In remarks delivered in 2022 before the Northwestern Pritzker School of Law’s Annual Securities Regulation Institute, SEC Chair Gary Gensler reminded us that “cybersecurity is a team sport,” and that the private sector is often on the front lines. (See this PubCo post.) He might have said the same thing about cyber resilience—the topic of a Financial Times summit held last month and the subject of remarks delivered to that audience by Gurbir Grewal, the current SEC Director of Enforcement. What is cyber resilience? As defined by Grewal, it’s a concept that assumes that “breaches and cyber incidents are likely going to happen, and that firms must be prepared to respond appropriately when they do. In other words, it’s not a matter of if, but when.”

Citing a recent poll from Deloitte,  Grewal observed that over “a third of executives reported that their organization’s accounting and financial data was targeted by cyber adversaries last year.” As threats increase, Grewal maintained, cybersecurity is “foundational to maintaining the integrity of not just our securities markets, but our economy as a whole.” To maintain that integrity, the SEC has proposed rules aimed at cybersecurity for a variety of market participants, including companies. (See this PubCo post.) In actions taken, Enforcement is also doing its part to “ensure that registrants take their cybersecurity and disclosure obligations seriously,” guided by the five principles discussed below; companies “would be well-served by considering them as they work to enhance their cyber resilience.”

First, cyber attacks victimize not just the public company attacked, but also the investing public. Companies need to “make real-time decisions when responding to cyber events and around related disclosures”; it is important not to forget that “those decisions directly impact customers whose PII or financial information has been compromised—and those decisions may also be material to investors in publicly-traded companies.”  To that end, “in addition to ensuring that market participants are doing their part to prevent and respond to cyber events,” Enforcement’s “goal is to prevent additional victimization by ensuring that investors receive timely and accurate required disclosures. I believe that the enforcement actions that the SEC has brought to date in this space strike the right balance among these various considerations.”

Second, companies need to do more than pay lip service to their policies. According to Grewal, “firms need to have real policies that work in the real world, and then they need to actually  implement them; having generic ‘check the box’ cybersecurity policies simply doesn’t cut it.”  Here, Grewal points to Reg S-ID, the SEC’s Identity Theft Red Flags Rule, which requires financial institutions “to develop and implement a written identity theft prevention program to identify, detect, and respond to ‘red flags’ that indicate possible identity theft.” Enforcement has brought actions against several companies that, Grewal charged, just “paid lip service” to the requirements of the Rule, failing to properly implement their programs by failing to provide any guidance as to “how to identify or how to respond to those red flags once identified.”

Third, companies must “regularly review and update all relevant cybersecurity policies to keep up with constantly evolving threats. What worked 12 months ago probably isn’t going to work today, or at a minimum may be less effective.” Grewal advised that companies and their counsel take a look at the SEC’s “enforcement actions and public orders on these topics. They clearly outline what good compliance looks like and where and how registrants fall short with their cybersecurity obligations.”

Fourth, Grewal reminded us that “when a cyber incident does happen, the right information must be reported up the chain to those making disclosure decisions. If they don’t get the right information, it doesn’t matter how robust your disclosure policies are.”  To illustrate, he describes the action against First American Financial Corporation (discussed in the SideBar above) where, according to the order, “First American only disclosed the vulnerability after a reporter brought it to the company’s attention. You see, although the company’s information security personnel had actually identified that vulnerability months earlier, they failed to remediate it in accordance with the company’s own policies. They then compounded those mistakes by failing to report it to the senior executives responsible for the company’s disclosures. Those executives were, therefore, in the dark until the reporter brought the issue to light.”

Fifth, Grewal cautioned that Enforcement has “zero tolerance for gamesmanship around the disclosure decision.”  Here, Grewal is critical of companies that are “more concerned about reputational damage than about coming clean with shareholders and the customers whose data is at risk. Companies might, for example, stick their head in the sand, or work hard to persuade themselves that disclosure is not necessary based on their hyper technical readings of the rules, or by minimizing the cyber incident.” Not a good idea, Grewal emphasizes: “[i]t doesn’t work for the customers whose data is at risk. It doesn’t work for the shareholders who are kept in the dark about material information. And it most certainly doesn’t work for the company, which will most likely face stiffer penalties once the breach gets out, as it invariably will, and if it turns out that the company violated its obligations.” As an example of an action by Enforcement in this context, Grewal referred to the case against Pearson (discussed in the SideBar above), where the company “referred to that data privacy incident as a hypothetical risk, even though it had already occurred. Pearson did not disclose the breach until it was contacted by the media.”

Grewal then advised, in the event of a material incident, that companies not wait too long to provide public disclosure and talk to the SEC about it. Companies can “always complete” their internal investigations “after meeting your disclosure obligations, if any, and reaching out to us.” Companies that provide real cooperation with the SEC, “including by coming in to speak with us or self-reporting, receive real benefits, such as reduced penalties or even no penalties at all….In contrast, firms that do not fulfill their obligations will likely face civil penalties higher than they have in the past.”

Posted by Cydney Posner