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Insider Trading Policies and Cybersecurity
Cybersecurity has been a high priority topic for the SEC the past few years. In September 2017, the SEC created a Cyber Unit within its Enforcement Division. This Cyber Unit had over 225 active investigations at the SEC's 2018 fiscal year end. The SEC has focused in particular on cybersecurity risks facing public companies.
The SEC twice issued cybersecurity guidance to public companies in 2018. The SEC used one of these pronouncements to opine on the need for insider trading policies to account for cyber-related incidents. Specifically, in February 2018, the SEC issued "Commission Statement and Guidance on Public Company Cybersecurity Disclosures" ("Cybersecurity Release") outlining its views on cybersecurity disclosure requirements for public companies under the federal securities laws. The Cybersecurity Release reinforced and expanded upon cybersecurity disclosure guidance issued by the SEC's Division of Corporation Finance in 2011. It further addressed a new topic — the application of insider trading prohibitions in the cybersecurity context. Later in 2018, the SEC issued a Report of Investigation that emphasized the need for public companies to implement a system of adequate internal accounting controls to address cyber-related fraud and to calibrate those controls to the current risk environment.
The Cybersecurity Release advised that information about a company's cybersecurity risks and incidents may constitute material nonpublic information. Directors, officers and other corporate insiders therefore could violate the insider trading laws, should they trade their company's securities in breach of their duty of trust or confidence while in possession of such material nonpublic information. As a result, the SEC recommended companies have policies and procedures crafted to prevent trading on the basis of material nonpublic information relating to cybersecurity risks and incidents.
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