SEC Publishes Five C&DIs Covering Cybersecurity Incident Disclosures Pursuant to Item 1.05 of Form 8-K
On June 24, 2024, the U.S. Securities and Exchange Commission (SEC) published five new Form 8-K Compliance and Disclosure Interpretations (C&DIs) expanding the agency’s interpretations of cybersecurity incident disclosures pursuant to Item 1.05 of Form 8-K. In July 2023, the SEC adoptedfinal rules with respect to cybersecurity incidentsthat generally require public companies to disclose (i) material cybersecurity incidents within four business days after determining the incident was material and (ii) material information regarding their cybersecurity risk management, strategy and governance on an annual basis.We wrote about the final cybersecurity disclosure rules here.
The new C&DIs, excerpted below, identify scenarios involving ransomware payments and the implications of such payments in relation to Form 8-K Item 1.05 disclosures and materiality assessments. Generally speaking, the new guidance confirms that making a ransomware payment (or, in one scenario a series of payments) does not relieve a registrant from assessing the materiality of the incident in question or the obligation to make a filing pursuant to Item 1.05 of Form 8-K.
The new C&DIs supplement four previous C&DIs published by the SEC in December 2023 regarding scenarios in which a registrant consults with the U.S. Attorney General following the occurrence of a cybersecurity incident and the impact, if any, such consultations have in relation to a registrant’s disclosure obligations. Notably, the new C&DIs follow two statements recently issued by Erik Gerding, Director, Division of Corporation Finance, regarding Form 8-K Item 1.05 disclosures. In his May 2024 statement, he advised that voluntary disclosures of these incidents should be made pursuant to Item 8.01 of Form 8-K, rather than Item 1.05, to the extent that the incident in question has been determined by a registrant to not be material (or with respect to which a materiality assessment has not yet been made). In this statement, Director Gerding noted that his clarifying statement was not intended to discourage registrants from making voluntary disclosures in relation to these incidents, but rather to ensure that such disclosures are not confusing to investors: “this statement is intended to encourage the filing of such voluntary disclosures in a manner that does not result in investor confusion or dilute the value of Item 1.05 disclosures regarding material cybersecurity incidents.” In his June 2024 statement, Director Gerding addressed selective disclosure of cybersecurity incidents, including potential Regulation Fair Disclosure (FD) implications. In this statement, he noted that nothing in Item 1.05 of Form 8-K prohibits a registrant from privately discussing a material cybersecurity incident with other parties or from providing information about the incident to such parties beyond what was included in Item 1.05 of Form 8-K. He also noted that nothing in Item 1.05 of Form 8-K alters Regulation FD or makes it apply any differently to communications regarding cybersecurity incidents.
Taken together with Director Gerding’s recent statements, the new C&DIs make clear that the SEC remains very focused on disclosures related to cybersecurity incidents. For ease of reference, the text of the new C&DIs is excerpted below:
Question 104B.05
Question: A registrant experiences a cybersecurity incident involving a ransomware attack. The ransomware attack results in a disruption in operations or the exfiltration of data. After discovering the incident but before determining whether the incident is material, the registrant makes a ransomware payment, and the threat actor that caused the incident ends the disruption of operations or returns the data. Is the registrant still required to make a materiality determination regarding the incident?
Answer: Yes. Item 1.05 of Form 8-K requires a registrant that experiences a cybersecurity incident to determine whether that incident is material. The cessation or apparent cessation of the incident prior to the materiality determination, including as a result of the registrant making a ransomware payment, does not relieve the registrant of the requirement to make such materiality determination.
Further, in making the required materiality determination, the registrant cannot necessarily conclude that the incident is not material simply because of the prior cessation or apparent cessation of the incident. Instead, in assessing the materiality of the incident, the registrant should, as the Commission noted in the adopting release for Item 1.05 of Form 8-K, determine “if there is a substantial likelihood that a reasonable shareholder would consider it important in making an investment decision, or if it would have significantly altered the total mix of information made available,” notwithstanding the fact that the incident may have already been resolved.1
Question 104B.06
Question: A registrant experiences a cybersecurity incident that it determines to be material. That incident involves a ransomware attack that results in a disruption in operations or the exfiltration of data and has a material impact or is reasonably likely to have a material impact on the registrant, including its financial condition and results of operations. Subsequently, the registrant makes a ransomware payment, and the threat actor that caused the incident ends the disruption of operations or returns the data. If the registrant has not reported the incident pursuant to Item 1.05 of Form 8-K before it made the ransomware payment and the threat actor has ended the disruption of operations or returned the data before the Form 8-K Item 1.05 filing deadline, does the registrant still need to disclose the incident pursuant to Item 1.05 of Form 8-K?
