On October 22, 2024, the U.S. Securities and Exchange Commission (SEC) announced it imposed substantial penalties against four companies for issuing misleading disclosures related to the 2019 SolarWinds data breach, highlighting the critical importance of accurate and transparent cybersecurity disclosures. 

The four companies sustained more than $7 million in penalties for providing misleading information regarding the impact of the 2019 SolarWinds data breach, underscoring the SEC's commitment to ensuring that investors are not misled about cybersecurity incidents. 

To avoid similar outcomes, publicly traded companies should consider the following strategies:

1. Enhance Disclosure Controls and Procedures

A robust disclosure control system is essential. Companies must ensure that their disclosure controls and procedures are capable of capturing and accurately reporting cybersecurity incidents. This involves regular audits and updates to these controls to address potential weaknesses. Implementing a cross-departmental team that includes IT, legal, and compliance experts can help ensure comprehensive oversight and accurate reporting.

2. Provide Clear and Comprehensive Disclosures

Transparency is key. Companies should avoid vague or generic language when disclosing cybersecurity risks or incidents. Instead, they should provide detailed information about the nature, scope, and potential impact of any breach. This includes specifying what data was accessed, how the breach occurred, and what steps are being taken to mitigate the risks. For instance, if a breach involves unauthorized access to a specific number of files or credentials, these details should be explicitly stated.

3. Assess Cybersecurity Incidents for Materiality

Cybersecurity incidents should be closely analyzed to determine whether they rise to the level of a material event requiring timely disclosure. Companies must avoid presenting these risks as hypothetical if they have already occurred. This necessitates a continuous evaluation of cybersecurity threats and their potential impact on the company's operations and financial health. Regularly updating risk factor disclosures in regulatory filings can help ensure transparency and compliance.

4. Encourage Compliance and Information Sharing

The SEC recognized the cooperation of the charged companies during its investigation, highlighting the benefits of engaging openly with regulatory bodies. Publicly traded companies should cultivate a culture that values compliance and proactive communication. By voluntarily sharing relevant information and analyses, companies can facilitate more efficient investigations and underscore their commitment to transparency and accountability, which can potentially mitigate regulatory scrutiny and enhance their reputation with stakeholders.

5. Regularly Train and Educate Employees

Employee training is vital to ensure that all staff understand the importance of accurate cybersecurity disclosures. Regular training sessions can help employees recognize potential threats and understand the procedures for reporting them. This training should be updated regularly to reflect the latest regulatory requirements and cybersecurity threats.

6. Engage with External Cybersecurity Experts

Engaging external cybersecurity experts can provide an objective assessment of a company's cybersecurity posture and disclosure practices. These experts can offer valuable insights into potential vulnerabilities and recommend best practices for compliance with SEC regulations.

While cybersecurity incidents are an unfortunate reality for many companies, the way these incidents are disclosed can significantly impact a company's regulatory standing and reputation. By establishing and implementing materiality review and disclosure processes, properly assessing cybersecurity incidents for materiality, and encouraging the appropriate sharing of information, publicly traded companies can better protect themselves from SEC enforcement actions and maintain investor trust.