United States: FINRA Issues Its Cybersecurity Report, Providing Tools And Encouragement To Broker-Dealers

Last Updated: March 3 2015
Article by Daniel Nathan

FINRA recently issued a Report on Cybersecurity Practices ("Report"), growing out of its targeted examination of firms last year. To issue the Report, FINRA gave careful consideration to the needs of many broker-dealers for information and the tools to combat cyber intrusions. The Report is comprehensive, and it doesn't shy away from delving into technical detail. Our review of it leads us to conclude that it is a useful resource for broker-dealers looking to assess and improve their procedures for preventing a cybersecurity attack, and dealing with one if and when it comes.

At the same time, FINRA also issued guidance to enable investors to understand the state of their firms' data protection by issuing a new Investor Alert entitled "Cybersecurity and Your Brokerage Firm." The Alert recommends that investors ask their firms about: the safeguards they have in place to protect personal information and assets; the procedures the firm uses to monitor investors' personal information; the firms' approaches to handling cyber events; whether the firms will reimburse investors if their assets are compromised due to a cyber attack; and what measures the firms recommend investors take to personally protect their information.

FINRA's Report (together with the SEC's recent cybersecurity report) should provide the motivation and some of the tools needed by those broker-dealers who have put off focusing on this area to roll up their sleeves, and additional motivation will come from the firms' own customers.

This Client Alert cannot hope to summarize the 45-page Report, and we encourage those firms embarking on a cybersecurity project to read the entire Report. Here we will point out some of the most relevant observations and recommendations in the Report, with a view to encouraging broker-dealers to review their procedures and adopt the recommendations as appropriate.

GENERAL PRINCIPLES

As FINRA's Report indicates, cybersecurity has been a regular theme in its annual Regulatory and Examination Priorities Letter since 2007, and over the years FINRA has conducted surveys and on-site reviews of firms to increase its awareness of how firms control cyber risks. FINRA points to a variety of factors driving firms' exposure to cybersecurity threats, including advances in technology, changes in firms' business models, and changes in how firms use technology. A prime example of such risks is the increased use of web-based access or mobile devices for brokerage activities.

FINRA defines "cybersecurity" as "the protection of investor and firm information from compromise through the use . . . of electronic digital media." "Compromise" is the loss of data confidentiality, integrity or availability.

FINRA acknowledges that there is no "one size fits all" approach, because firms come in a variety of sizes and business models, and acceptable approaches to compliance and supervision may vary widely among firms. But at the end of the day, "firms must have appropriate risk management measures in place to address the cybersecurity-related threats they face."

FINRA's Report is perhaps at its most useful when it reviews practices that it observed at firms in each area discussed; these discussions will permit broker-dealers to benchmark their practices against the industry in general, and increase the urgency of improving their systems when they find that they fall short.

GOVERNANCE AND RISK MANAGEMENT

A defined governance framework will enable a firm to make decisions about establishing policies and procedures, selecting, implementing and monitoring controls, and establishing an independent assessment function. The governance framework should describe the leadership role that the board of directors (if the firm has one) should play in overseeing the firm's cybersecurity, and that role will require the board, among other things: to understand that cybersecurity is an enterprise-wide risk management issue; to have access to expertise in the area; and to set expectations for management to establish a risk management framework with adequate resources.

The Report notes the benefits to greater board involvement in ensuring that firms adequately focus on cybersecurity. As evidence, the Report cites to FINRA enforcement actions related to cybersecurity that frequently made findings of significant governance or management failures – for example, failures to act on warnings that, if heeded, could have mitigated the loss of customer information. In the Report, FINRA identifies existing industry frameworks and standards that firms can draw upon in developing their approach to cybersecurity, including those created by the National Institute of Standards and Technology, the International Organization for Standardization and International Electrotechnical Commission, and the ISACA, which FINRA found are used by almost 90 percent of the firms reviewed.

