# Conformed to Federal Register version > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Asec%3A8be9f2041df8b6b1 ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text Conformed to Federal Register version SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 229, 232, 239, 240, and 249 [Release Nos. 33-11216; 34-97989; File No. S7-09-22] RIN 3235-AM89 Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure AGENCY: Securities and Exchange Commission. ACTION: Final rule. SUMMARY: The Securities and Exchange Commission (“Commission”) is adopting new rules to enhance and standardize disclosures regarding cybersecurity risk management, strategy, governance, and incidents by public companies that are subject to the reporting requirements of the Securities Exchange Act of 1934. Specifically, we are adopting amendments to require current disclosure about material cybersecurity incidents. We are also adopting rules requiring periodic disclosures about a registrant’s processes to assess, identify, and manage material cybersecurity risks, management’s role in assessing and managing material cybersecurity risks, and the board of directors’ oversight of cybersecurity risks. Lastly, the final rules require the cybersecurity disclosures to be presented in Inline eXtensible Business Reporting Language (“Inline XBRL”). DATES: Effective date: The amendments are effective September 5, 2023. Compliance dates: See Section II.I (Compliance Dates). FOR FURTHER INFORMATION CONTACT: Nabeel Cheema, Special Counsel, at (202) 551-3430, in the Office of Rulemaking, Division of Corporation Finance; and, with respect to the application of the rules to business development companies, David Joire, Senior Special 1 Counsel, at (202) 551-6825 or IMOCC@sec.gov, Chief Counsel’s Office, Division of Investment Management, U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549. SUPPLEMENTARY INFORMATION: We are adopting amendments to: Commission Reference Regulation S-K Regulation S-T Securities Act of 1933 (“Securities Act”) 1 Securities Exchange Act of 1934 (“Exchange Act”) 2 1 15 U.S.C. 77a et seq. 2 15 U.S.C. 78a et seq. Rule 405 CFR Citation (17 CFR) §§ 229.10 through 229.1305 §§ 229.106 and 229.601 §§ 232.10 through 232.903 § 232.405 Form S-3 § 239.13 Rule 13a-11 § 240.13a-11 Rule 15d-11 Form 20-F Form 6-K Form 8-K Form 10-K § 240.15d-11 § 249.220f § 249.306 § 249.308 § 249.310 Items 106 and 601 2 Table of Contents Introduction and Background ................................................................................................. 5 Discussion of Final Amendments ......................................................................................... 13 A. Disclosure of Cybersecurity Incidents on Current Reports ........................................... 13 1. Proposed Amendments ................................................................................................. 13 2. Comments ..................................................................................................................... 16 3. Final Amendments ........................................................................................................ 27 B. Disclosures about Cybersecurity Incidents in Periodic Reports .................................... 46 1. Proposed Amendments ................................................................................................. 46 2. Comments ..................................................................................................................... 48 3. Final Amendments ........................................................................................................ 50 C. Disclosure of a Registrant’s Risk Management, Strategy and Governance Regarding Cybersecurity Risks .................................................................................................................. 53 1. Risk Management and Strategy .................................................................................... 53 a. Proposed Amendments ........................................................................................... 53 b. Comments ............................................................................................................... 56 c. Final Amendments .................................................................................................. 60 2. Governance ................................................................................................................... 65 a. Proposed Amendments ........................................................................................... 65 b. Comments ............................................................................................................... 67 c. Final Amendments .................................................................................................. 68 3. Definitions..................................................................................................................... 71 a. Proposed Definitions ............................................................................................... 71 b. Comments ............................................................................................................... 72 c. Final Definitions ..................................................................................................... 75 D. Disclosure Regarding the Board of Directors’ Cybersecurity Expertise ....................... 81 1. Proposed Amendments ................................................................................................. 81 2. Comments ..................................................................................................................... 82 3. Final Amendments ........................................................................................................ 85 E. Disclosure by Foreign Private Issuers............................................................................ 85 1. Proposed Amendments ................................................................................................. 85 2. Comments ..................................................................................................................... 86 3. Final Amendments ........................................................................................................ 87 F. Structured Data Requirements ....................................................................................... 88 1. Proposed Amendments ................................................................................................. 88 2. Comments ..................................................................................................................... 88 3. Final Amendments ........................................................................................................ 88 G. Applicability to Certain Issuers ..................................................................................... 89 1. Asset-Backed Issuers .................................................................................................... 89 2. Smaller Reporting Companies ...................................................................................... 91 H. Need for New Rules and Commission Authority .......................................................... 93 I. Compliance Dates ........................................................................................................ 107 III. OTHER MATTERS............................................................................................................ 107 IV. ECONOMIC ANALYSIS .................................................................................................. 108 A. Introduction .................................................................................................................. 108 I. II. 3 B. Economic Baseline....................................................................................................... 112 1. Current Regulatory Framework .................................................................................. 112 2. Affected Parties ........................................................................................................... 117 C. Benefits and Costs of the Final Rules .......................................................................... 118 1. Benefits ....................................................................................................................... 119 a. More Timely and Informative Disclosure............................................................. 119 b. Greater Uniformity and Comparability................................................................. 130 2. Costs............................................................................................................................ 134 3. Indirect Economic Effects........................................................................................... 143 D. Effects on Efficiency, Competition, and Capital Formation........................................ 145 E. Reasonable Alternatives............................................................................................... 146 1. Website Disclosure ..................................................................................................... 146 2. Disclosure through Periodic Reports .......................................................................... 147 3. Exempt Smaller Reporting Companies ....................................................................... 148 V. PAPERWORK REDUCTION ACT ................................................................................... 150 A. Summary of the Collections of Information ................................................................ 150 B. Summary of Comment Letters and Revisions to PRA Estimates ................................ 151 C. Effects of the Amendments on the Collections of Information ................................... 152 D. Incremental and Aggregate Burden and Cost Estimates for the Final Amendments .. 154 VI. FINAL REGULATORY FLEXIBILITY ANALYSIS ...................................................... 158 A. Need for, and Objectives of, the Final Amendments ................................................... 158 B. Significant Issues Raised by Public Comments ........................................................... 158 1. Estimate of Affected Small Entities and Impact to Those Entities ............................. 160 2. Consideration of Alternatives ..................................................................................... 162 C. Small Entities Subject to the Final Amendments ........................................................ 165 D. Projected Reporting, Recordkeeping, and other Compliance Requirements ............... 165 E. Agency Action to Minimize Effect on Small Entities ................................................. 166 Statutory Authority ..................................................................................................................... 169 4 I. Introduction and Background On March 9, 2022, the Commission proposed new rules, and rule and form amendments, to enhance and standardize disclosures regarding cybersecurity risk management, strategy, governance, and cybersecurity incidents by public companies that are subject to the reporting requirements of the Exchange Act. 3 The proposal followed on interpretive guidance on the application of existing disclosure requirements to cybersecurity risk and incidents that the Commission and staff had issued in prior years. In particular, in 2011, the Division of Corporation Finance issued interpretive guidance providing the Division’s views concerning operating companies’ disclosure obligations relating to cybersecurity (“2011 Staff Guidance”). 4 In that guidance, the staff observed that “[a]lthough no existing disclosure requirement explicitly refers to cybersecurity risks and cyber incidents, a number of disclosure requirements may impose an obligation on registrants to disclose such risks and incidents,” and further that “material information regarding cybersecurity risks and cyber incidents is required to be disclosed when necessary in order to make other required disclosures, in light of the circumstances under which they are made, not misleading.” 5 The guidance pointed specifically to disclosure obligations under 17 CFR 229.503 (Regulation S-K “Item 503(c)”) (Risk factors) (since moved to 17 CFR 229.105 (Regulation S-K “Item 105”)), 17 CFR 229.303 (Regulation S-K “Item 303”) (Management’s discussion and analysis of financial condition and results of operations), 17 CFR 229.101 (Regulation S-K “Item 101”) (Description of business), 17 CFR 229.103 (Regulation S-K “Item 103”) (Legal proceedings), and 17 CFR 229.307 3 See Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure, Release No. 33-11038 (Mar. 9, 2022) [87 FR 16590 (Mar. 23, 2022)] (“Proposing Release”). 4 See CF Disclosure Guidance: Topic No. 2—Cybersecurity (Oct. 13, 2011), available at https://www.sec.gov/divisions/corpfin/guidance/cfguidance-topic2.htm. 5 Id. 5 (Disclosure controls and procedures), as well as to Accounting Standards Codifications 350-40 (Internal-Use Software), 605-50 (Customer Payments and Incentives), 450-20 (Loss Contingencies), 275-10 (Risks and Uncertainties), and 855-10 (Subsequent Events). 6 In 2018, “[i]n light of the increasing significance of cybersecurity incidents,” the Commission issued interpretive guidance to reinforce and expand upon the 2011 Staff Guidance and also address the importance of cybersecurity policies and procedures, as well as the application of insider trading prohibitions in the context of cybersecurity (“2018 Interpretive Release”). 7 In addition to discussing the provisions previously covered in the 2011 Staff Guidance, the new guidance addressed 17 CFR 229.407 (Regulation S-K “Item 407”) (Corporate Governance), 17 CFR Part 210 (“Regulation S-X”), and 17 CFR Part 243 (“Regulation FD”). 8 The 2018 Interpretive Release noted that companies can provide current reports on Form 8-K and Form 6-K to maintain the accuracy and completeness of effective shelf registration statements, and it also advised companies to consider whether it may be appropriate to implement restrictions on insider trading during the period following an incident and prior to disclosure. 9 As noted in the Proposing Release, current disclosure practices are varied. For example, while some registrants do report material cybersecurity incidents, most typically on Form 10-K, review of Form 8-K, Form 10-K, and Form 20-F filings by staff in the Division of Corporation Finance has shown that companies provide different levels of specificity regarding the cause, scope, impact, and materiality of cybersecurity incidents. Likewise, staff has also observed that, 6 Id. 7 See Commission Statement and Guidance on Public Company Cybersecurity Disclosures, Release No. 3310459 (Feb. 21, 2018) [83 FR 8166 (Feb. 26, 2018)], at 8167. 