs Navigate the SEC Cybersecurity and Disclosure Rules?

Question: How should security leaders navigate the SEC's cybersecurity and disclosure rules? What do they need to do in order to ensure compliance?

Michael Gray, CTO, Thrive: While the Securities and Exchange Commission's (SEC) Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure rules went into effect toward the end of 2023, many organizations still have questions when it comes to filings and disclosures. Under these rules, organizations have to disclose significant cybersecurity incidents and provide annual updates on their cybersecurity posture. Being able to accurately share cybersecurity updates, sometimes within short time frames, requires teams to have a deep understanding of 8-K and 10-K filings, and to implement new processes that simplify compliance.

The Difference Between an 8-K and 10-K Filing

8-K filings, in general, are periodic reports that public companies use to share information about major events that investors would likely want to know when making investment decisions. The SEC's cybersecurity rules now explicitly require that companies disclose material cybersecurity incidents via Item 1.05 of Form 8-K.

10-K filings, on the other hand, are detailed annual reports that summarize a public company's financial and operational performance over the past year. Part of a company's responsibility is to disclose the inner happenings of the business with stakeholders, and 10-K filings help to educate investors so that they can make informed decisions about their investments. Public companies must now include information about their cybersecurity strategy, governance, perceived threats, and material events that happened throughout the year within their yearly 10-K filings.

The 8-K: Define Materiality

A common question among cybersecurity teams today is how to determine whether a cybersecurity incident is "material" — incidents that have a significant impact on financial outcomes, as well as implications on the company's operations, reputation, compliance, and customer or stakeholder relations — and deserving of an 8-K filing. The SEC's guidance is that a cybersecurity incident is material if a rational investor would want to know about the event, such as incidents that result in substantial revenue losses, operational interruption or downtime, negative media coverage, legal risk, and customer data loss. For example, the Change Healthcare ransomware attack was material —patients' data was compromised, and it negatively affected hospitals, clinics, and healthcare professionals relying on the company. On the other hand, a phishing scheme targeted at an individual through a work email would not be considered material, as it most likely would not result in substantial revenue loss for the business or impact company stakeholders — especially if only personal information was given.

Companies must file an 8-K within four business days of identifying an incident, not within four business days of the incident occurring. If additional material information is identified that needs to be disclosed, companies would file an amendment to the original 8-K that disclosed the incident. In many cases, cybersecurity teams will uncover additional details about the incident that they can then share in subsequent reports to the SEC. Companies also have a duty to correct a prior disclosure that is found to be untrue as additional facts are determined.

The 10-K: Disclosing Too Much and Too Little Information

10-K filings are where cybersecurity teams share details on the current state of the company's cybersecurity program and strategy. The SEC's disclosure rules require that organizations identify who has oversight over cybersecurity activity and describe how they evaluate, discover, and mitigate material risks from cybersecurity threats. Item 106 of the 10-K is also where teams can revisit material incidents over the past year and provide additional commentary on the company's response and performance since the event. Item 106 also requires organizations to describe the board of directors' oversight of risks and management's role in assessing material risks. 10-K filings are not necessarily “new” in terms of information about an incident previously reported in an 8-K filing, but rather information about the resultant impact to the business and any identified cyber-risks the company faces that could result from a previous incident.

Again, the rule of thumb on how much information to disclose is that companies should give enough information for shareholders to be able to make sound investment decisions. A few details to consider include whether your company has a CISO, what cyber training programs are implemented for the board and employees at large, and if anyone on the board has detailed cybersecurity knowledge or expertise. More often than not, this means leaning into transparency rather than hiding critical details.

Make Compliance Simpler

Outside of 8-K and 10-K filings, employees should understand the company's overarching cybersecurity framework. This framework should cover how the organization approaches cybersecurity overall, document incident response procedures, and summarize how the enterprise improves over time.

Modern organizations have to be able to mitigate risk before and after cybersecurity incidents. Cybersecurity leaders should frequently audit their cybersecurity capabilities, as threats are evolving constantly. This involves identifying potential vulnerabilities and implementing effective risk management strategies, running real-time tests on your network and endpoints, and continuously communicating and training staff on cybersecurity policies. The SEC provides readiness assessments that can help in this area.

After an incident occurs, leaders should reflect on how well the organization responded and ensure key details are thoroughly documented within the 8-K. Companies should also engage with legal experts to review their compliance posture on a regular basis. Furthermore, employees need dedicated training on the SEC's cybersecurity disclosure rules, so that they are aware of the company's reporting obligations and understand their roles when it comes to incident response and annual readouts.