SEC Takes a Stand on Cybersecurity Maturity: New Reporting Requirements Aim to Bolster Market Confidence

Published On: March 30, 2023

The Securities and Exchange Commission (SEC) requirements for cybersecurity reporting represent a significant step forward in promoting transparency and accountability for corporations. As cyber threats continue to evolve, it is more critical than ever for boards to take a proactive approach in managing the maturity their organization’s cybersecurity posture. The emphasis on maturity will no doubt lead to increased vigilance and improved security practices, ultimately benefiting both companies and the market.

In this landmark move, the SEC has recently unveiled a set of stringent requirements for boards to follow in reporting their cybersecurity preparedness. In this article, we delve into these new requirements for expertise, risk assessment, incident detection and response, and cybersecurity performance management, examining their potential impact on companies and the market.

One of the key aspects of the new requirements is the identification of a board member with cybersecurity expertise. Recognizing the importance of having individuals with a deep understanding of cyber threats and risk management, the SEC now mandates that at least one board member possess expertise in the field of cybersecurity. This measure is crucial, as a study by the National Association of Corporate Directors (NACD) in 2020 showed that only 38% of directors felt confident in their board’s ability to oversee cybersecurity risks, emphasizing the need for a more informed approach at the highest level.

The requirement for a cybersecurity expert on the board has a positive impact on investor confidence. A 2019 study by the Global Cyber Alliance found that 59% of investors consider a company’s cyber risk management when making investment decisions, and 73% of them would be more likely to invest in a company with a board member who has cybersecurity expertise. Thus, the presence of a cybersecurity expert on the board can be seen as a competitive advantage and a sign of the company’s commitment to protecting its assets and stakeholders from potential cyber threats.

A board member with cybersecurity expertise can serve as a liaison between the board and the organization’s IT and security teams. This communication channel ensures that the board remains informed about the latest cyber threats, the effectiveness of the organization’s security measures, and any potential improvements that need to be made. They can help identify potential vulnerabilities, recommend appropriate safeguards, and ensure that cybersecurity measures align with the organization’s overall strategy and objectives.

The SEC also emphasizes the importance of a comprehensive risk assessment in its new requirements. Boards are now required to perform a thorough risk assessment of their organization’s cybersecurity posture. A study by the Ponemon Institute in 2021 revealed that 53% of organizations experienced a data breach due to inadequate risk assessment, highlighting the critical need for a comprehensive evaluation of cyber risks. The assessment should include an evaluation of potential threats and vulnerabilities, as well as the effectiveness of current security measures. Moreover, the risk assessment should be conducted on a regular basis and be integrated into the company’s overall risk management processes.

According to a 2020 report by IBM Security, organizations with a formalized risk assessment process experienced an average cost reduction of $293,000 per data breach compared to those without such a process. These assessments help organizations identify and prioritize their most critical assets, allowing them to allocate resources more effectively and minimize the potential damage caused by cyber incidents.

According to the SEC, companies must adopt a framework, such as the NIST Cybersecurity Framework or the ISO 27001 standard, to ensure that organizations have a structured approach to managing cybersecurity risks and can demonstrate their commitment to robust security practices.

The benefits of adopting a recognized cybersecurity framework are evident in various studies. A 2019 report by the MITRE Corporation found that companies using the NIST Cybersecurity Framework saw improvements in their overall risk management processes, experienced fewer security incidents, and reported faster recovery times when incidents occurred. Similarly, a 2018 study by the International Organization for Standardization (ISO) discovered that organizations certified under the ISO 27001 standard experienced a 29% reduction in security incidents and a 20% reduction in compliance costs.

The SEC mandates the reporting of cybersecurity incidents as a critical component of its new requirements. Boards are required to promptly disclose any material cybersecurity incidents to the SEC, ensuring transparency and accountability in their handling of cyber threats. This includes not only successful attacks but also significant attempts to breach the company’s defenses, regardless of whether they resulted in actual damage or data loss.

The aim of this disclosure requirement is to provide investors and the wider market with a transparent view of the organization’s exposure to cyber threats. By requiring companies to report incidents in a timely manner, the SEC seeks to foster trust and confidence among stakeholders, as well as to promote the sharing of valuable threat intelligence that can benefit the broader business community.

A 2020 study by the Ponemon Institute found that organizations that reported data breaches within 100 days experienced an average cost savings of $1.2 million per incident compared to those that took longer to disclose the breach. Prompt reporting not only demonstrates a company’s commitment to transparency but also allows it to take swift action to mitigate the potential fallout, such as informing affected parties and implementing measures to prevent similar incidents in the future.

The reporting requirement also has the potential to enhance overall cybersecurity readiness across industries. A 2019 study by the Carnegie Mellon University’s Software Engineering Institute found that organizations that shared information about cyber threats with their peers were better prepared to handle incidents, as they could learn from the experiences of others and adapt their security measures accordingly. By encouraging organizations to disclose cybersecurity incidents, the SEC helps foster a culture of collaboration and collective defense against cyber threats.

Lastly, the SEC emphasizes the need for regular board-level review of cybersecurity performance as a critical component of its new requirements. Boards must consistently review their organization’s cybersecurity performance, assessing the effectiveness of security measures, monitoring the evolving threat landscape, and ensuring that the company is adapting its strategies accordingly. This ongoing review process is essential in fostering cybersecurity maturity within the organization and maintaining a proactive approach to risk management.

Regular board-level reporting helps organizations stay ahead of emerging cyber threats and adapt to the rapidly changing technological landscape. A 2020 study by Gartner revealed that organizations with active board-level involvement in cybersecurity oversight experienced a 26% decrease in cyber incidents and a 28% reduction in the average financial impact of those incidents. This underscores the value of board engagement in driving more effective cybersecurity practices.

By consistently discussing cybersecurity performance and continuous improvement, the board sends a clear message to employees at all levels that security is a top priority. This can lead to a greater sense of ownership and responsibility for cybersecurity among employees, resulting in better adherence to security policies and procedures.

These requirements send a clear message to the market: the SEC is serious about holding boards accountable for their organization’s cybersecurity posture. Companies that fail to meet these standards may face fines, reputational damage, and potential shareholder lawsuits. On the other hand, companies that demonstrate robust cybersecurity practices can expect to garner the trust of investors and stakeholders alike. The new SEC requirements also underscore the importance of collaboration between boards, C-suite executives, and IT professionals in managing cyber risks. By placing the responsibility for cybersecurity reporting squarely on the shoulders of board members, the SEC is ensuring that cybersecurity maturity remains a top priority for organizations.

Want to learn more? Download our The SEC Cybersecurity Risk Management Rules and You: Minimizing your impact ahead of the April 2023 Ruling Toolkit HERE.