MANAGING Cybersecurity Risk AND DISCLOSURE OBLIGATIONS

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1 MANAGING Cybersecurity Risk AND DISCLOSURE OBLIGATIONS RRD Donnelley SEC Hot Topics Institute May 21,

2 MANAGING CYBERSECURITY RISK AND DISCLOSURE OBLIGATIONS Patrick J. Schultheis Partner Wilson Sonsini Goodrich & Rosati Seattle James D. Evans Partner Fenwick & West Seattle / Mountain View Lauren Neiswinder General Counsel Blue Nile Seattle Jeff Christianson Executive VP and General Counsel ( ) F5 Networks Seattle 2

3 Introduction Cybersecurity A Perfect Storm Disclosure obligations related to cybersecurity risks and incidents Corporate governance and enterprise risk management considerations The role of legal counsel in cybersecurity risk management 3

4 Cybersecurity and Cyber Attacks Cybersecurity is the body of technologies, processes and practices designed to protect networks, systems, computers, programs and data from attack, damage or unauthorized access Most common cyber attacks: Installation of viruses or malware on computer systems Theft of private or confidential information Disruption or denial of service attacks Unauthorized access to computer systems Inappropriate use of computer systems by employees Why focus on cybersecurity: the financial, operational and reputational risks for the enterprise are potentially huge 4

5 Cybersecurity A Perfect Storm? Growth of internet access and speeds Explosion of digital data and multiple storage devices and locations Cloud computing / Outsourcing Mobility / BYOD Social Media Sophistication of bad actors Rise of entrepreneurial bad actors Geopolitical motivations DOJ Indictment of Chinese Hackers Stricter data security and privacy laws Recent cyber incidents Target, Heartbleed bug on OpenSSL software Evolving best practices for cybersecurity See NIST Framework for Improving Critical Infrastructure Cybersecurity published in February 2014 Board level attention and scrutiny 5

6 Symantec 2014 Internet Security Threat Report 91% increase in targeted attacks campaigns in % increase in the number of breaches in 2013 Over 552 million identities were exposed via breaches in 2013 an increase of 493% over zero-day vulnerabilities discovered an increase of 64% 38% of mobile users have experienced mobile cybercrime in past 12 months Spam volume dropped to 66% of all traffic 1 in 392 s contain a phishing attack 1 in 196 s contain malware Web-based attacks are up 23% 1 in 8 legitimate websites have a critical vulnerability Small businesses 1 in 5.2 chance of being attacked Large companies 1 in 2.3 chance of being attacked 6

7 Cyber Risk and Cyber Incident Disclosures SEC Guidance CF Disclosure Guidance: Topic No. 2 Cybersecurity Provides guidance on potential current and periodic reporting obligations related to cybersecurity risks and cyber incidents The Guidance does not require disclosure that itself could compromise a company s cybersecurity. Material information regarding cybersecurity risks and cyber incidents is required to be disclosed when necessary in order to make other required disclosures, in light of the circumstances under which they are made, not misleading. While registrants should provide disclosure tailored to their particular circumstances and avoid generic boilerplate disclosure, we reiterate that the federal securities laws do not require disclosure that itself would compromise a registrant s cybersecurity. Instead, registrants should provide sufficient disclosure to allow investors to appreciate the nature of the risks faced by the particular registrant in a manner that would not have that consequence. 7

8 SEC Guidance Specific disclosure obligations that may require a discussion of cybersecurity risks and cyber incidents Risk Factors Management s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Description of Business Legal Proceedings Financial statement disclosures Disclosure Controls and Procedures Effective Shelf Registrations Materiality considerations Discussion at SEC s Cybersecurity Roundtable (March 26, 2014) 8

9 Additional Disclosure After a Cyber Incident SEC staff comments: It appears that you may have experienced one or more security breaches or cyber attacks that did not result in a material adverse effect on your operations. If true, beginning with you next periodic filing, please simply state this fact so investors are aware that you are currently experiencing these cyber risks. Proper accounting for any customer retention incentives Potential loss contingency disclosure Potential diminished future cash flows and potential asset impairment Impact of cyber incident on estimates of warranty liability, product returns, software costs, inventory, litigation and deferred revenue Timing of event may require disclosure of a subsequent event 9

10 Other Disclosure Considerations A patchwork of state and federal laws and regulatory obligations Potential breach notice requirement under state law 46 states (plus D.C. and Puerto Rico) have breach notice laws Sample of existing supervisory bodies Federal Bureau of Investigation Department of Defense Department of Homeland Security Department of the Treasury and the Federal Financial Institutions Examination Council Federal Energy Regulatory Commission Federal Communications Commission External and internal corporate communications 10

11 Corporate Governance and Enterprise Risk Management Considerations Risk oversight by board of directors Important to right size cybersecurity risk for the Board Board still protected by the business judgment rule Board should have a high-level understanding of the company s cyber risks, the management of these risks and the company s cyber incident response plan Delegate responsibility of cybersecurity to the appropriate Board committee 11

