The Securities and Exchange Commission (SEC) has placed a very strong emphasis on materiality in its new cyber disclosure requirements. But what does "material" mean in the context of these rules, and why is it so important for both companies and investors?
In this blog post, we take a brief look at materiality including its definition, factors that influence it, and some best practices for assessing materiality accurately.
In the context of the SEC's cyber disclosure requirements, an event is considered material if it could have a significant impact on a company's financial condition, operations, or market valuation. Materiality plays a crucial role in ensuring that investors receive relevant information about a company's cybersecurity risks and incidents.
Understanding materiality is important for companies because it dictates how they must respond when reporting cybersecurity incidents to the SEC and the public.
Several factors influence whether a cybersecurity incident is considered material. These include the size and nature of the incident, the potential impact on the company's finances and reputation, and how the incident could affect market perceptions.
For example, a data breach that results in the compromise of a large amount of sensitive customer information would likely be considered material. However an incident involving a single unopened phishing email where nothing is acted upon would not be considered material.
Determining materiality can be challenging for companies because it requires a deep understanding of the potential impact of cybersecurity incidents. Companies must balance the need for timely disclosure with the risk of causing unnecessary alarm among investors. It's important to note that the SEC deadline is not 4 days after the discovery of an incident but 4 days after Materiality is determined.
To navigate these challenges, companies should involve legal counsel, cybersecurity experts, and key stakeholders in the decision-making process. They should also stay informed about industry best practices and SEC guidelines on materiality.
Materiality is a critical concept in the context of the SEC's cyber disclosure requirements. By understanding and effectively assessing materiality, companies can provide investors with the information they need to make informed decisions while ensuring compliance with SEC regulations. Below we outline best practices for assessing materiality to help organizations navigate the complexities of the SEC's cyber disclosure requirements with confidence.
Involving board members, legal counsel, and cybersecurity experts in assessing materiality helps ensure a comprehensive and balanced approach. These stakeholders can provide valuable insights and perspectives on the potential impact of incidents.
Quantitative Factors: This includes hard numbers like the financial impact of a cyber incident, such as the cost of remediation, potential fines, and lost revenue.
Qualitative Factors: These are more subjective aspects that can influence investor decisions. Examples include the reputational damage from a data breach, the potential loss of customer trust, and the impact on business operations.
Its important companies consider both types of factors to make a more informed judgment about whether an incident is likely to be material or not.
Ongoing monitoring of cybersecurity risks and regular reporting to key stakeholders can help companies stay proactive in assessing materiality. This approach allows companies to understand the impact of incidents and respond quickly, helping to maintain compliance with SEC requirements.
The Cado Platform helps organizations better understand the impact of detected threats, in turn helping them to assess whether an incident is indeed material or not. With Cado, you can:
Interested to see how the Cado platform can ensure compliance with the latest legislation? Contact us to schedule a demo.