Cybersecurity Disclosures

SEC Adopts Final New Rules On Cybersecurity Disclosures

On July 26, 2023, the SEC adopted final new rules requiring disclosures for both domestic and foreign companies related to cybersecurity incidents, risk management, strategy and governance. The proposed rules were published in March 2022 (see HERE). In response to numerous comments, the final rules made several changes to the proposal, including narrowing the disclosures in both the Form 8-K/6-K and annual reports on Form 10-K and 20-F.

The final rules add new Item 1.05 to Form 8-K requiring disclosure of a material cybersecurity incident including the incident’s nature, scope, timing, and material impact or reasonably likely impact on the company. An Item 1.05 Form 8-K will be due within four business days following determination that a cybersecurity incident is material. Given the sensitive nature of cybersecurity crimes, the SEC has added a provision allowing an 8-K to be delayed if it is informed by the United States Attorney General, in writing, that immediate disclosure would pose a substantial

August 29, 2023

Proposed Rules On Cybersecurity Disclosure

Earlier this year, the SEC published proposed rules on cybersecurity risk management, strategy, governance and incident disclosure by public companies. Although the comment period has passed, a final rule has not yet been issued. As of now, cybersecurity disclosures are encompassed within the general anti-fraud provisions including the requirement to disclose “such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading” as well SEC guidance last updated in 2018 (see HERE).

The proposed amendments would require, among other things, current reporting about material cybersecurity incidents and updates about previously reported cybersecurity incidents. The proposal also would require periodic reporting about a company’s policies and procedures to identify and manage cybersecurity risks; the company’s board of directors’ oversight of cybersecurity risk; and management’s role and expertise in assessing and managing cybersecurity risk and implementing cybersecurity policies and procedures. The proposal would further

December 20, 2022

Caremark Is Alive And Well – Director Liability In Delaware

The last time I wrote about In Re Caremark International Inc. (“Caremark”), and its protections for a board of directors from breach of fiduciary duty claims, was in early 2021 following a year of cases that had eroded its historical strong defenses. Now, almost two years later, boards have paid attention to the judicial opinions and added compliance practices, including implementing written oversight systems, resulting in a dramatic uptick in the dismissal of plaintiff’s attempts to satisfy Caremark claims.

Background

In Re Caremark International Inc. Derivative Litigation was a civil action in the Delaware Court of Chancery in 1996 which drilled down on a director’s duty of care in the oversight context. A Caremark claim “seeks to hold directors accountable for the consequences of a corporate trauma.” To adequately allege such a claim, a plaintiff must allege that the board had some level of involvement in the trauma such that it knew or should have known about

December 13, 2022

Russia-Ukraine Disclosures And Supply Chain Issues

Supply chain issues continue to plague just about every industry and the continuing attack by Russia against the Ukraine, gives little hope of a respite in the near future. The recent easing of congestion at the handful of U.S. ports big enough to accommodate container ships is likely more a result of inflation and a summer slowdown than effective logistical management. Amid the ongoing difficulties, the SEC has published a sample letter to companies regarding disclosures pertaining to Russia’s invasion of the Ukraine and related supply chain issues.

SEC Sample Comment Letter

The SEC is of the view that companies should provide detailed disclosure, to the extent material or if required by a prescriptive rule, regarding: (i) direct or indirect exposure to Russia, Belarus, or Ukraine through their operations, employee base, investments in Russia, Belarus, or Ukraine, securities traded in Russia, sanctions against Russian or Belarusian individuals or entities, or legal or regulatory uncertainty associated with operating in or exiting

August 9, 2022

Intellectual Property And Technology Risks – International Business Operations

In December 2019, the SEC Division of Corporation Finance issued CF Disclosure Guidance: Topic No. 8 providing guidance related to the disclosure of intellectual property and technology risks associated with international business operations.

The global and technologically interconnected nature of today’s business environment exposes companies to a wide array of evolving risks, which they must individually examine to determine proper disclosures using a principles-based approach. A company is required to conduct a continuing analysis on the materiality of risks in the ever-changing technological landscape to ensure proper reporting of risks. To assist management in making these determinations, the SEC has issued additional guidance.