Answer: Yes. Because the registrant experienced a cybersecurity incident that it determined to be material, the subsequent ransomware payment and cessation or apparent cessation of the incident does not relieve the registrant of the requirement to report the incident under Item 1.05 of Form 8-K within four business days after the registrant determines that it has experienced a material cybersecurity incident.
Question 104B.07
Question: A registrant experiences a cybersecurity incident involving a ransomware attack, and the registrant makes a ransomware payment to the threat actor that caused the incident. The registrant has an insurance policy that covers cybersecurity incidents and is reimbursed for all or a substantial portion of the ransomware payment. Is the incident necessarily not material as a result of the registrant being reimbursed for the ransomware payment under its insurance policy?
Answer: No. The standard that the Commission articulated for assessing the materiality of a cybersecurity incident under Item 1.05 of Form 8-K is set forth in the adopting release for the rule and is reiterated in Question 104B.05. Further, as the Commission noted in the adopting release for Item 1.05 of Form 8-K, when assessing the materiality of cybersecurity incidents, registrants “should take into consideration all relevant facts and circumstances, which may involve consideration of both quantitative and qualitative factors” including, for example, “consider[ing] both the immediate fallout and any longer term effects on its operations, finances, brand perception, customer relationships, and so on, as part of its materiality analysis.”2 Under the facts described in this question, such consideration also may include an assessment of the subsequent availability of, or increase in cost to the registrant of, insurance policies that cover cybersecurity incidents.
Question 104B.08
Question: A registrant experiences a cybersecurity incident involving a ransomware attack. Is the size of the ransomware payment, by itself, determinative as to whether the cybersecurity incident is material? For example, would a ransomware payment that is small in size necessarily make the related cybersecurity incident immaterial?
Answer: No. The standard that the Commission articulated for assessing the materiality of a cybersecurity incident under Item 1.05 of Form 8-K is set forth in the adopting release for the rule and reiterated in Question 104B.05. Under that standard, the size of any ransomware payment demanded or made is only one of the facts and circumstances that registrants should consider in making its materiality determination regarding the cybersecurity incident. Further, in the adopting release for Item 1.05 of Form 8-K, the Commission declined “to use a quantifiable trigger for Item 1.05 because some cybersecurity incidents may be material yet not cross a particular financial threshold.”
Any ransomware payment made is only one of the various potential impacts of a cybersecurity incident that a registrant should consider under Item 1.05. As the Commission further stated in Item 1.05’s adopting release:
[T]he 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 cross a particular quantitative threshold, but it should nonetheless be reported if the reputational harm is material.3
Question 104B.09
Question: A registrant experiences a series of cybersecurity incidents involving ransomware attacks over time, either by a single threat actor or by multiple threat actors. The registrant determines that each incident, individually, is immaterial. Is disclosure of those cybersecurity incidents nonetheless required pursuant to Item 1.05 of Form 8-K?
Answer: Disclosure of those cybersecurity incidents may, depending on the particular facts and circumstances, be required pursuant to Item 1.05 of Form 8-K. In these circumstances, the registrant should consider whether any of those incidents were related, and if so, determine whether those related incidents, collectively, were material. The definition of “cybersecurity incident” under Item 106(a) of Regulation S-K (which, as noted in Instruction 3 to Item 1.05, is the definition that applies to Item 1.05 of Form 8-K) includes “a series of related unauthorized occurrences.” In the adopting release for Item 1.05, the Commission noted:
[W]hen 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. Another example is a series of related attacks from multiple actors exploiting the same vulnerability and collectively impeding the company’s business materially.4
1See Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure, Release Nos. 33-11216; 34-97989 (July 26, 2023) [88 FR 51896, 51917 (Aug. 4, 2023)] (quoting Matrixx Initiatives v. Siracusano, 563 U.S. 27, 38-40 (2011); Basic Inc. v. Levinson, 485 U.S. 224, 240 (1988); TSC Indus. v. Northway, 426 U.S. 438, 449 (1976)) (internal quotation marks omitted).
2See Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure, Release Nos. 33-11216; 34-97989 (July 26, 2023) [88 FR 51896, 51917 (Aug. 4, 2023)]
3See Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure, Release Nos. 33-11216; 34-97989 (July 26, 2023) [88 FR 51896, 51906 (Aug. 4, 2023)].
4See Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure, Release Nos. 33-11216; 34-97989 (July 26, 2023) [88 FR 51896, 51910 (Aug. 4, 2023)].