8 Id. 9 Id. 6 while the majority of registrants that are disclosing cybersecurity risks appear to be providing such disclosures in the risk factor section of their annual reports on Form 10-K, the disclosures are sometimes included with other unrelated disclosures, which makes it more difficult for investors to locate, interpret, and analyze the information provided. 10 In the Proposing Release, the Commission explained that a number of trends underpinned investors’ and other capital markets participants’ need for more timely and reliable information related to registrants’ cybersecurity than was produced following the 2011 Staff Guidance and the 2018 Interpretive Release. First, an ever-increasing share of economic activity is dependent on electronic systems, such that disruptions to those systems can have significant effects on registrants and, in the case of large-scale attacks, systemic effects on the economy as a whole. 11 Second, there has been a substantial rise in the prevalence of cybersecurity incidents, propelled by several factors: the increase in remote work spurred by the COVID-19 pandemic; the increasing reliance on third-party service providers for information technology services; and the rapid monetization of cyberattacks facilitated by ransomware, black markets for stolen data, and crypto-asset technology. 12 Third, the costs and adverse consequences of cybersecurity incidents to companies are increasing; such costs include business interruption, lost revenue, ransom payments, remediation costs, liabilities to affected parties, cybersecurity protection costs, lost assets, litigation risks, and reputational damage. 13 10 See infra Section IV.A (noting that current cybersecurity disclosures appear in varying sections of companies’ periodic and current reports and are sometimes included with other unrelated disclosures). 11 Proposing Release at 16591-16592. See also U.S. FINANCIAL STABILITY OVERSIGHT COUNCIL, ANNUAL REPORT (2021), at 168, available at https://home.treasury.gov/system/files/261/FSOC2021AnnualReport.pdf (finding that “a destabilizing cybersecurity incident could potentially threaten the stability of the U.S. financial system”). 12 Proposing Release at 16591-16592. 13 Id. 7 Since publication of the Proposing Release, these trends have continued apace, with significant cybersecurity incidents occurring across companies and industries. For example, threat actors repeatedly and successfully executed attacks on high-profile companies across multiple critical industries over the course of 2022 and the first quarter of 2023, causing the Department of Homeland Security’s Cyber Safety Review Board to initiate multiple reviews. 14 Likewise, state actors have perpetrated multiple high-profile attacks, and recent geopolitical instability has elevated such threats. 15 A recent study by two cybersecurity firms found that 98 percent of organizations use at least one third-party vendor that has experienced a breach in the last two years. 16 In addition, recent developments in artificial intelligence may exacerbate cybersecurity threats, as researchers have shown that artificial intelligence systems can be leveraged to create code used in cyberattacks, including by actors not versed in programming. 17 Overall, evidence suggests companies may be underreporting cybersecurity incidents. 18 14 See Department of Homeland Security, Cyber Safety Review Board to Conduct Second Review on Lapsus$ (Dec. 2, 2022), available at https://www.dhs.gov/news/2022/12/02/cyber-safety-review-board-conduct-secondreview-lapsus; see also Tim Starks, The Latest Mass Ransomware Attack Has Been Unfolding For Nearly Two Months, WASH. POST (Mar. 27, 2023), available at https://www.washingtonpost.com/politics/2023/03/27/latestmass-ransomware-attack-has-been-unfolding-nearly-two-months/. 15 See, e.g., Press Release, Federal Bureau of Investigation, FBI Confirms Lazarus Group Cyber Actors Responsible for Harmony’s Horizon Bridge Currency Theft (Jan. 23, 2023), available at https://www.fbi.gov/news/press-releases/fbi-confirms-lazarus-group-cyber-actors-responsible-for-harmonyshorizon-bridge-currency-theft; Alert (AA22-257A), Cybersecurity & Infrastructure Security Agency, Iranian Islamic Revolutionary Guard Corps-Affiliated Cyber Actors Exploiting Vulnerabilities for Data Extortion and Disk Encryption for Ransom Operations (Sep. 14, 2022), available at https://www.cisa.gov/uscert/ncas/alerts/aa22-257a; National Security Agency et al., Joint Cybersecurity Advisory: Russian State-Sponsored and Criminal Cyber Threats to Critical Infrastructure (Apr. 20, 2022), available at https://media.defense.gov/2022/Apr/20/2002980529/-1/-1/1/joint_csa_russian_statesponsored_and_criminal_cyber_threats_to_critical_infrastructure_20220420.pdf. 16 SecurityScorecard, Cyentia Institute and SecurityScorecard Research Report: Close Encounters of the Third (and Fourth) Party Kind (Feb 1, 2023), available at https://securityscorecard.com/research/cyentia-closeencounters-of-the-third-and-fourth-party-kind/. 17 Check Point Research, OPWNAI: AI that Can Save the Day or Hack it Away (Dec. 19, 2022), available at https://research.checkpoint.com/2022/opwnai-ai-that-can-save-the-day-or-hack-it-away. 18 Bitdefender, Whitepaper: Bitdefender 2023 Cybersecurity Assessment (Apr. 2023), available at https://businessresources.bitdefender.com/bitdefender-2023-cybersecurity-assessment. 8 Legislatively, we note two significant developments occurred following publication of the Proposing Release. First, the President signed into law the Cyber Incident Reporting for Critical Infrastructure Act of 2022 (“CIRCIA”) 19 on March 15, 2022, as part of the Consolidated Appropriations Act of 2022. 20 The centerpiece of CIRCIA is the reporting obligation placed on companies in defined critical infrastructure sectors. 21 Once rules are adopted by the Cybersecurity & Infrastructure Security Agency (“CISA”), these companies will be required to report covered cyber incidents to CISA within 72 hours of discovery, and report ransom payments within 24 hours. 22 Importantly, reports made to CISA pursuant to CIRCIA will remain confidential; while the information contained therein may be shared across Federal agencies for cybersecurity, investigatory, and law enforcement purposes, the information may not be disclosed publicly, except in anonymized form. 23 We note that CIRCIA also mandated the creation of a “Cyber Incident Reporting Council . . . to coordinate, deconflict, and harmonize Federal incident reporting requirements” (the “CIRC”), of which the Commission is a member. 24 Second, on December 21, 2022, the President signed into law the Quantum Computing Cybersecurity Preparedness Act, which directs the Federal Government to adopt technology that is protected from decryption by quantum computing, a developing technology that may increase 19 Cyber Incident Reporting for Critical Infrastructure Act of 2022, Pub. L. No. 117-103, 136 Stat. 1038 (2022). 20 Consolidated Appropriations Act of 2022, H.R. 2471, 117th Cong. (2022). 21 The sectors are defined in Presidential Policy Directive / PPD-21, Critical Infrastructure Security and Resilience (Feb. 12, 2013), as: Chemical; Commercial Facilities; Communications; Critical Manufacturing; Dams; Defense Industrial Base; Emergency Services; Energy; Financial Services; Food and Agriculture; Government Facilities; Healthcare and Public Health; Information Technology; Nuclear Reactors, Materials, and Waste; Transportation Systems; Water and Wastewater Systems. Because these sectors encompass some private companies and do not encompass all public companies, CIRCIA’s reach is both broader and narrower than the set of companies subject to the rules we are adopting. 22 6 U.S.C. 681b(a)(1). 23 6 U.S.C. 681e. See infra Section II.A.3 for a discussion of why our final rules serve a different purpose and are not at odds with the goals of CIRCIA. 24 6 U.S.C. 681f. 9 computer processing capacity considerably and thereby render existing computer encryption vulnerable to decryption. 25 We received over 150 comment letters in response to the Proposing Release. 26 The majority of comments focused on the proposed incident disclosure requirement, although we also received substantial comment on the proposed risk management, strategy, governance, and board expertise requirements. In addition, the Commission's Investor Advisory Committee adopted recommendations (“IAC Recommendation”) with respect to the proposal, stating that it: supports the proposed incident disclosure requirement; supports the proposed risk management, strategy, and governance disclosure requirements; recommends the Commission reconsider the proposed board of directors’ cybersecurity expertise disclosure requirement; suggests requiring companies to disclose the key factors they used to determine the materiality of a reported cybersecurity 25 Quantum Computing Cybersecurity Preparedness Act, H.R. 7535, 117th Cong. (2022). More recently, the White House released a National Cybersecurity Strategy to combat the ongoing risks associated with cyberattacks. The National Cybersecurity Strategy seeks to rebalance the responsibility for defending against cyber threats toward companies instead of the general public, and looks to realign incentives to favor long-term investments in cybersecurity. See Press Release, White House, FACT SHEET: Biden-⁠Harris Administration Announces National Cybersecurity Strategy (Mar. 2, 2023), available at https://www.whitehouse.gov/briefingroom/statements-releases/2023/03/02/fact-sheet-biden-harris-administration-announces-nationalcybersecurity-strategy/. 26 The public comments we received are available at https://www.sec.gov/comments/s7-09-22/s70922.htm. On Mar. 9, 2022, the Commission published the Proposing Release on its website. The comment period for the Proposing Release was open for 60 days from issuance and publication on SEC.gov and ended on May 9, 2022. One commenter asserted that the comment period was not sufficient and asked the Commission to extend it by 30 days. See letter from American Chemistry Council (“ACC”). In Oct. 2022, the Commission reopened the comment period for the Proposing Release and other rulemakings because certain comments on the Proposing Release and other rulemakings were potentially affected by a technological error in the Commission’s internet comment form. See Resubmission of Comments and Reopening of Comment Periods for Several Rulemaking Releases Due to a Technological Error in Receiving Certain Comments, Release No. 33-11117 (Oct. 7, 2022) [87 FR 63016 (Oct. 18, 2022)] (“Reopening Release”). The Reopening Release was published on the Commission’s website on Oct. 7, 2022 and in the Federal Register on Oct. 18, 2022, and the comment period ended on Nov. 1, 2022. A few commenters asserted that the comment period for the reopened rulemakings was not sufficient and asked the Commission to extend the comment period for those rulemakings. See, e.g., letters from Attorneys General of the states of Montana et al. (Oct. 24, 2022) and U.S. Chamber of Commerce (Nov. 1, 2022). We have considered all comments received since Mar. 9, 2022 and do not believe an additional extension of the comment period is necessary. 10 incident; and suggests extending the proposed 17 CFR 229.106 (Regulation S-K “Item 106”) disclosure requirements to registration statements. 27 We are making a number of important changes from the Proposing Release in response to comments received. With respect to incident disclosure, we are narrowing the scope of disclosure, adding a limited delay for disclosures that would pose a substantial risk to national security or public safety, requiring certain updated incident disclosure on an amended Form 8-K instead of Forms 10-Q and 10-K for domestic registrants, and on Form 6-K instead of Form 20-F for foreign private issuers (“FPIs”), 28 and omitting the proposed aggregation of immaterial incidents for materiality analyses. We are streamlining the proposed disclosure elements related to risk management, strategy, and governance, and we are not adopting the proposed requirement to disclose board cybersecurity expertise. The following table summarizes the requirements we are adopting, including changes from the Proposing Release, as described more fully in Section II below: 29 27 See U.S. Securities and Exchange Commission Investor Advisory Committee, Recommendation of the Investor as Owner Subcommittee and Disclosure Subcommittee of the SEC Investor Advisory Committee Regarding Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure (Sept. 21, 2022), available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/20220921-cybersecurity-disclosurerecommendation.pdf. The Investor Advisory Committee also held a panel discussion on cybersecurity at its Mar. 10, 2022 meeting. See U.S. Securities and Exchange Commission Investor Advisory Committee, Meeting Agenda (Mar. 10, 2022), available at https://www.sec.gov/spotlight/investor-advisory-committee/iac031022agenda.htm. 28 An FPI is any foreign issuer other than a foreign government, except for an issuer that (1) has more than 50 percent of its outstanding voting securities held of record by U.S. residents; and (2) any of the following: (i) a majority of its executive officers or directors are citizens or residents of the United States; (ii) more than 50 percent of its assets are located in the United States; or (iii) its business is principally administered in the United States. 17 CFR 230.405. See also 17 CFR 240.3b-4(c). 