The guidance, which is grounded in materiality and a principles-based approach, is meant to supplement prior guidance on technology and cybersecurity matters including the February 2018 SEC statement on public company cybersecurity disclosures (see my blog HERE); Director Hinman’s speech at the 18th Annual Institute on Securities Regulation in Europe in March, 2019; the SEC

December 22, 2020

A COVID IPO

On June 25, 2020, SEC Chair Jay Clayton gave testimony before the Investor Protection, Entrepreneurship and Capital Markets Subcommittee of the U.S. House Committee on Financial Services on the topic of capital markets and emergency lending in the Covid-19 era. The next day, on June 26, Chair Clayton, William Hinman, Director of the Division of Corporation Finance, Dalia Blass, Director of the Division of Investment Management and Brett Redfearn, Director of the Division of Trading and Markets issued a public statement on the same topic but expanded to include efforts to ensure the orderly function of U.S. capital markets.

Chair Clayton Testimony

Chair Clayton breaks down his testimony over five topics including: (i) market monitoring and regulatory coordination; (ii) guidance and targeted assistance and relief; (iii) investor protection, education and outreach efforts; (iv) ongoing mission-oriented work; and (v) the SEC’s fiscal-year 2021 budget request.

Market Monitoring and Regulatory Coordination

Despite the extraordinary volumes and volatility we have seen in the

August 25, 2020

SEC Statements On Capital Markets Amid Covid-19

Chair Clayton Testimony

Market Monitoring and Regulatory Coordination

Despite the extraordinary volumes and volatility we have seen

July 28, 2020

Proposed 2021 U.S. Budget

In February, the Office of Management and Budget released the proposed fiscal 2021 United States government budget. The beginning of the Budget contains a message from President Trump delineating a list of key priorities of the administration including better trade deals, preserving peace through strength, overcoming the opioid crisis, regulation relief and American energy independence. The budget has some notable aspects that directly relate to the capital markets and its participants.

SEC

As the federal government has been doing for all agencies, the 2021 Budget seeks to eliminate agency reserve funds. Specifically regarding the SEC, the Budget cuts the SEC reserve by $50 million. The reduction in reserve fund is thought to increase overall accountability as the SEC would need to go to Congress to ask for additional funds if needed, with an explanation, instead of just accessing a reserve account. Reserve fund cuts are sent to the U.S. Treasury for deficit reduction.

However, the Budget also increases the

July 7, 2020

Division of Enforcement 2019 Annual Report

As my firm does not practice in the enforcement arena, it is not an area I always write about, but this year I found a few trends that are interesting. In particular, just by following published enforcement matters on the SEC’s website, I’ve noticed a large uptick in actions to suspend the trading in, or otherwise take action against, micro- and small-cap companies, especially delinquent filers. I’ve also noticed a large uptick of actions against smaller public and private companies that use misleading means to raise capital from retail investors, and the concurrent use of unlicensed broker-dealers. Of course, there have always been a significant number of actions involving cryptocurrencies. In light of my own observations, I decided to review and report on the SEC’s view of its actions.

As an aside, before discussing the report, I note that the Government Accountability Office (GAO) has raised concerns about the quality of record keeping and documentation maintained by the

December 24, 2019

SEC Testifies At House Financial Services Committee Hearing

On September 24, 2019, all five SEC commissioners gave testimony to, and were questioned by, members of the U.S. House of Representatives Committee on Financial Services. Commissioner Robert J. Jackson, Jr. also gave an opening statement at the Committee hearing.

Commissioner Jackson’s Opening Statement

Commissioner Jackson’s short opening statement was consistent with his prior public views, consisting of a list of three areas in which he believes legislation should intervene to prevent corporate insiders from spending shareholder money to advance their own interests over those of investors.

His first recommendation is to shorten the current four-day 8-K filing requirement in which a company must notify the public of certain material events. For an overview of 8-K filing categories, including the categories that require an advance filing (Regulation FD) or lesser time period than the standard four days, see HERE. Commissioner Jackson states that there is “evidence that corporate insiders often trade during the ‘gap’ between key business events and

October 22, 2019

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SEC Adopts Final New Rules On Cybersecurity Disclosures

Proposed Rules On Cybersecurity Disclosure

Russia-Ukraine Disclosures And Supply Chain Issues

A COVID IPO

Proposed 2021 U.S. Budget

Division of Enforcement 2019 Annual Report

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