Proposed rules relating to incident reporting aim to improve cybersecurity in public companies, but FTI Consulting’s Jordan Rae Kelly suggests the SEC’s well-intentioned requirements could have unintended consequences.
The SEC recently voted in favor of a proposal that would require publicly traded companies to report cybersecurity incidents and data breaches within four days, as well as disclose updates regarding previous incidents.
The proposed rules are subject to a public comment period through May 9, 2022.
The Best of Intentions …
In a speech presented at the Northwestern Pritzker School of Law’s Annual Securities Regulation Institute, SEC Chairman Gary Gensler stated that the agency is working to “improve the overall cybersecurity posture and resiliency of the financial sector.”
This proposal follows a global trend of increased attention and corresponding regulation regarding cybersecurity, and the expectation that organizations are doing all they can to protect their own interests and the interests of their customers and clients (e.g., personal information).
The proposed SEC regulation aside, organizations should already be determining and analyzing how to properly invest in cybersecurity. However, this may serve as a wake-up call for those who have not considered the genuine cybersecurity risk they face. Certainly, the SEC believes that increased regulation that makes organizations more forthcoming about cybersecurity risk will help drive positive behavior and improve cybersecurity readiness.
… Often Breed Unintended Consequences
Cybersecurity risks facing all organizations, including those in the financial services industry, are significant and carry the potential for costly damages, both financially and reputationally. Carefully considered regulation that helps improve cybersecurity programs and processes and that mitigates risk is a step in the right direction.
However, in its current form, the proposed rules may have the opposite effect on organizations. The proposal could, for example:
- Divert resources and attention mid-crisis: Concentrating on compliance and regulatory requirements diverts valuable resources away from adequately addressing an incident in a timely manner. When dealing with a cybersecurity incident, which might be the largest crisis an organization faces all year, the focus should be on containment, recovery and remediation. This added pressure to comply with stringent regulation could create impediments and lead to additional damages that could otherwise be avoided.
- Publicly expose network weaknesses: Further, the proposed regulation creates concerns around data security. The information requested during mandatory disclosure is often sensitive in nature and would be damaging if leaked. Specifics around what protections are in place — and more importantly, what areas are lacking proper defenses — would be highly valuable to malicious cyber actors. If exposed, this information could serve as a playbook for how to gain entry to systems and networks.
- Convey more power to bad actors: Cybersecurity teams at many organizations are short-handed and overworked pre-incident. Shifting their focus to disclosures and reporting for compliance purposes gives the upper hand back to the cyber actors, as they are now dealing with a distracted team.
The Key to Cybersecurity Is Investor Engagement
Whether the SEC’s proposal achieves the intended outcome of improving the cybersecurity practices of publicly traded companies, or at least effectively changes the behavior of impacted organizations, is yet to be seen. What may end up being a more significant driver of change is the role of investors and their ability to access disclosures.
In Gensler’s speech, he noted that “if customer data is stolen, if a company paid ransomware, that may be material to investors.” In other words, a decision to invest may come down to how secure the organization is and how much risk they possess.
This allows cybersecurity to be a market differentiator and value-add, as groups will potentially look to invest elsewhere if it is known that an organization has not adequately addressed cybersecurity risk. This is ultimately where the SEC’s proposed regulation could have the largest impact. Organizations are more likely to focus on ensuring they are meeting cybersecurity requirements to remain attractive to investors versus working to achieve compliance to avoid enforcement penalties.
When explained to organizations in this light — implementing proper cybersecurity programs will better protect critical assets and give investors greater confidence — it hopefully resonates and positively changes behavior regarding cybersecurity. Conversely, if SEC messaging focuses on reporting and disclosure requirements, which it can be argued further penalizes an organization already in crisis mode by giving them additional work, the regulation will likely not have its desired effect.
The views expressed herein are those of the author and not necessarily the views of FTI Consulting Inc., its management, its subsidiaries, its affiliates or its other professionals.