29 The information in this table is not comprehensive and is intended only to highlight some of the more significant aspects of the final amendments. It does not reflect all of the amendments or all of the rules and forms that are affected by the final amendments, which are discussed in detail below. As such, this table should be read together with the entire release, including the regulatory text. 11 Item Summary Description of the Disclosure Requirement 30 Regulation S-K Item 106(b) – Registrants must describe their processes, if any, for the Risk management and assessment, identification, and management of material risks strategy from cybersecurity threats, and describe whether any risks from cybersecurity threats have materially affected or are reasonably likely to materially affect their business strategy, results of operations, or financial condition. Regulation S-K Item 106(c) – Governance Registrants must: - Describe the board’s oversight of risks from cybersecurity threats. - Describe management’s role in assessing and managing material risks from cybersecurity threats. Form 8-K Item 1.05 – Material Cybersecurity Incidents Registrants must disclose any cybersecurity incident they experience that is determined to be material, and describe the material aspects of its: - Nature, scope, and timing; and - Impact or reasonably likely impact. An Item 1.05 Form 8-K must be filed within four business days of determining an incident was material. A registrant may delay filing as described below, if the United States Attorney General (“Attorney General”) determines immediate disclosure would pose a substantial risk to national security or public safety. Form 20-F Form 6-K 30 Registrants must amend a prior Item 1.05 Form 8-K to disclose any information called for in Item 1.05(a) that was not determined or was unavailable at the time of the initial Form 8-K filing. FPIs must: - Describe the board’s oversight of risks from cybersecurity threats. - Describe management’s role in assessing and managing material risks from cybersecurity threats. FPIs must furnish on Form 6-K information on material cybersecurity incidents that they disclose or otherwise For purposes of this release, the terms “public companies,” “companies,” and “registrants” include issuers that are business development companies as defined in section 2(a)(48) of the Investment Company Act of 1940, which are a type of closed-end investment company that is not registered under the Investment Company Act, but do not include investment companies registered under that Act. 12 publicize in a foreign jurisdiction, to any stock exchange, or to security holders. Overall, we remain persuaded that, as detailed in the Proposing Release: under-disclosure regarding cybersecurity persists despite the Commission’s prior guidance; investors need more timely and consistent cybersecurity disclosure to make informed investment decisions; and recent legislative and regulatory developments elsewhere in the Federal Government, including those developments subsequent to the issuance of the Proposing Release such as CIRCIA 31 and the Quantum Computing Cybersecurity Preparedness Act, 32 while serving related purposes, will not effectuate the level of public cybersecurity disclosure needed by investors in public companies. II. Discussion of Final Amendments A. Disclosure of Cybersecurity Incidents on Current Reports 1. Proposed Amendments The Commission proposed to amend Form 8-K by adding new Item 1.05 that would require a registrant to disclose the following information regarding a material cybersecurity incident, to the extent known at the time of filing: • When the incident was discovered and whether it is ongoing; • A brief description of the nature and scope of the incident; • Whether any data were stolen, altered, accessed, or used for any other unauthorized purpose; • The effect of the incident on the registrant’s operations; and 31 Supra note 19. 32 Supra note 25. 13 • Whether the registrant has remediated or is currently remediating the incident. 33 The Commission clarified in the Proposing Release that this requirement would not extend to specific, technical information about the registrant’s planned response to the incident or its cybersecurity systems, related networks and devices, or potential system vulnerabilities in such detail as would impede the registrant’s response or remediation of the incident. 34 The Commission proposed to set the filing trigger for Item 1.05 as the date the registrant determines that a cybersecurity incident is material; as with all other Form 8-K items, the proposed filing deadline would be four business days after the trigger. 35 To protect against any inclination on the part of a registrant to delay making a materiality determination with a view toward prolonging the filing deadline, the Commission proposed adding Instruction 1 to Item 1.05 requiring that “a registrant shall make a materiality determination regarding a cybersecurity incident as soon as reasonably practicable after discovery of the incident.” 36 The Commission affirmed in the Proposing Release that the materiality standard registrants should apply in evaluating whether a Form 8-K would be triggered under proposed Item 1.05 would be consistent with that set out in the numerous cases addressing materiality in the securities laws, including TSC Industries, Inc. v. Northway, Inc., 37 Basic, Inc. v. Levinson, 38 and Matrixx Initiatives, Inc. v. Siracusano, 39 and likewise with that set forth in 17 CFR 230.405 (“Securities Act Rule 405”) and 17 CFR 240.12b-2 (“Exchange Act Rule 12b-2”). That is, 33 Proposing Release at 16595. 34 Id. 35 Id. 36 Id. at 16596. 37 TSC Indus. v. Northway, 426 U.S. 438, 449 (1976). 38 Basic Inc. v. Levinson, 485 U.S. 224, 232 (1988). 39 Matrixx Initiatives v. Siracusano, 563 U.S. 27 (2011). 14 information is material if “there is a substantial likelihood that a reasonable shareholder would consider it important” 40 in making an investment decision, or if it would have “significantly altered the ‘total mix’ of information made available.” 41 “Doubts as to the critical nature” of the relevant information should be “resolved in favor of those the statute is designed to protect,” namely investors. 42 The Commission explained that the timely disclosure of the information required by proposed Item 1.05 would enable investors and other market participants to assess the possible effects of a material cybersecurity incident on the registrant, including any short- and long-term financial effects or operational effects, resulting in information useful for their investment decisions. 43 Aligning the deadline for Item 1.05 with that of the other Form 8-K items would, the Commission maintained, significantly improve the timeliness of cybersecurity incident disclosures as well as standardize those disclosures. 44 The Commission did not propose to provide a reporting delay in cases of ongoing internal or external investigations of cybersecurity incidents. 45 Nevertheless, the Proposing Release requested comment on whether to allow a delay in reporting where the Attorney General determines that a delay is in the interest of national security. 46 40 TSC Indus., 426 U.S. at 449. 41 Id. 42 Id. at 448. 43 Proposing Release at 16595. 44 Id. 45 Id. at 16596. 46 Id. at 16598. 15 2. Comments Proposed Item 1.05 received a significant amount of feedback from commenters. Some commenters supported Item 1.05 as proposed, 47 saying that the current level of disclosure on cybersecurity incidents is inadequate to meet investor needs, and Item 1.05 would remedy this inadequacy by effectuating the disclosure of decision-useful information. 48 One commenter also anticipated that Item 1.05 would reduce the risk of insider trading by shortening the time between discovery of an incident and public disclosure. 49 Other commenters opposed proposed Item 1.05, for several reasons. Some commenters said that if proposed Item 1.05 were to result in disclosure while an incident is still ongoing, it would tip off the threat actor and thus make successful neutralization of the incident more difficult. 50 Commenters also expressed concern that public notice of a vulnerability could draw attacks from other threat actors who were previously unaware of the vulnerability; and such attacks could target the disclosing registrant or other companies with the same vulnerability, particularly if the vulnerability is with a third-party service provider used by multiple 47 See letters from American Institute of CPAs (“AICPA”); Better Markets (“Better Markets”); BitSight Technologies, Inc. (“BitSight”); California Public Employees’ Retirement System (“CalPERS”); Crindata, LLC (“Crindata”); Council of Institutional Investors (“CII”); Information Technology and Innovation Foundation (“ITIF”); North American Securities Administrators Association Inc. (“NASAA”); Professor Jerry Perullo (“Prof. Perullo”); Professor Preeti Choudhary (“Prof. Choudhary”); Tessa Mishoe (“T. Mishoe”). See also IAC Recommendation. 48 Id. 49 See letter from Better Markets. 50 See letters from ACC; American Gas Association and Interstate Natural Gas Association of America (“AGA/INGAA”); BioTechnology Innovation Organization (“BIO”); Bank Policy Institute, American Bankers Association, and Mid-Size Bank Coalition of America (“BPI et al.”); BSA / The Software Alliance (“BSA”); Business Roundtable (“Business Roundtable”); Canadian Bankers Association (“CBA”); Edison Electric Institute (“EEI”); Energy Infrastructure Council (“EIC”); Federation of American Hospitals (“FAH”); Financial Services Sector Coordinating Council (“FSSCC”); Information Technology Industry Council (“ITI”); LTSE Services, Inc. (“LTSE”); National Association of Manufacturers (“NAM”); National Defense Industrial Association (“NDIA”); Quest Diagnostics Incorporated (“Quest”); Rapid7, Inc. (“Rapid7”); Society for Corporate Governance (“SCG”); Securities Industry and Financial Markets Association (“SIFMA”); TransUnion; R Street Institute (“R Street”); U.S. Chamber of Commerce (“Chamber”). 16 companies. 51 Some of these commenters objected specifically to the requirement in Item 1.05 to disclose whether remediation has occurred, stating that this information could assist threat actors in their targeting or invite further targeted attacks, 52 while others more generally stated that the Item 1.05 disclosure would be overly detailed, such that it would give a road map to threat actors for planning attacks. 53 One commenter argued that the prospect of possibly having to file an Item 1.05 Form 8-K could chill threat information sharing within industries, because companies would fear that any cybersecurity risk information they share could later be used to question their disclosure decisions. 54 Some of the commenters that disagreed with the level of disclosure required by proposed Item 1.05 recommended that the Commission narrow the disclosure requirements of the rule. For example, one such commenter advised dropping the proposed requirement to disclose “when the incident was discovered,” arguing that this detail may cause confusion, particularly where an incident was detected some time ago but a significant aspect rendering it material surfaced only recently. 55 Another commenter opined that “whether the registrant has remediated or is currently remediating the incident” is duplicative of “whether it is ongoing,” so either of the two could be 51 See letters from ABA Committee on Federal Regulation of Securities (“ABA”); Aerospace Industries Association of America (“AIA”); Alliance for Automotive Innovation (“Auto Innovators”); AGA/INGAA; American Property Casualty Insurance Association (“APCIA”); BPI et al.; BSA; Business Roundtable; CBA; Chamber; Cellular Telecommunications and Internet Assoc. (“CTIA”); Cybersecurity Coalition; EEI; EIC; Empire State Realty Trust, Inc. (“Empire”); Enbridge Inc. (“Enbridge”); FSSCC; Internet Security Alliance; ITI; Microsoft Corporation (“Microsoft”); NDIA; PPG Industries, Inc. (“PPG”); PricewaterhouseCoopers LLP (“PWC”); Rapid7; R Street; SCG; SIFMA; U.S. Senator Rob Portman (“Sen. Portman”); Virtu Financial (“Virtu”). 52 See letters from ABA; AGA/INGAA; BPI et al.; Cybersecurity Coalition; Empire; Enbridge; PWC; SIFMA; SCG; Virtu. 53 See letters from AGA/INGAA; BSA; EIC; ITI; PPG. 54 See letter from Consumer Technology Association (“CTA”). 55 See letter from Prof. Perullo. 17 eliminated. 56 One commenter contended that a materiality filter should be added to the details required by Item 1.05, such that companies would have to disclose only details that themselves are material, rather than immaterial details of a material incident. 57 By contrast, there were also commenters that recommended expanding the disclosure requirements in the proposed rule. In this regard, some commenters recommended requiring that registrants disclose asset losses, intellectual property losses, and the value of business lost due to the incident. 58 Other suggestions included requiring that incidents be quantified as to their severity and impact via standardized rating systems, and that registrants disclose how they became aware of the incident, as this may shed light on the effectiveness of a company’s cybersecurity policies and procedures. 59 Additionally, commenters suggested banning trading by insiders during the time between the materiality determination and disclosure of the incident. 60 Commenters provided reactions to the application of Item 1.05 to incidents connected with third-party systems. A number of commenters contended that registrants should be exempt from having to disclose cybersecurity incidents in third-party systems they use because of their reduced control over such systems. 61 Similarly, several commenters advocated for a safe harbor for information disclosed about third-party systems, given registrants’ reduced visibility into such systems. 62 A few commenters suggested a longer reporting timeframe for third-party 56 See letter from ABA. 57 See letter from ITI. 58 See letters from Profs. Rajgopal & Sharpe; PWC. 59 See letters from BitSight; Cloud Security Alliance (“CSA”). 60 See letter from Prof. Mitts. 61 See letters from ABA; AIA; APCIA; Business Roundtable; Cybersecurity Coalition; Chamber; EIC; FAH; ISA; ITI; NAM; NDIA; National Multifamily Housing Council and National Apartment Association (“NMHC”); Paylocity; SIFMA. 62 See letters from Chevron Corporation (“Chevron”); APCIA; BPI et al.; BIO; CSA; Financial Executive International’s Committee on Corporate Reporting (“FEI”); ITI; ISA; NMHC; SIFMA. 18 incidents, because the registrant may be dependent on the third party for information (which may not be provided in a timely manner), and to avoid harm to other companies reliant on the same third party. 63 Commenters also recommended that Item 1.05 be phased in over a longer period of time with respect to third-party incidents, to give registrants time to develop information sharing processes with their third-party service providers. 64 Commenters also requested guidance or otherwise raised concerns where the proposed requirements might trigger disclosures by third-party service providers. A commenter requested clarity on whether an incident should be disclosed by the third-party service provider registrant that owns the affected system or the customer registrant that owns the affected information, or both. 65 And two commenters argued that third-party service providers should simply pass along information to their end customers, who would then make their own materiality determination and disclose accordingly; this should particularly be the case, a commenter said, where an attack on a third-party data center results in a data breach for an end customer but does not affect the services the data center provides. 