United States: Cybersecurity: SEC Is Starting To Scrutinize Registrants’ Practices

Last Updated: April 29 2014
Article by Daniel Nathan and Libby J. Greismann

The SEC plans to examine the cybersecurity practices of over 50 registered broker-dealers and investment advisers. The SEC announced its plan in an April 15, 2014 Risk Alert, which closely follows the March 26 Cybersecurity Roundtable at which Chair Mary Jo White underscored the importance of cybersecurity to market security and customer data protection. At the Roundtable, Chair White emphasized the "compelling need for stronger partnerships between the government and private sector" to address cyber threats.1

The Risk Alert included a comprehensive Appendix detailing the types of questions the SEC may be asking registrants in these exams, on such topics as cybersecurity governance, risks associated with remote customer access and risks associated with vendors and third parties. The sample questions include whether companies have discovered malware in their systems, suffered a network breach or found that computers used by customers and vendors to remotely access networks have been compromised since January 2013.2

The scope and detail of the sample questions reflect the SEC's commitment to assessing and encouraging cybersecurity readiness. In the past, the SEC has been fairly active in enforcing Rule 30 of its Regulation S-P (Privacy of Consumer Financial Information), the so-called Safeguards Rule, in the cybersecurity area. The SEC has imposed fines ranging from $100,000 to $275,000 for such deficiencies as the failure of a firm to have customer information policies and procedures for its employees designed to protect customer records and information, distribution of limited and insufficient written materials regarding safeguarding customer information and failure to implement adequate controls to safeguard customer information. FINRA has also been active in the area of cybersecurity, as discussed in our previous Client Alert. However, the increased attention, in the wake of several recent highly publicized intrusions, likely heralds additional enforcement actions and more serious scrutiny of companies' preparedness to respond to the growing threat presented by cyber hackers.

RESPONDING TO THE RISK ALERT

It is incumbent on companies to ensure that their practices are up to snuff when the scrutiny arrives. First, companies should use the SEC's questions themselves to gain insight into the regulators' thinking and adjust their own policies and processes accordingly. The questions are far more specific than anything previously issued by the SEC, and the level of detail is a valuable resource for those companies that are searching for guidance in updating their cybersecurity practices. Companies should ask themselves the questions provided in the Risk Alert to ensure that they are complying with the SEC's proposed cybersecurity framework. Among other things, the SEC will be requesting information about:

  • The firm's cybersecurity governance, including:
    • the firm's practices for managing information security assets;
    • whether the firm conducts periodic risk assessments to identify cybersecurity and physical security threats; and
    • the firm's written information security policy, written business continuity plan to mitigate the effects of a cybersecurity incident and written documentation of cybersecurity roles and responsibilities.
  • The firm's practices for protecting its networks and information, including:
    • employee training in information security and risks;
    • controls to prevent unauthorized escalation of user privileges and lateral movement among network resources;
    • processes for managing IT assets and ensuring regular system maintenance; and
    • the firm's information security policy, written data destruction policy and written cybersecurity incident response policy.
  • The firm's practices for dealing with risks associated with remote customer access and funds transfer requests, including:
    • whether the firm provides customers with on-line account access;
    • the firm's procedures for verifying authenticity of email requests seeking to transfer customer funds; and
    • firm policies for addressing responsibility for losses associated with attacks impacting customers.
  • The firm's practices regarding risks associated with vendors and other third parties, including whether the firm conducts cybersecurity risk assessments of vendors and business partners, and details about those assessments.
  • The practices employed by the firm to assist in detecting unauthorized activity on its networks and devices, and details about those practices.
  • Any previous cybersecurity breach, including any detected malware, unauthorized user breach, fraudulent activity or emails.
  • Any incident in which customer information was stolen, lost or exposed, resulting either from deliberate wrongdoing, an accident or negligence.

If, in reviewing these questions, firms identify aspects of their cybersecurity policies and procedures that do not conform to the SEC's expectations, they should first consider whether their business model and size require such policies. A firm need not be expected to say "yes" or provide detail with respect to every single question asked, but it must be prepared to explain its answer if it appears insufficient. On the other hand, if the firm concludes that it should have a policy or procedure in place, it should immediately develop a plan for instituting the missing practice. A firm should identify an appropriate vendor for strengthening its security plans and lay out a clear timetable for implementing those plans. Such steps allow a firm to demonstrate a good faith effort to the SEC should the firm be examined or audited.

The non-binding nature of the SEC's Risk Alert and proposed questions suggest that the SEC is still working on its approach to cybersecurity issues. Right now, the SEC is focused on gaining information about the state of the industry and it may use that information to issue further guidelines or a more specific framework for improvement. The ability to be flexible and responsive to changing guidelines will serve firms well as the SEC clarifies its requirements and expectations.

Footnotes

1 Chair Mary Jo White, "Opening Statement at SEC Roundtable on CyberSecurity" (March 26, 2014), available at http://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370541286468.

2 The SEC is in a good position to offer such advice, having been the subject of a Government Accounting Office audit earlier this year that identified several ways that the SEC's own network, servers, applications and databases were open to cyberattack. "Without adequate access controls, unauthorized individuals, including intruders and former employees, can surreptitiously read and copy sensitive data and make undetected changes or deletions for malicious purposes or for personal gain," the auditors wrote.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Daniel Nathan
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.