United States: SEC (OCIE) Cybersecurity Initiative

The US Securities and Exchange Commission's (SEC) Office of Compliance Inspections and Examinations (OCIE) has issued a National Exam Program Risk Alert entitled OCIE Cybersecurity Initiative (the "Risk Alert") in which it announced its plans to conduct examinations of more than 50 (of approximately 15,000) registered broker-dealers and investment advisers.1

The Risk Alert does not indicate the nature of the firms that OCIE intends to examine, although it can be expected that the sample may be designed to elicit information about how firms of different sizes and levels of complexity are approaching and addressing cybersecurity risks. Accordingly, registered broker-dealers and investment advisers should review the Risk Alert carefully and begin preparations for dealing with a potential examination by OCIE of their cybersecurity defenses, whether as part of this initial review or in the future.

The Risk Alert includes a sample information request list that demonstrates the many categories of detailed information that OCIE will potentially be seeking from the entities being examined. This important and somewhat unusual disclosure by OCIE is, per the Risk Alert, "intended to empower compliance professionals in the industry with questions and tools they can use to assess their firms' level of preparedness, regardless of whether they are included in OCIE's examinations."

More substantively, the sample information request list can be used by a firm's compliance professionals as a guide to map with greater depth and breadth the firm's cyber infrastructure, assess the firm's cybersecurity risks and document, implement and monitor policies and procedures regarding identification, documentation, prioritization, management and mitigation of cyber risks. In this regard, the sample information request list suggests that all financial firms should, among various other measures: 

  • be using an established framework to address cybersecurity;2
  • have policies and procedures in place to manage information security assets, networks and information, including the prioritization of resources for protection based on their sensitivity and business value; 
  • conduct periodic risk assessments to identify physical security threats and vulnerabilities that bear on cybersecurity;
  • identify a person responsible for overseeing cybersecurity risks; and
  • have a cybersecurity incident response policy.

Registered broker-dealers and investment advisers should review the information requests included in the Risk Alert and evaluate their existing cybersecurity policies and procedures. Firms should also prepare for greater scrutiny of their cybersecurity policies and procedures. 

The Risk Alert references the February 2014 issuance by the NIST of its first iteration of a "Framework for Improving Critical Infrastructure Cybersecurity."3 NIST's Framework is intended to "help organizations charged with providing the nation's financial, energy, health care and other critical systems better protect their information and physical assets from cyber attack" and "provides a structure that organizations, regulators and customers can use to create, guide, assess or improve comprehensive cybersecurity programs."

We believe the Risk Alert may indeed serve as a significant "empowering" tool for compliance professional and boards. Furthermore, in our view, the NIST Framework for cybersecurity that is referenced in the Risk Alert can be viewed as analogous to COSO's framework for internal controls.4 Public companies have developed internal controls over the last several years, and specifically in response to requirements under Section 404 of the Sarbanes-Oxley Act of 2002, generally using the COSO internal control framework. Similarly, we believe that public companies (and other organizations) generally may come to use the NIST Framework to develop controls to address cybersecurity.

Taken together with the NIST Framework, the OCIE Risk Alert and sample information request list show that cybersecurity, rather than being a mere IT issue, is a business issue that raises significant operational, financial and reputational risks that should be addressed as part of a company's enterprise risk management program.

Cybersecurity is not a new issue for the SEC or other regulators in the United States and globally. In 2011, the SEC's Division of Corporation Finance issued CF Disclosure Guidance: Topic No. 2, "Cybersecurity"5, in which it stated that:

Registrants should disclose the risk of cyber incidents if these issues are among the most significant factors that make an investment in the company speculative or risky. In determining whether risk factor disclosure is required, we expect registrants to evaluate their cybersecurity risks and take into account all available relevant information, including prior cyber incidents and the severity and frequency of those incidents. As part of this evaluation, registrants should consider the probability of cyber incidents occurring and the quantitative and qualitative magnitude of those risks, including the potential costs and other consequences resulting from misappropriation of assets or sensitive information, corruption of data or operational disruption. In evaluating whether risk factor disclosure should be provided, registrants should also consider the adequacy of preventative actions taken to reduce cybersecurity risks in the context of the industry in which they operate and risks to that security, including threatened attacks of which they are aware.

As part of the continued and increased national and global attention to cybersecurity issues, the SEC hosted a Cybersecurity Roundtable in March 2014, during which Chair Mary Jo White referred to the NIST Framework and noted the "compelling need for stronger partnerships between the government and the private sector" to address cybersecurity risks. She further stated that:

The SEC's formal jurisdiction over cybersecurity is directly focused on the integrity of our market systems, customer data protection, and disclosure of material information. But it is incumbent on every government agency to be informed on the full range of cybersecurity risks and actively engage to combat those risks in our respective spheres of responsibility.

In light of the increasing focus on cybersecurity by the U.S. government, including not only the SEC but also the U.S. Department of Homeland Security, NIST and other agencies, as well as international organizations like ISO, it is generally expected that every public company should have already considered cybersecurity matters and risks. A significant number of companies globally have already implemented policies and procedures to address the voluntary practices set out in the NIST Framework or the ISO standards, most significantly for identifying cybersecurity threats, testing cybersecurity procedures, regularly updating procedures to address identified threats and appropriately communicating with internal and external stakeholders about cybersecurity risks. But a significant number of companies have also found themselves unprepared for cyber attacks and have yet to take appropriate steps, including in some instances to even assign the oversight of cybersecurity risks to senior management or to the board of directors (or both), to address cybersecurity risks.

OCIE's Risk Alert indicates that registered broker-dealers and investment advisers must be ahead of the curve in addressing cybersecurity risks and prepared for addressing further guidance from the SEC or other agencies of the U.S. government. Indeed, it is foreseeable that regulation of cybersecurity risks could ultimately be formulated in a manner that corresponds to regulations pertaining to internal control under Sarbanes-Oxley Section 404. The risk of cybersecurity threats to financial firms (and other companies) and their investors, customers and other constituents and the need for such firms to adopt and regularly monitor appropriate defenses against those threats is great enough potentially to lead to such a result.

Please contact us if you have questions about the Risk Alert or cybersecurity, including cybersecurity governance matters.


1 The Securities and Exchange Commission, National Exam Program Risk Alert, OCIE Cybersecurity Initiative (April 15, 2014)

2 Frameworks established by the National Institute of Standards and Technology ("NIST") and the International Organization for Standardization ("ISO") are referenced in the sample information request. NIST is a non-regulatory agency of the U.S. Department of Commerce that "promotes U.S. innovation and industrial competitiveness by advancing measurement science, standards and technology in ways that enhance economic security and improve our quality of life." (See NIST's press release regarding the issuance of the framework) ISO is a network of national standards bodies, whose membership includes most countries across the globe, with headquarters in Geneva Switzerland. ISO began operations in 1947 has published over 19,500 International Standards covering almost all aspects of technology and manufacturing. ISO's cybersecurity paper is available.

3 Available at Framework for Improving Critical Infrastructure Cybersecurity. NIST was directed to establish this framework under the February 12, 2013, Executive Order 13636 issued by President Obama.

4 "COSO" is the Committee of Sponsoring Organizations of the Treadway Commission. COSO's stated goal is to provide thought leadership dealing with three interrelated subjects: enterprise risk management ("ERM"), internal control, and fraud deterrence. In 1992, COSO published Internal Control – Integrated Framework. Section 404 of the Sarbanes-Oxley Act basically requires public companies use COSO's framework to assess and report on the design and operating effectiveness of their internal controls. COSO recently updated its framework.

5 Available at CF Disclosure Guidance: Topic No. 2.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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