66 The proposed timing of incident disclosure also received a significant level of public comment. For example, a few commenters said the level of detail required by Item 1.05 is impractical to produce in the allotted time. 67 Other commenters said that the proposed deadline would lead to the disclosure of tentative, unclear, or potentially inaccurate information that is not 63 See letters from ABA; R Street. 64 See letters from Business Roundtable; Deloitte & Touche LLP (“Deloitte”). 65 See letter from Business Roundtable. 66 See letters from BSA; ITI. 67 See letters from ABA; NMHC; Quest. 19 decision-useful to investors, 68 resulting in the market mispricing the underlying securities. 69 Commenters also argued that Item 1.05 is qualitatively different from all other Form 8-K items in that the trigger for Item 1.05 is largely outside the company’s control. 70 Some commenters worried the proposed deadline would lead to disclosure of “false positives,” that is, incidents that appear material at first but later on with the emergence of more information turn out not to be material. 71 Commenters suggested a range of alternative reporting deadlines for Item 1.05. A common suggestion was to modify the measurement date from the determination of materiality to another point in the lifecycle of the incident when the incident is no longer a threat to the registrant—commenters variously termed this as “containment,” “remediation,” “mitigation,” and comparable terms. 72 One commenter recommended conditioning a reporting delay on the registrant being actively engaged in containing the incident and reasonably believing that containment can be completed in a timely manner. 73 Similarly, several commenters recommended that the rule allow for a delay in providing Item 1.05 disclosure based on a registrant’s assessment of the potential negative consequences of public disclosure, using a 68 See letters from ABA; ACC; AIA; Auto Innovators; American Investment Council (“AIC”); BIO; Business Roundtable; CBA; Chamber; Confidentiality Coalition; CTIA; Davis Polk & Wardwell LLP (“Davis Polk”); Debevoise & Plimpton (“Debevoise”); Federated Hermes; FSSCC; Microsoft; NAM; Nasdaq Stock Market, LLC (“Nasdaq”); NDIA; Quest; SCG; TransUnion; Wilson Sonsini Goodrich & Rosati (“Wilson Sonsini”); Virtu. 69 See letters from ABA; ACC; AIA; AIC; BIO; BPI et al.; Business Roundtable; Confidentiality Coalition; Davis Polk; ISA; Nasdaq; PPG; Quest; Rapid7; SCG; Sen. Portman; SIFMA; Virtu. 70 See letters from CTIA; Debevoise; EIC; LTSE; New York City Bar Association (“NYC Bar”); Quest. 71 See letters from LTSE; PPG; SCG. 72 See letters from American Council of Life Insurers (“ACLI”); BCE Inc., Rogers Communications Inc., TELUS Corporation (“BCE”); BPI et al.; Business Roundtable; Chamber; CTA; Cybersecurity Coalition; Empire; FAH; Federated Hermes; FSSCC; ISA; ITI; NAM; Nasdaq; NDIA; NMHC; NYSE Group (“NYSE”); Quest; Rapid7; Sen. Portman; SCG; SIFMA; SM4RT Secure LLC (“SM4RT Secure”); TransUnion. 73 See letter from Rapid7. 20 variety of measures they suggested. 74 Another suggestion was to replace the proposed deadline with an instruction to disclose material incidents “without unreasonable delay.” 75 Some commenters recommended instead increasing the number of days between the reporting trigger and the reporting deadline. A few commenters recommended adding one business day to make the deadline five business days; 76 one noted this would result in every registrant having at least a full calendar week to gather information and prepare the Form 8-K. 77 Another commenter recommended a deadline of 15 business days, along with a cure period to allow registrants a defined period of time to fix potential reporting mistakes. 78 A few commenters recommended a 30-day deadline, 79 with their choice of 30 days tending to be a proxy for some other factor, such as containment or remediation, 80 or state notification requirements. 81 74 See letters from BSA (suggesting a “tailored, balancing test”); EEI (advocating delay “to the extent… the registrant in good faith concludes that its disclosure will expose it or others to ongoing or additional risks of a cybersecurity incident”); EIC; Microsoft (requesting that companies be allowed to “manage the timing” of disclosure “when compelling conditions exist such that premature disclosure would result in greater harm to the company, its investors, or the national digital ecosystem”); Nareit and The Real Estate Roundtable (“Nareit”) (stating delay should be permitted where disclosure “would exacerbate injury to the company and/or its shareholders”); SIFMA (advocating a “‘responsible disclosure’ exception” that applies “where disclosure of a cyber incident or vulnerability could have a more damaging effect than delayed disclosure”); Wilson Sonsini (stating “the Commission should allow board members to decide to delay reporting if doing so could cause material harm to the company”). 75 See letters from CTIA; National Restaurant Association (“NRA”). 76 See letters from AIC; Debevoise; NYC Bar. 77 See letter from AIC. 78 See letter from R Street. 79 See letters from APCIA; Hunton Andrews Kurth, LLP (“Hunton”); Rapid7. 80 See letters from APCIA (“[w]e believe that permitting a registrant to delay the filing for a short period of time strikes an appropriate balance between timely disclosure to shareholders and an opportunity for a registrant to achieve the best resolution for itself and its shareholders”); Rapid7 (“[i]n Rapid7’s experience, the vast majority of incidents can be contained and mitigated within that time frame [30 days]”). 81 See letters from APCIA (“[a]llowing up to 30 days for disclosure would also bring the SEC’s proposal in line with data breach disclosure requirements at the state level”); Hunton (“[w]hile state data breach notification laws vary from state to state, 30 days from the cybersecurity incident is the earliest date any state requires that notification to affected persons be made”). 21 Several commenters recommended addressing the timing concerns by replacing current reporting on Form 8-K with periodic reporting on Forms 10-Q and 10-K, to allow additional time to assess an incident’s impact before reporting to markets. 82 In this vein, one commenter likened cybersecurity incident disclosure to the disclosure of legal proceedings under Regulation S-K Item 103. 83 A few commenters recommended instead that the materiality trigger be replaced with a quantifiable trigger; for example, an incident implicating a specified percentage of revenue, or the costs of an incident exceeding a specified benchmark, could trigger disclosure. 84 Other commenters advocated for the disclosure trigger to be tied to any legal obligation that forces a registrant to notify persons outside the company. 85 Commenters also recommended a number of exceptions to the filing deadline. The most common recommendation was to include a provision allowing for delayed filing where there is an active law enforcement investigation or the disclosure otherwise implicates national security or public safety. 86 A representative comment in this vein advanced a provision whereby registrants may “delay reporting of a cybersecurity incident that is the subject of a bona fide 82 See letters from ABA; Davis Polk; Debevoise; LTSE; NYC Bar; Quest; SCG. 83 See letter from Quest. 84 See letters from BIO; Bitsight; EIC; Paylocity. 85 See letters from ABA; Business Roundtable. 86 See letters from ABA; ACC; ACLI; AGA/INGAA; AIA; AICPA; APCIA; Auto Innovators; Rep. Banks; BPI et al.; BIO; BSA; Business Roundtable; CBA; Chamber; Chevron; CII; CSA; CTA; CTIA; Cybersecurity Coalition; Debevoise; EEI; EIC; Empire; Enbridge; FAH; FedEx Corporation (“FedEx”); FEI; FSSCC; Global Privacy Alliance (“GPA”); Hunton; ISA; ITI; ITIF; Microsoft; NAM; Nareit; NASAA; NDIA; NMHC; NRA; NYC Bar; Prof. Perullo; Sen. Portman; PPG; PWC; Quest; R Street; Profs. Rajgopal & Sharpe; Rapid7; SCG; SIFMA; TransUnion; Virtu; USTelecom – The Broadband Association (“USTelecom”); U.S. Chamber of Commerce & various associations (“Chamber et al.”). 22 investigation by law enforcement,” because such “delay in reporting may not only facilitate such an investigation, it may be critical to its success.” 87 In calling for a law enforcement delay, associations for industries in critical sectors emphasized the national security implications of public cybersecurity incident disclosure. For example, one association explained that disclosure “may alert malicious actors that we have uncovered their illegal activities in circumstances where our defense and intelligence agencies wish to keep that information secret.” 88 Likewise, another association pointed out that, in its industry, companies “are likely to possess some of the nation’s most critical confidential information, including cybersecurity threat information furnished by government entities, such as the Federal Bureau of Investigation (FBI), the Department of Homeland Security (DHS), and the National Security Agency (NSA),” and therefore, disclosure may not be possible. 89 Commenters largely advocated for “a broad law enforcement exception that applies not only in the interest of national security but also when law enforcement believes disclosure will hinder their efforts to identify or capture the threat actor.” 90 Many commenters that responded to the Commission’s request for comment regarding a provision whereby the Attorney General determines that a delay is in the interest of national security indicated that such a provision should be more expansive and extend to other law enforcement authorities. 91 One of these commenters questioned whether the Attorney General would opine on matters “that are under the ambit of other Federal agencies, such as the Department of Homeland Security, Department of 87 See letter from Debevoise. 88 See letter from AIA. 89 See letter from EEI. 90 See letter from ABA. 91 See letters from BPI et al.; CBA; CSA; Hunton; ITIF; SCG; Wilson Sonsini. 23 State and the Department of Defense.” 92 Another commenter pointed out that “the Department of Justice is not the primary, or even the lead, organization in the Federal Government for cybersecurity response, rather the Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency is often the first call that companies make,” while “[f]or defense contractors, the Department of Defense is likely to have the highest interest in the timing of an announcement.” 93 For the financial industry specifically, one suggestion was to permit a delay if the Federal Reserve, Federal Deposit Insurance Corporation, or Office of the Comptroller of the Currency finds that disclosure would compromise the safety or soundness of the financial institution or of the financial system as a whole. 94 Some commenters specifically urged that state law enforcement be included within any delay provision, 95 and one commenter appeared to contemplate inclusion of foreign law enforcement. 96 A few commenters advocated for a confidential reporting system, whereby a registrant would initially file a nonpublic report with the Commission while a law enforcement investigation is ongoing, and then unseal the report upon the investigation’s completion. 97 A number of commenters provided feedback regarding proposed Instruction 1, which would have directed registrants to make their materiality determination regarding an incident “as 92 See letter from Hunton. This commenter also questioned whether law enforcement would be inclined to provide a written determination, particularly within four business days, because in its experience with State data breach laws, “the relevant state and federal law enforcement agencies seldom (if ever) provide written instructions when the relevant exception comes into play.” 93 See letter from Wilson Sonsini. 94 See letter from BPI et al. Cf. letter from FSSCC. 95 See, e.g., letter from ITIF. 96 See letter from CBA (stating “the scope of the contemplated exemption is indefensibly narrow, particularly for registrants with operations outside of the United States . . . there should be an exemption to permit delayed disclosure upon the request of any competent national, state or local law enforcement authority”). 97 See letters from CSA; Hunton; SCG. See also letter from LTSE (positing the Regulation SCI disclosure framework as a model for Item 1.05). 24 soon as reasonably practicable after discovery of the incident.” Several commenters recommended removing the instruction altogether as, in their view, it would place unnecessary pressure on companies to make premature determinations before they have sufficient information. 98 Other commenters stated that the instruction is too ambiguous for registrants to ascertain whether they have complied with it. 99 Conversely, one commenter advised the Commission not to provide further guidance on the meaning of “as soon as reasonably practicable,” explaining that doing so would interfere with each registrant’s individual assessment of what is practicable given its specific context, resulting in pressure to move more quickly than may be appropriate. 100 Another commenter likewise found that “as soon as reasonably practicable” is a “reasonable approach” that “provides public companies with the appropriate degree of flexibility to conduct a thorough assessment while ensuring that the markets get timely and relevant information.” 101 One commenter recommended a safe harbor for actions and determinations made in good faith to satisfy Instruction 1 that later turn out to be mistaken. 102 In response to a request for comment in the Proposing Release, several commenters recommended registrants be permitted to furnish rather than file an Item 1.05 Form 8-K, so that filers of an Item 1.05 Form 8-K would not be subject to liability under Section 18 of the Exchange Act. 103 A significant number of commenters also endorsed the proposal to amend 17 98 See letters from ABA; AGA/INGAA; Federated Hermes; ISA; Paylocity; Quest; SCG. 99 See letter from Center for Audit Quality (“CAQ”); CSA; Institute of Internal Auditors (“IIA”); LTSE; NYC Bar. 100 See letter from Cybersecurity Coalition. 101 See letter from NASAA. 102 See letter from Nasdaq. 103 See letters from BPI et al.; Business Roundtable; Chevron; CSA; EEI; LTSE; NAM; SCG. 25 CFR 240.13a-11(c) (“Rule 13a-11(c)”) and 17 CFR 240.15d-11(c) (“Rule 15d-11(c)”) under the Exchange Act to include Item 1.05 in the list of Form 8-K items eligible for a limited safe harbor from liability under Section 10(b) or 17 CFR 240.10b-5 (“Rule 10b-5”) under the Exchange Act. 104 Likewise, the proposal to amend General Instruction I.A.3.(b) of Form S-3 and General Instruction I.A.2 of Form SF-3 to provide that an untimely filing on Form 8-K regarding new Item 1.05 would not result in loss of Form S-3 or Form SF-3 eligibility received much support. 