12 Corporate Governance and Enterprise Risk Management Considerations Incorporate cybersecurity into the company s enterprise risk management program Provide Board reasonable access to IT security team and any outside networks security consultants Report to Board on other risk mitigation programs Cyber-risk insurance Networks security infrastructure Internal IT security training programs Results of threat assessments Report to Board on the Crisis Management Plan 12

13 Role of Legal Counsel in Cybersecurity Risk Management Cybersecurity is a natural extension of the General Counsel s responsibilities to protect and secure the company s intellectual properties and other technologies, and to adequately assess, minimize and mitigate risk Promote universal awareness of cybersecurity risks throughout the company Consult with IT department on need for vulnerability or threat assessment Contribute to development of an efficient incident response plan 13

14 Role of Legal Counsel in Cybersecurity Risk Management Manage response to a cyber attack Manage internal and external cybersecurity-related communications Management cybersecurity-related third party and transactional risk Monitor cybersecurity-related regulatory, compliance and public policy issues, including security breach notification requirements Consult on potential need for cyber-risk insurance 14

15 Operational Considerations Determine need for network vulnerability or threat assessments Compliance with any state information security regulations Review network security policies Implement best practices for risk management NIST has issued Framework for Improving Critical Infrastructure Cybersecurity (http://www.nist.gov/cyberframework/upload/cybersecurityframework pdf) May become de facto best practices for enterprise cybersecurity 15

16 Develop Crisis Management Plan Identify, classify, quantify cyber risk Identify outside forensic IT consultants Review internal/external communications policies Establish cross-functional incident response team corporate communications, compliance, finance, HR) Company-wide training on network security policies and procedures Anticipate common cyber attack scenarios and develop appropriate preventative and response plans Consider running a mock incident scenario (IT, legal, 16

17 Issues During Cyber Incident Response Engage counsel/third-party IT forensic and PR experts Maintain/monitor privilege Coordination with other affected/necessary internal resources Educate board of directors/senior management Document and data retention Determine disclosure needs and monitor media plans Coordinate with law enforcement and other regulators 17

18 Appendices MANAGING Cybersecurity Risk AND DISCLOSURE OBLIGATIONS 18

19 If more than 75 percent of the value of a company is in information assets, why do firms focus on ancient risks, like product defects? Kevin Kalinich Global Practice Leader, Cyber Insurance Aon Risk Solutions 19

20 Is Cyber Insurance Right for Your Company? Why Cyber Insurance as opposed to relying on standard property and general liability policies? Covers 3 rd party liability for data/ network access of 3 rd parties Property insurance would cover physical computers but not (or in very limited fashion) the data contained on the computers Can cover costs to recreate any corrupted or lost damage from scratch, as well as to restore networks to pre-outage conditions Covers liability for information security (PHI, PII, corporate secrets, etc.) Can cover employee acts for theft or corruption of data Can cover media perils that are generally excluded from a GL or Property policies, such as slander, libel, infringement of copyright, trademark, slogan, trade dress, etc. Covers costs associated with notification to consumers and offerings of credit monitoring and ID theft monitoring Covers any costs associated with or fines and penalties assessed by Regulatory investigation Can cover fines assessed for non-pci compliance 20

21 Is Cyber Insurance Right for Your Company? Willis FINEX estimates the 40-50% of publicly traded companies with a significant privacy risk have purchased Cyber Insurance Poneman Institute study on cyber insurance (www.poneman.org, Average financial impact of cyber breach incident - $9.4 million Average cost of a digital data breach was $188 per lost or stolen item Costs generally $5,000 - $35,000 per $1 million coverage Deductibles for small companies - $100,000-$250,000, premiums $5,000 to $15,000 per $1 million coverage, limits up to $10 million Deductibles and retentions for larger companies - $1 million to $5 million, premiums $20,000 to $50,000 per $1 million coverage, limits $200 million to $300,000 Policies are customizable 21

22 Is Cyber Insurance Right for Your Company? Be prepared for the underwriting process Harden your network Update IT security and data-breach prevention policies and procedures Update incident response plan Understand your unique cyber risks, if any Understand and audit your third party exposures (vendors, suppliers, cloud providers, off site hosting services, etc.) Know the gaps in your current property and GL policies Review third party and customer contracts for allocation of cybersecurity risks Review insurer s pre-approved defense counsel and authorized vendors lists Retain experienced advisors 22

23 Cyber Insurance Coverage Issues Make sure the policy covers both third-party claims and first-party losses Understand your existing coverages (e.g. business interruption) and buy what you need Watch for sublimits on crisis management expenses, notification and regulatory investigation costs Get retroactive coverage Beware of broad exclusions (e.g. exclusion for coverage on unencrypted devices) Do you need coverage for acts and omissions by third parties? (e.g. outsourced data processing or cloud storage and application vendors) 23

24 Cyber Insurance Coverage Issues Reconcile cyber insurance and contractual indemnity rights Coverage for data restoration costs Allocation of defense costs Request a partial subrogation waiver Does the insurer offer risk management services? Are there preapproved defense counsel, etc.? Does the policy require insurer s prior consent to incur claims-related expenses? 24

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