105 Finally, a number of commenters averred that Item 1.05 would conflict with other Federal and state cybersecurity reporting or other regulatory regimes. For example, one commenter stated Item 1.05 would counteract the goals of CIRCIA by requiring public disclosure of information the act would keep confidential, and went on to assert that CIRCIA was intended as the primary means for reporting incidents to the Federal Government. 106 Also related to CIRCIA, a number of commenters urged harmonization of the Commission’s proposal with forthcoming regulations expected from CISA pursuant to CIRCIA. 107 Several commenters alleged Item 1.05 would conflict with rules the Department of Health and Human Services (“HHS”) has adopted pursuant to the Health Insurance Portability and Accountability Act (“HIPAA”) regarding the reporting of private health information breaches. 108 A few commenters likewise said Item 1.05 would conflict with the reporting regime set forth in Federal Communications Commission (“FCC”) regulations for breaches of customer proprietary network 104 See letters from ABA; APCIA; BIO; Business Roundtable; Chevron; CTIA; Cybersecurity Coalition; Debevoise; EEI; LTSE; NYC Bar; PWC; SCG. 105 See letters from ABA; APCIA; BIO; Business Roundtable; Chevron; CTIA; Cybersecurity Coalition; Debevoise; EEI; LTSE; NYC Bar; PWC; SCG. 106 See letter from Sen. Portman. 107 See letters from ACC; ACLI; APCIA; BPI et al.; BIO; Confidentiality Coalition; Chamber; CTA; CTIA; Cybersecurity Coalition; EIC; FEI; FSSCC; Insurance Coalition (“IC”); ISA; ITI; ITIF; Nareit; NAM; NRA; R Street; SCG; SIFMA; USTelecom. 108 See letters from Chamber; Confidentiality Coalition; FAH; R Street. 26 information. 109 Conflicts were also alleged with regulations and programs of the Department of Defense (“DOD”), 110 Department of Energy (“DOE”), 111 and Department of Homeland Security (“DHS”). 112 Commenters called for harmonization of Item 1.05 with regulations issued by Federal banking regulators, 113 as well as with regulations of the Federal Trade Commission (“FTC”). 114 Some commenters noted the potential interaction between the proposed rules and state laws. 115 One commenter noted the McCarran-Ferguson Act, which provides that a state law preempts a Federal statute if the state law was enacted for the purpose of regulating the business of insurance and the Federal statute does not specifically relate to the business of insurance. 116 3. Final Amendments Having considered the comments, we remain convinced that investors need timely, standardized disclosure regarding cybersecurity incidents materially affecting registrants’ businesses, and that the existing regulatory landscape is not yielding consistent and informative disclosure of cybersecurity incidents from registrants. 117 However, we are revising the proposal 109 See letters from Chamber; CTIA; USTelecom. 110 See letter from Chamber et al. 111 See letter from EEI. 112 See letter from ACC. This letter additionally alleged conflicts with regulations of the Department of Energy, Transportation Security Agency, Department of Defense, and Environmental Protection Agency, but did not explain specifically where those conflicts lie. 113 See letters from FSSCC; Structured Finance Association (“SFA”); SIFMA. 114 See letters from BIO; CTIA. 115 See letters from IC (noting “[a]n important issue will be to ensure harmonized regulation between the federal government and the several states with proposed or preexisting cybersecurity regulations”); R Street (noting that state privacy laws “mandate reporting of incidents across very different timelines”); SIFMA (noting that “many state financial services and/or insurance regulators already require regulated entities certify cybersecurity compliance”). 116 See letter from IC. 117 As the Commission has previously stated, markets rely on timely dissemination of information to accurately and quickly value securities. Additional Form 8-K Disclosure Requirements and Acceleration of Filing Date, Release No. 33-8400 (Mar. 16, 2004) [69 FR 15593 (Mar. 25, 2004)] (“Additional Form 8-K Disclosure Release”). Congress recognized that the ongoing dissemination of accurate information by issuers about 27 in two important respects in response to concerns raised by commenters. First, we are narrowing the amount of information required to be disclosed, to better balance investors’ needs and registrants’ cybersecurity posture. And second, we are providing for a delay for disclosures that would pose a substantial risk to national security or public safety, contingent on a written notification by the Attorney General, who may take into consideration other Federal or other law enforcement agencies’ findings. As described above, commenters’ criticisms of Item 1.05 generally arose from two aspects of the proposal: (1) the scope of disclosure; and (2) the timing of disclosure. With respect to disclosure scope, we note in particular commenter concerns that the disclosure of certain details required by proposed Item 1.05 could exacerbate security threats, both for the registrants’ systems and for systems in the same industry or beyond, and could chill threat information sharing within industries. We agree that a balancing of concerns consistent with our statutory authority is necessary in crafting Item 1.05 to avoid empowering threat actors with actionable information that could harm a registrant and its investors. However, we are not persuaded, as some commenters suggested, 118 that we should forgo requiring disclosure of the existence of an incident while it is ongoing to avoid risks, such as the risk of tipping off threat actors. Some companies already disclose material cybersecurity incidents while they are ongoing and before they are fully remediated, but the timing, form, and substance of those disclosures are inconsistent. Several commenters indicated both that investors look for information regarding registrants’ cybersecurity incidents and that current disclosure levels are themselves and their securities is essential to the effective operation of the markets, and specifically recognized the importance of current reporting in this regard by requiring that “[e]ach issuer reporting under Section 13(a) or 15(d) … disclose to the public on a rapid and current basis such additional information concerning material changes in the financial condition or operations of the issuer … as the Commission determines … is necessary or useful for the protection of investors and in the public interest.” 15 U.S.C. 78m(l). 118 See supra note 50. 28 inadequate to their needs in making investment decisions. 119 In addition, we note below in Section IV evidence showing that delayed reporting of cybersecurity incidents can result in mispricing of securities, and that such mispricing can be exploited by threat actors, employees, related third parties, and others through trades made before an incident becomes public. 120 Accordingly, we believe it is necessary to adopt a requirement for uniform current reporting of material cybersecurity incidents. To that end, and to balance investors’ needs with the concerns raised by commenters, we are streamlining Item 1.05 to focus the disclosure primarily on the impacts of a material cybersecurity incident, rather than on requiring details regarding the incident itself. The final rules will require the registrant to “describe the material aspects of the nature, scope, and timing of the incident, and the material impact or reasonably likely material impact on the registrant, including its financial condition and results of operations.” We believe this formulation more precisely focuses the disclosure on what the company determines is the material impact of the incident, which may vary from incident to incident. The rule’s inclusion of “financial condition and results of operations” is not exclusive; companies should consider qualitative factors alongside quantitative factors in assessing the material impact of an incident. 121 By way of illustration, harm to a company’s reputation, customer or vendor relationships, or competitiveness may be examples of a material impact on the company. Similarly, the possibility of litigation or regulatory investigations or actions, including regulatory actions by 119 See letters from Better Markets; CalPERS; CII. 120 See infra notes 413 and 462. 121 See also Proposing Release at 16596 (stating that “[a] materiality analysis is not a mechanical exercise” and not solely quantitative, but rather should take into consideration “all relevant facts and circumstances surrounding the cybersecurity incident, including both quantitative and qualitative factors”). 29 state and Federal Governmental authorities and non-U.S. authorities, may constitute a reasonably likely material impact on the registrant. We are not adopting, as proposed, a requirement for disclosure regarding the incident’s remediation status, whether it is ongoing, and whether data were compromised. While some incidents may still necessitate, for example, discussion of data theft, asset loss, intellectual property loss, reputational damage, or business value loss, registrants will make those determinations as part of their materiality analyses. Further, we are adding an Instruction 4 to Item 1.05 to provide that a “registrant need not disclose specific or technical information about its planned response to the incident or its cybersecurity systems, related networks and devices, or potential system vulnerabilities in such detail as would impede the registrant’s response or remediation of the incident.” While the Commission provided this assurance in the Proposing Release, 122 we agree with some commenters that codifying it in the Item 1.05 instructions should provide added clarity to registrants on the type of disclosure required by Item 1.05. With respect to commenters’ questions concerning the application of Item 1.05 to incidents occurring on third-party systems, we are not exempting registrants from providing disclosures regarding cybersecurity incidents on third-party systems they use, nor are we providing a safe harbor for information disclosed about third-party systems. While we appreciate the commenters’ concerns about a registrant’s reduced control over such systems, we note the centrality of the materiality determination: whether an incident is material is not contingent on where the relevant electronic systems reside or who owns them. In other words, we do not believe a reasonable investor would view a significant breach of a registrant’s data as immaterial merely because the data were housed on a third-party system, especially as 122 Id. at 16595. 30 companies increasingly rely on third-party cloud services that may place their data out of their immediate control. 123 Instead, as discussed above, materiality turns on how a reasonable investor would consider the incident’s impact on the registrant. Depending on the circumstances of an incident that occurs on a third-party system, disclosure may be required by both the service provider and the customer, or by one but not the other, or by neither. We appreciate that companies may have reduced visibility into third-party systems; registrants should disclose based on the information available to them. The final rules generally do not require that registrants conduct additional inquiries outside of their regular channels of communication with third-party service providers pursuant to those contracts and in accordance with registrants’ disclosure controls and procedures. This is consistent with the Commission’s general rules regarding the disclosure of information that is difficult to obtain. 124 Turning to disclosure timing, we believe that the modifications from the proposed rules regarding the disclosures called for by Item 1.05 alleviate many of the concerns some commenters had regarding the proposed disclosure deadline of four business days from the materiality determination. Because the streamlined disclosure requirements we are adopting are focused on an incident’s basic identifying details and its material impact or reasonably likely material impact, the registrant should have the information required to be disclosed under this rule as part of conducting the materiality determination. For example, most organizations’ materiality analyses will include consideration of the financial impact of a cybersecurity 123 See Deloitte, Global Third-Party Risk Management Survey 2022, at 15, available at https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/risk/deloitte-uk-global-tprm-survey-report2022.pdf (discussing results of a global survey of 1,309 “senior leaders from a variety of organizations” indicating that “73% of respondents currently have a moderate to high level of dependence on [cloud-service providers]” and “[t]hat is expected to increase to 88% in the years ahead”). 124 See 17 CFR 230.409 and 17 CFR 240.12b-21, which provide that information need only be disclosed insofar as it is known or reasonably available to the registrant. Accordingly, we are not providing additional time to comply with Item 1.05 as it relates to third-party incidents, as requested by some commenters. 31 incident, so information regarding the incident’s impact on the registrant’s financial condition and results of operations will likely have already been developed when Item 1.05 is triggered. 125 Thus, we believe that the four business day timeframe from the date of a materiality determination will be workable. The reformulation of Item 1.05 also addresses the concern among commenters that the disclosure may be tentative and unclear, resulting in false positives and mispricing in the market. In the majority of cases, the registrant will likely be unable to determine materiality the same day the incident is discovered. The registrant will develop information after discovery until it is sufficient to facilitate a materiality analysis. 126 At that point, we believe investors are best served knowing, within four business days after the materiality determination, that the incident occurred and what led management to conclude the incident is material. While it is possible that occasionally there may be incidents that initially appear material but developments after the filing of the Item 1.05 Form 8-K reveal to be not material, the alternative of delaying disclosure beyond the four business day period after a materiality determination has the potential to lead to far more mispricing and will negatively impact investors making investment and voting decisions without the benefit of knowing that there is a material cybersecurity incident. Commenters posited an array of alternative deadlines for the Item 1.05 Form 8-K, as recounted above. We are not persuaded by commenters’ arguments that disclosure should be delayed until companies mitigate, contain, remediate, or otherwise diminish the harm of the incident, because, as discussed above, Item 1.05 does not require disclosure of the types of 125 To the extent any required information is not determined or is unavailable at the time of the required filing, Instruction 2 to Item 1.05, as adopted, directs the registrant to include a statement to this effect in the Form 8-K and then file a Form 8-K amendment containing such information within four business days after the registrant, without unreasonable delay, determines such information or within four business days after such information becomes available. See infra Section II.B.3. 126 As discussed below, registrants should develop such information without unreasonable delay. 32 details that have the potential to be exploited by threat actors, but rather focuses on the incident’s material impact or reasonably likely material impact on the registrant. While there may be, as commenters noted, some residual risk of the disclosure of an incident’s existence tipping off threat actors, such risk is justified, in our view, by investors’ need for timely information, and similar risk already exists today with some companies’ current cybersecurity incident disclosure practices. We are also not persuaded that Item 1.05 is sufficiently different from other Form 8-K items such that deviating from the form’s four business day deadline following the relevant trigger would be indicated. While some commenters argued that Item 1.05 is qualitatively different from all other Form 8-K filings in that its trigger is largely outside the company’s control, we disagree because other Form 8-K items may also be triggered unexpectedly, such as Item 4.01 (Changes in Registrant’s Certifying Accountants) and Item 5.02 (Departure of Directors or Principal Officers). And as compared to those items, the information needed for Item 1.05 may be further along in development when the filing is triggered, whereas, for example, a company may have no advance warning that a principal officer is departing. With respect to the five business day deadline suggested by a few commenters to allow registrants a full calendar week from the materiality determination to the disclosure, we note that in the majority of cases registrants will have had additional time leading up to the materiality determination, such that disclosure becoming due less than a week after discovery should be uncommon. More generally with respect to the various alternative timing suggestions, we observe that the Commission adopted the uniform four business day deadline in 2004 to simplify the previous bifurcated deadlines, and we find commenters have not offered any compelling 33 rationale to return to bifurcated deadlines. 127 Form 8-K provides for current reporting of events that tend to be material to investor decision-making, and we see no reason to render the reporting of Item 1.05 less current than other Form 8-K items. In the Proposing Release, the Commission requested comment on whether to allow registrants to delay filing an Item 1.05 Form 8-K where the Attorney General determines that a delay is in the interest of national security. 128 In response to comments, we are adopting a delay provision in cases where disclosure poses a substantial risk to national security or public safety. Pursuant to Item 1.05(c), a registrant may delay making an Item 1.05 Form 8-K filing if the Attorney General determines that the disclosure poses a substantial risk to national security or public safety and notifies the Commission of such determination in writing. 129 Initially, disclosure may be delayed for a time period specified by the Attorney General, up to 30 days following the date when the disclosure was otherwise required to be provided. The delay may be extended for an additional period of up to 30 days if the Attorney General determines that disclosure continues to pose a substantial risk to national security or public safety and notifies the Commission of such determination in writing. In extraordinary circumstances, disclosure may be delayed for a final additional period of up to 60 days if the Attorney General determines that disclosure continues to pose a substantial risk to national security and notifies the Commission of such determination in writing. We are 127 See Additional Form 8-K Disclosure Release. See also Proposed Rule: Additional Form 8-K Disclosure Requirements and Acceleration of Filing Date, Release No. 33-8106 (June 17, 2002) [67 FR 42914 (June 25, 2002)]. 128 Proposing Release at 16598. 129 We note that the delay provision we are adopting does not relieve a company’s obligations under Regulation FD or with respect to the securities laws’ antifraud prohibitions that proscribe certain insider trading, including Exchange Act Section 10(b). Under Regulation FD, material nonpublic information disclosed to any investor, for example, through investor outreach activities, would be required to be disclosed publicly, subject to limited exceptions. See 17 CFR 243.100 et seq. 34 providing for the final additional delay period in recognition that, in extraordinary circumstances, national security concerns may justify additional delay beyond that warranted by public safety concerns, due to the relatively more critical nature of national security concerns. Beyond the final 60-day delay, if the Attorney General indicates that further delay is necessary, the Commission will consider additional requests for delay and may grant such relief through Commission exemptive order. 130 We have consulted with the Department of Justice to establish an interagency communication process to allow for the Attorney General’s determination to be communicated to the Commission in a timely manner. The Department of Justice will notify the affected registrant that communication to the Commission has been made, so that the registrant may delay filing its Form 8-K. We agree with commenters that a delay is appropriate for the limited instances in which public disclosure of a cybersecurity incident may cause harm to national security or public safety. The final rules appropriately balance such security concerns against investors’ informational needs. In particular, the provision’s “substantial risk to national security or public safety” bases are sufficiently expansive to ensure that significant risks of harm from disclosure may be protected against, while also ensuring that investors are not denied timely access to material information. 131 With respect to commenters who recommended that other Federal 130 Any exercise of exemptive authority in these circumstances would need to meet all of the standards of Section 36 of the Exchange Act. Furthermore, Item 1.05 of Form 8-K in no way limits the Commission’s general exemptive authority under Section 36. 131 The delay provision for substantial risk to national security or public safety is separate from Exchange Act Rule 0-6, which provides for the omission of information that has been classified by an appropriate department or agency of the Federal Government for the protection of the interest of national defense or foreign policy. If the information a registrant would otherwise disclose on an Item 1.05 Form 8-K or pursuant to Item 106 of Regulation S-K or Item 16K of Form 20-F is classified, the registrant should comply with Exchange Act Rule 0-6. 35 agencies and non-Federal law enforcement agencies also be permitted to trigger a delay or who argued that other agencies may be the primary organization in the Federal Government for the response, we note that the rule does not preclude any such agency from requesting that the Attorney General determine that the disclosure poses a substantial risk to national security or public safety and communicate that determination to the Commission. However, we believe that designating a single law enforcement agency as the Commission’s point of contact on such delays is critical to ensuring that the rule is administrable. Turning to other timing-related issues raised by commenters, we are not adopting commenters’ suggestion to replace Item 1.05 with periodic reporting of material cybersecurity incidents on Forms 10-Q and 10-K because such an approach may result in significant variance as to when investors learn of material cybersecurity incidents. Based on when an incident occurs during a company’s reporting cycle, the timing between the materiality determination and reporting on the next Form 10-Q or Form 10-K could vary from a matter of months to a matter of weeks or less. For example, if two companies experience a similar cybersecurity incident, but one determines the incident is material early during a quarterly period and the other makes such determination at the end of the quarterly period, commenters’ suggested approach would have both companies report the incident around the same time despite the first company having determined the incident was material weeks or months sooner, which would result in a significant delay in this information being provided to investors. Such variance would therefore reduce comparability across registrants and may put certain registrants at a competitive disadvantage. We also decline to use a quantifiable trigger for Item 1.05 because some cybersecurity incidents may be material yet not cross a particular financial threshold. We note above that the 36 material impact of an incident may encompass a range of harms, some quantitative and others qualitative. A lack of quantifiable harm does not necessarily mean an incident is not material. For example, an incident that results in significant reputational harm to a registrant may not be readily quantifiable and therefore may not cross a particular quantitative threshold, but it should nonetheless be reported if the reputational harm is material. Similarly, whereas a cybersecurity incident that results in the theft of information may not be deemed material based on quantitative financial measures alone, it may in fact be material given the impact to the registrant that results from the scope or nature of harm to individuals, customers, or others, and therefore may need to be disclosed. In another change from the proposal, and to respond to commenters’ concerns that the proposed “as soon as reasonably practicable” language in Instruction 1 could pressure companies to draw conclusions about incidents with insufficient information, we are revising the instruction to state that companies must make their materiality determinations “without unreasonable delay.” As explained in the Proposing Release, the instruction was intended to address any concern that some registrants may delay making such a determination to avoid a disclosure obligation. 132 We understand commenter concerns that the proposed instruction could result in undue pressure to make a materiality determination before a registrant has sufficient information to do so, and we recognize that a materiality determination necessitates an informed and deliberative process. We believe the revised language should alleviate this unintended consequence, while providing registrants notice that, though the determination need not be rushed prematurely, it also cannot be unreasonably delayed in an effort to avoid timely disclosure. For example, for incidents that 132 Proposing Release at 16596. 37 impact key systems and information, such as those the company considers its “crown jewels,” 133 as well as incidents involving unauthorized access to or exfiltration of large quantities of particularly important data, a company may not have complete information about the incident but may know enough about the incident to determine whether the incident was material. In other words, a company being unable to determine the full extent of an incident because of the nature of the incident or the company’s systems, or otherwise the need for continued investigation regarding the incident, should not delay the company from determining materiality. Similarly, if the materiality determination is to be made by a board committee, intentionally deferring the committee’s meeting on the materiality determination past the normal time it takes to convene its members would constitute unreasonable delay. 134 As another example, if a company were to revise existing incident response policies and procedures in order to support a delayed materiality determination for or delayed disclosure of an ongoing cybersecurity event, such as by extending the incident severity assessment deadlines, changing the criteria that would require reporting an incident to management or committees with responsibility for public disclosures, or introducing other steps to delay the determination or disclosure, that would constitute unreasonable delay. In light of the revision to Instruction 1, we find that a safe harbor, as suggested by some commenters, is unnecessary; adhering to normal internal practices and disclosure controls and procedures will suffice to demonstrate good faith compliance. Importantly, we remind registrants, as the Commission did in the Proposing Release, that 133 See National Cybersecurity Alliance, Identify Your “Crown Jewels” (July 1, 2022), available at https://staysafeonline.org/cybersecurity-for-business/identify-your-crown-jewels/ (explaining that “[c]rown jewels are the data without which your business would have difficulty operating and/or the information that could be a high-value target for cybercriminals”). 134 We note that Form 8-K Item 1.05 does not specify whether the materiality determination should be performed by the board, a board committee, or one or more officers. The company may establish a policy tasking one or more persons to make the materiality determination. Companies should seek to provide those tasked with the materiality determination information sufficient to make disclosure decisions. 38 “[d]oubts as to the critical nature” of the relevant information “will be commonplace” and should “be resolved in favor of those the statute is designed to protect,” namely investors. 135 Revised Instruction 1 should also reassure registrants that they should continue sharing information with other companies or government actors about emerging threats. Such information sharing may not necessarily result in an Item 1.05 disclosure obligation. The obligation to file the Item 1.05 disclosure is triggered once a company has developed information regarding an incident sufficient to make a materiality determination, and a decision to share information with other companies or government actors does not in itself necessarily constitute a determination of materiality. A registrant may alert similarly situated companies as well as government actors immediately after discovering an incident and before determining materiality, so long as it does not unreasonably delay its internal processes for determining materiality. As proposed, we are adding Item 1.05 to the list of Form 8-K items in General Instruction I.A.3.(b) of Form S-3 , so that the untimely filing of an Item 1.05 Form 8-K will not result in the loss of Form S-3 eligibility. 136 We note the significant support from commenters regarding this proposal, and as noted in the Proposing Release, continue to believe that the consequences of the loss of Form S-3 eligibility would be unduly severe given the circumstances that will surround Item 1.05 disclosures. Likewise, as supported by many commenters, we are adopting as proposed amendments to Rules 13a-11(c) and 15d-11(c) under the Exchange Act to include new Item 1.05 in the list of Form 8-K items eligible for a limited safe harbor from liability under Section 10(b) or Rule 10b-5 under the Exchange Act. This accords with the view the 135 Proposing Release at 16596 (quoting TSC Indus. v. Northway, 426 U.S. at 448). The Court’s opinion in TSC Indus. has a nuanced discussion of the balance of considerations in setting a materiality standard. 426 U.S. at 448-450. 136 Because of our decision to exempt asset-backed issuers from the new rules (see infra Section II.G.1), we are not amending Form SF-3. 39 Commission articulated in 2004 that the safe harbor is appropriate if the triggering event for the Form 8-K requires management to make a rapid materiality determination. 137 We decline to permit registrants to furnish rather than file the Item 1.05 Form 8-K, as suggested by some commenters. While we understand commenters’ points that reducing liability may ease the burden on registrants, we believe that treating Item 1.05 disclosures as filed will help promote the accuracy and reliability of such disclosures for the benefit of investors. Of the existing Form 8-K items, only Items 2.02 (Results of Operations and Financial Condition) and 7.01 (Regulation FD Disclosure) are permitted to be furnished rather than filed. The Commission created exceptions for those two items to allay concerns that do not pertain here. Specifically, with respect to Item 2.02, the Commission was motivated by concerns that requiring the information to be filed would discourage registrants from proactively issuing earnings releases and similar disclosures. 138 Similarly, with respect to Item 7.01, the Commission decided to allow the disclosure to be furnished to address concerns that, if required to be filed, the disclosure could be construed as an admission of materiality, which might lead some registrants to avoid making proactive disclosure. 139 By contrast, Item 1.05 is not a voluntary disclosure, and it is by definition material because it is not triggered until the registrant determines the materiality of an incident. It is thus more akin to the Form 8-K items other than Items 2.02 and 7.01, in that it is a description of a material event that has occurred about which investors need adequate information. Therefore, the final rules require an Item 1.05 Form 8-K to be filed. 137 Additional Form 8-K Disclosure Release at 15607. 138 See Conditions for Use of Non-GAAP Financial Measures, Release No. 33-8176 (Jan. 22, 2003) [68 FR 4819 (Jan. 30, 2003)]. 139 See Selective Disclosure and Insider Trading, Release No. 33-7881 (Aug. 15, 2000) [65 FR 51715 (Aug. 24, 2000)]. 40 We are not including a new rule to ban trading by insiders during the materiality determination time period, as suggested by some commenters. Those with a fiduciary duty or other relationship of trust and confidence are already prohibited from trading while in possession of material, nonpublic information. 140 And because we are adopting the four business days from materiality determination deadline, we agree with the point raised by some commenters that the risk of insider trading is low given the limited time period between experiencing a material incident and public disclosure. We also note that we recently adopted amendments to 17 CFR 240.10b5-1 (“Rule 10b5-1”) that added a certification condition for directors and officers wishing to avail themselves of the rule’s affirmative defense; specifically, if relying on the amended affirmative defense, directors and officers need to certify in writing, at the time they adopt the trading plan, that they are unaware of material nonpublic information about the issuer or its securities, and are adopting the plan in good faith and not as part of a plan or scheme to evade the insider trading prohibitions. 141 Therefore, given the timing of the incident disclosure requirement as well as the recently adopted amendments to Rule 10b5-1, we do not find need for a new rule banning trading by insiders during the time period between the materiality determination and disclosure. A number of commenters raised concerns about conflicts with other Federal laws and regulations. Of the Federal laws and regulations that we reviewed and commenters raised concerns with, we have identified one conflict, with the FCC’s notification rule for breaches of 140 United States v. O’Hagan, 521 U.S. 642 (1997). 141 See Insider Trading Arrangements and Related Disclosures, Release No. 33-11138 (Dec. 14, 2022) [87 FR 80362 (Dec. 29, 2022)]. 41 customer proprietary network information (“CPNI”). 142 Of the remaining Federal laws and regulations noted by commenters as presenting conflicts, our view is that Item 1.05 neither directly conflicts with nor impedes the purposes of other such laws and regulations. The FCC’s rule for notification in the event of breaches of CPNI requires covered entities to notify the United States Secret Service (“USSS”) and the Federal Bureau of Investigation (“FBI”) no later than seven business days after reasonable determination of a CPNI breach, and further directs the entities to refrain from notifying customers or disclosing the breach publicly until seven business days have passed following the notification to the USSS and FBI. 143 To accommodate registrants who are subject to this rule and may as a result face conflicting disclosure timelines, 144 we are adding paragraph (d) to Item 1.05 providing that such registrants may delay making a Form 8-K disclosure up to the seven business day period following notification to the USSS and FBI specified in the FCC rule, 145 with written notification to the Commission. 146 142 47 CFR 64.2011. CPNI is defined in 47 CFR 222(h)(1) as: “(A) information that relates to the quantity, technical configuration, type, destination, location, and amount of use of a telecommunications service subscribed to by any customer of a telecommunications carrier, and that is made available to the carrier by the customer solely by virtue of the carrier-customer relationship; and (B) information contained in the bills pertaining to telephone exchange service or telephone toll service received by a customer of a carrier; except that such term does not include subscriber list information.” 143 We note that the FCC recently proposed amending its rule; among other things, the proposal would eliminate the seven-business day waiting period, potentially eliminating the conflict. Federal Communications Commission, Data Breach Reporting Requirements, 88 FR 3953 (Jan. 23, 2023). 144 Commission staff consulted with FCC staff about a potential delay provision to address any conflict between the FCC rule and the Form 8-K reporting requirements. 145 The exception we are creating does not apply to 47 CFR 64.2011(b)(3), which provides that the USSS or FBI may direct the entity to further delay notification to customers or public disclosure beyond seven business days if such disclosure “would impede or compromise an ongoing or potential criminal investigation or national security.” If the USSS or FBI believes that disclosure would result in a substantial risk to national security or public safety, it may, as explained above, work with the Department of Justice to seek a delay of disclosure. 146 Such notice should be provided through correspondence on EDGAR no later than the date when the disclosure required by Item 1.05 was otherwise required to be provided. 42 We also considered the conflicts commenters alleged with CIRCIA. Specifically, they stated that Item 1.05 is at odds with the goals of CIRCIA, and that it may conflict with forthcoming regulations from CISA. The confidential reporting system established by CIRCIA serves a different purpose from Item 1.05 and through different means; the former focuses on facilitating the Federal Government’s preparation for and rapid response to cybersecurity threats, while the latter focuses on providing material information about public companies to investors in a timely manner. While CISA has yet to propose regulations to implement CIRCIA, given the statutory authority, text, and legislative history of CIRCIA, it appears unlikely the regulations would affect the balance of material information available to investors about public companies, because the reporting regime CIRCIA establishes is confidential. 147 Nonetheless, the Commission participates in interagency working groups on cybersecurity regulatory implementation, and will continue to monitor developments in this area to determine if modification to Item 1.05 becomes appropriate in light of future developments. 148 We also considered the HIPAA-related conflict alleged by commenters, specifically with respect to HHS’s rule on Notification in the Case of Breach of Unsecured Protected Health Information. That rule provides, in the event of a breach of unsecured protected health information, for the covered entity to provide notification to affected individuals “without unreasonable delay and in no case later than 60 calendar days after discovery of a breach.” 149 If the breach involves more than 500 residents of a state or jurisdiction, the rule directs the covered 147 6 U.S.C. 681e. 148 Should a conflict arise in the future with CISA regulations or regulations of another Federal agency, the Commission can address such conflict via rulemaking or other action at that time. 149 45 CFR 164.404(b). The notification must describe the breach, the types of unsecured protected health information involved, steps the individuals should take to protect themselves, what the entity is doing to mitigate harm and remediate, and where the individuals can seek additional information. Id. 43 entity to also notify prominent media outlets within the same timeframe. 150 The rule further provides that if a company receives written notice from “a law enforcement official” requesting a delay and specifying the length of the delay, then the company “shall … delay such notification, notice, or posting for the time period specified by the official.” 151 We do not view Form 8-K Item 1.05 as implicated by the HHS rule. Importantly, the HHS rule’s delay provision applies specifically to any “notification, notice, or posting required under this subpart,” or in other words notice to affected individuals, media, and the Secretary of HHS. 152 Such notification focuses on the consequences of the breach for the affected individuals; for example, individuals must be told what types of protected health information were accessed, and what steps they should take to protect themselves from harm. 153 This is different from the disclosure required by Item 1.05, which focuses on the consequences for the company that are material to investors, and whose timing is tied not to discovery but to a materiality determination. The HHS rule does not expressly preclude the latter type of public disclosure, or other potential communications companies experiencing a breach may make. Therefore, we believe that a registrant subject to the HHS rule will not face a conflict in complying with Item 1.05. 154 We also considered the conflicts commenters alleged with regulations and programs of DOD, DOE, DHS, the Federal banking regulatory agencies, state insurance laws, and miscellaneous other Federal agencies or laws. We find that, while there may be some overlap of 150 45 CFR 164.406. 151 45 CFR 164.412. 152 Id. 153 45 CFR 164.404(c). 154 For the same reason, the Federal Trade Commission’s Health Breach Notification rule, which is similar to HHS’s rule, does not present a conflict either. See 16 CFR part 318. 44 subject matter, Item 1.05 neither conflicts with nor impedes the purpose of those regulations and programs. 155 We disagree with one commenter’s assertion that cybersecurity incident disclosure “falls squarely within the jurisdiction of state insurance commissioners” as state cybersecurity incident reporting regulations would not pertain to the “business of insurance” as courts have interpreted the McCarran-Ferguson Act, and the commenter did not note any particular state insurance laws that would present a conflict. 156 With respect to Federal banking regulatory agencies specifically, we note that, in the event they believe that the disclosure of a material cybersecurity incident would threaten the health of the financial system in such a way that results in a substantial risk to national security or public safety, they may, as explained above, work with the Department of Justice to seek to delay disclosure. It would not be practical to further harmonize Item 1.05 with other agencies’ cybersecurity incident reporting regulations, as one commenter suggested, 157 because Item 1.05 serves a different purpose—it is focused on the needs of investors, rather than the needs of regulatory agencies, affected individuals, or the like. With respect to state insurance and privacy laws, commenters did not provide any evidence sufficient to alter the Commission’s finding in the Proposing Release that, to the extent that Item 1.05 would require disclosure in a situation where state law would excuse or delay notification, we consider prompt reporting of material cybersecurity incidents to investors critical to investor protection and well-functioning, orderly, and efficient markets. 155 For example, one commenter alleged conflicts with DHS’s Chemical Facilities Anti-Terrorism Standards program (“CFATS”) and with the Maritime Transportation Security Act (“MTSA”). See letter from American Chemistry Council. Both CFATS and MTSA provide for the protection of certain sensitive information, but neither is implicated by cybersecurity incident disclosure to the Commission. 156 See, e.g., SEC v. National Sec., Inc., 393 U.S. 453 (1969). 157 See letter from BIO. 45 B. Disclosures about Cybersecurity Incidents in Periodic Reports 1. Proposed Amendments The Commission proposed to add new Item 106 to Regulation S-K to, among other things, require updated cybersecurity disclosure in periodic reports. If a registrant previously provided disclosure regarding one or more cybersecurity incidents pursuant to Item 1.05 of Form 8-K, proposed 17 CFR 229.106(d)(1) (Regulation S-K “Item 106(d)(1)”) would require such registrant to disclose “any material changes, additions, or updates” on the registrant’s quarterly report on Form 10-Q or annual report on Form 10-K. 158 In addition, proposed Item 106(d)(1) would require disclosure of the following information: • Any material effect of the incident on the registrant’s operations and financial condition; • Any potential material future impacts on the registrant’s operations and financial condition; • Whether the registrant has remediated or is currently remediating the incident; and • Any changes in the registrant’s policies and procedures as a result of the cybersecurity incident, and how the incident may have informed such changes. 159 The Commission explained that it paired current reporting under Item 1.05 of Form 8-K with periodic reporting under 17 CFR 229.106(d) (Regulation S-K “Item 106(d)”) to balance investors’ need for timely disclosure with their need for complete disclosure. 160 When an Item 1.05 Form 8-K becomes due, the Commission noted, a registrant may not possess complete 158 Proposing Release at 16598. 159 Id. 160 Id. 46 information about the material cybersecurity incident. Accordingly, under the proposed rules, a registrant would provide the information known at the time of the Form 8-K filing and follow up in its periodic reports with more complete information as it becomes available, along with any updates to previously disclosed information. The Commission also proposed 17 CFR 229.106(d)(2) (Regulation S-K “Item 106(d)(2)”) to require disclosure in a registrant’s next periodic report when, to the extent known to management, a series of previously undisclosed individually immaterial cybersecurity incidents become material in the aggregate. 161 The Proposing Release explained that this requirement may be triggered where, for example, a threat actor engages in a number of smaller but continuous related cyberattacks against the same company and collectively they become material. 162 Item 106(d)(2) would require disclosure of essentially the same information required in proposed Item 1.05 of Form 8-K, as follows: • A general description of when the incidents were discovered and whether they are ongoing; • A brief description of the nature and scope of the incidents; • Whether any data were stolen or altered in connection with the incidents; • The effect of the incidents on the registrant’s operations; and • Whether the registrant has remediated or is currently remediating the incidents. 163 161 Id. at 16599. 162 Id. 163 Id. at 16619-16620. 47 2. Comments Reaction among commenters to proposed Item 106(d)(1) was mixed. Some wrote in support, noting that updated incident disclosure is needed to avoid previously disclosed information becoming stale and misleading as more information becomes available, and saying that updates help investors assess the efficacy of companies’ cybersecurity procedures. 164 Others took issue with specific aspects of the proposed rule. For example, some commenters stated that the proposed requirement to disclose “any potential material future impacts” is vague and difficult to apply, and urged removing or revising it. 165 Similarly, other commenters said that registrants should not be required to describe progress on remediation, noting that such information could open them up to more attacks. 166 In the same vein, one commenter suggested that no updates be required until remediation is sufficiently complete. 167 One commenter said the requirement to disclose changes in policies and procedures is unnecessary and overly broad, 168 and another commenter said the requirement should be narrowed to “material changes.” 169 More generally, commenters sought clarification on how to differentiate instances where updates should be included in periodic reports from instances where updates should be filed on Form 8-K; they found the guidance in the Proposing Release on this point “unclear.” 170 And one 164 See letters from AICPA; Crindata; R Street. See also IAC Recommendation. 165 See letters from EEI; Prof. Perullo; PWC; SCG. 166 See letters from BCE; BPI et al.; Enbridge. See also letter from EEI (suggesting narrowing the rule to “material remediation,” and delaying such disclosure until remediation is complete). 167 See letter from EEI. 168 See letter from Prof. Perullo. 169 See letter from EEI. 170 See letter from PWC; accord letter from Deloitte. The Proposing Release stated: “Notwithstanding proposed Item 106(d)(1), there may be situations where a registrant would need to file an amended Form 8-K to correct disclosure from the initial Item 1.05 Form 8-K, such as where that disclosure becomes inaccurate or materially misleading as a result of subsequent developments regarding the incident. For example, if the impact of the incident is determined after the initial Item 1.05 Form 8-K filing to be significantly more severe than previously disclosed, an amended Form 8-K may be required.” Proposing Release at 16598. 48 commenter argued that, regardless of where the update is filed, the incremental availability of information would make it difficult for companies to determine when the update requirement is triggered. 171 With respect to proposed Item 106(d)(2), a large number of commenters expressed concern about the aggregation requirement, saying, for example, that companies experience too many events to realistically communicate internally upward to senior management, and that retaining and analyzing data on past events would be too costly. 172 A number of other commenters relatedly said that, for the aggregation requirement to be workable, companies need more guidance on the nature, timeframe, and breadth of incidents that should be collated. 173 In this regard, one supporter of the requirement explained in its request for additional guidance that “cybersecurity incidents are so unfortunately common that a strict reading of this section could cause overreporting to the point that it is meaningless for shareholders.” 174 Some commenters suggested revising the rule to cover only “related” incidents. 175 Possible definitions offered for “related” incidents included those “performed by the same malicious actor or that exploited the same vulnerability,” 176 and those resulting from “attacks on the same systems, processes or controls of a registrant over a specified period of time.” 177 Suggestions for limiting the time period over which aggregation should occur included the 171 See letter from Quest. 172 See letters from ABA; ACLI; AIA; Business Roundtable; EEI; Enbridge; Ernst & Young LLP (“E&Y”); FAH; FedEx; Center on Cyber and Technology Innovation at the Foundation for Defense of Democracies (“FDD”); GPA; Hunton; ITI; ISA; LTSE; Microsoft; Nareit; NAM; NDIA; NRA; Prof. Perullo; SCG; SIFMA. 173 See letters from ACC; APCIA; BDO USA, LLP (“BDO”); BPI et al.; CAQ; Chamber; Chevron; Deloitte; EIC; FEI; M. Barragan; PWC; R Street.; TransUnion. 174 See letter from R Street. 175 See letters from ABA; APCIA; EEI; E&Y; PWC. 176 See letter from ABA. 177 See letter from E&Y. 49 preceding one year, 178 and the preceding two years. 179 One commenter requested the Commission clarify that a company’s Item 106(d)(2) disclosure need describe only the aggregate material impact of the incidents, rather than describing each incident individually; the commenter was concerned with threat actors becoming informed of a company’s vulnerabilities through overly detailed disclosure. 180 Another commenter suggested granting registrants additional time to come into compliance with Item 106(d)(2) after Commission adoption, so that they can develop system functionality to retain details about immaterial incidents. 181 Commenters also wrote in support of the aggregation requirement. 182 One of these commenters stated that aggregation is needed especially where an advanced persistent threat actor 183 seeks to exfiltrate data or intellectual property over time. 184 3. Final Amendments In response to comments, we are not adopting proposed Item 106(d)(1) and instead are adopting a new instruction to clarify that updated incident disclosure must be provided in a Form 8-K amendment. Specifically, we are revising proposed Instruction 2 to Item 1.05 of Form 8-K to direct the registrant to include in its Item 1.05 Form 8-K a statement identifying any 178 See letter from APCIA. 179 See letter from EEI. 180 See letter from AGA/INGAA. 181 See letter from Deloitte. 182 See letters from CII; CSA; R Street; NASAA. 183 The National Institute of Standards and Technology explains that an advanced persistent threat “is an adversary or adversarial group that possesses the expertise and resources that allow it to create opportunities to achieve its objectives by using multiple attack vectors, including cyber, physical, and deception. The APT objectives include establishing a foothold within the infrastructure of targeted organizations for purposes of exfiltrating information; undermining or impeding critical aspects of a mission, function, program, or organization; or positioning itself to carry out these objectives in the future. The APT pursues its objectives repeatedly over an extended period, adapts to defenders’ efforts to resist it, and is determined to maintain the level of interaction needed to execute its objectives.” National Institute of Standards and Technology, NIST Special Publication 800-172, Enhanced Security Requirements for Protecting Controlled Unclassified Information (Feb. 2021), at 2. 184 See letter from CSA. 50 information called for in Item 1.05(a) that is not determined or is unavailable at the time of the required filing and then file an amendment to its Form 8-K containing such information within four business days after the registrant, without unreasonable delay, determines such information or within four business days after such information becomes available. This change mitigates commenters’ concerns with Item 106(d)(1). In particular, under the final rules, companies will not have to distinguish whether information regarding a material cybersecurity incident that was not determined or was unavailable at the time of the initial Form 8-K filing should be included on current reports or periodic reports, as the reporting would be in an amended Form 8-K; details that commenters suggested raised security concerns, such as remediation status, are not required; and concerns that the proposed rule was vague or overbroad have been addressed by narrowing the required disclosure to the information required by Item 1.05(a). We also believe that use of a Form 8-K amendment rather than a periodic report will allow investors to more quickly identify updates regarding incidents that previously were disclosed. We appreciate that new information on a reported cybersecurity incident may surface only in pieces; the final rules, however, do not require updated reporting for all new information. Rather, Instruction 2 to Item 1.05 directs companies to file an amended Form 8-K with respect to any information called for in Item 1.05(a) that was not determined or was unavailable at the time of the initial Form 8-K filing. Other than with respect to such previously undetermined or unavailable information, the final rules do not separately create or otherwise affect a registrant’s duty to update its prior statements. We remind registrants, however, that they may have a duty to correct prior disclosure that the registrant determines was untrue (or omitted a material fact 51 necessary to make the disclosure not misleading) at the time it was made 185 (for example, if the registrant 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 186 (for example, when the original statement is still being relied on by reasonable investors). Registrants should consider whether they need to revisit or refresh previous disclosure, including during the process of investigating a cybersecurity incident. 187 We are not adopting proposed Item 106(d)(2), in response to concerns that the proposed aggregation requirement was vague or difficult to apply. We are persuaded by commenters that the proposed requirement might be difficult to differentiate from Item 1.05 disclosure, or by contrast, could result in the need for extensive internal controls and procedures to monitor all immaterial events to determine whether they have become collectively material. The intent of the proposed requirement was to capture the material impacts of related incidents, and prevent the avoidance of incident disclosure through disaggregation of such related events. However, upon further reflection, and after review of comments, we believe that the proposed requirement is not necessary based on the scope of Item 1.05. To that end, we emphasize that the term “cybersecurity incident” as used in the final rules is to be construed broadly, as the Commission stated in the Proposing Release. 188 The definition 185 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”). 186 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). 187 Relatedly, registrants should be aware of the requirement under Item 106(b)(2) of Regulation S-K to describe “[w]hether any risks from cybersecurity threats, including as a result of any previous cybersecurity incidents, have materially affected or are reasonably likely to materially affect the registrant” (emphasis added). See infra Section II.C.1.c. 188 Proposing Release at 16601. 52 of “cybersecurity incident” we are adopting extends to “a series of related unauthorized occurrences.” 189 This reflects that cyberattacks sometimes compound over time, rather than present as a discrete event. Accordingly, when a company finds that it has been materially affected by what may appear as a series of related cyber intrusions, Item 1.05 may be triggered even if the material impact or reasonably likely material impact could be parceled among the multiple intrusions to render each by itself immaterial. One example was provided in the Proposing Release: the same malicious actor engages in a number of smaller but continuous cyberattacks related in time and form against the same company and collectively, they are either quantitatively or qualitatively material. 190 Another example is a series of related attacks from multiple actors exploiting the same vulnerability and collectively impeding the company’s business materially. C. Disclosure of a Registrant’s Risk Management, Strategy and Governance Regarding Cybersecurity Risks 1. Risk Management and Strategy a. Proposed Amendments The Commission proposed to add 17 CF [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3A8be9f2041df8b6b1. Public record. Not legal advice.