CYBERSECURITY RISK ASSESSMENT

FINRA recommends that firms conduct regular assessments to identify cybersecurity risks, and give priority to remediating these risks. FINRA explains that these risk assessments should focus on specific broker-dealer-oriented risks, that is, the compromise of customer or firm confidential information, misuse of customer assets, and theft of proprietary trading algorithms. And, of course, FINRA points out the risk of harm to a firm's reputation in the event of a breach.

A risk assessment should ensure that a firm's controls are adequate to prevent harm, detect potential threats, correct a system after a detrimental event, and predict the possibility of an event occurring. The Report lists fifteen areas in which a firm might want to improve its controls, including controls governing data storage at vendors, employee access, or Wi-Fi protection.

INCIDENT RESPONSE PLANNING

The general assumption for designing cybersecurity procedures and controls is that it is not a matter of if a cyber event might occur, but when. Firms must have an incident response plan that will prepare them to manage a cybersecurity event in order to limit damage, maintain the confidence of external stakeholders, and reduce recovery time and costs. FINRA points to firms that have a dedicated Computer Security Incident Response Team, and for smaller firms approves the step of contracting with a knowledgeable vendor to provide incident response capability.

FINRA cites these incident response steps:

  • Containment to prevent an incident from further damaging a firm, and mitigation of any damage;
  • Eradication of any causes of the incident, and recovery of systems to restore them to normal operation;
  • Investigation of the incident to determine the extent of loss and identify the causes;
  • Notification of all relevant parties, including regulators and, where appropriate, customers; and
  • Making clients whole, including providing free credit monitoring services and reimbursing customers for losses.

VENDOR MANAGEMENT

Even if a firm has established state-of-the-art internal controls and procedures, it remains vulnerable if it does not ensure that the third-party vendors that it uses – for example, for cloud-based services – are not themselves a source of cybersecurity risks. A vendor or its employees could misuse firm data, or the vendor itself could be subject to cyber attack.

The Report provides an extensive list of suggestions for controlling this potential risk area. The recommended practices include:

  • Initial due diligence on prospective vendors;
  • Contractual provisions that set out the vendor's obligations for protecting firm information and permit ongoing oversight of the vendor, among other things; and
  • Ongoing due diligence of a vendor's controls and processes.

STAFF TRAINING

Even with adequate systems and controls, a firm's employees who do not adequately understand and apply them can be weak links and high risk areas. Cybersecurity training therefore is an essential component of any program, and the Report provides suggestions for the content and frequency of such training. The good news is that 95 percent of firms reviewed already provide mandatory cybersecurity training for their staff; the bad news is that those firms that do not will probably be easily identifiable as outliers.

OTHER AREAS

Technical Controls: The Report reviews technical controls approaches in general and specific types of controls to protect firm software and hardware as well as firm data. The discussion is highly technical and will be of value to the IT departments or vendors who are assigned those responsibilities.

Cyber Intelligence and Information Sharing: Firms need to keep up with intelligence about cyber threats – through assigned staff or outside vendors – in order to maintain protections against any new or emerging threats. In addition, firms should participate in information-sharing protocols to benefit from available information about new technologies and recent attacks.

Cyber Insurance: The market for cyber insurance is evolving rapidly, and in some cases costs are decreasing as the number of participants increase and the need for coverage becomes more apparent. There are a variety of cyber insurance plans that provide a range of types of coverage. The Report points out that the evolving nature of cyber threats compels many firms to review their coverage annually.

RECOMMENDATION

Without taking a position on which controls and procedures discussed in FINRA's lengthy Report are more important or effective, it is easy for us to simply recommend that key personnel at all broker-dealers read the Report. After reading it, officials at many firms will derive satisfaction from knowing that they are up-to-date with all of its recommendations and, indeed, that they themselves were the subjects of the best practices that FINRA reports to the industry. Many firms will find that they are largely on point, but will identify some gaps that are worth filling in the interest of having a more effective system. And some firms will have been waiting for this "wake up call" to start the necessary process of putting a system in place. With the benefit of these and other resources, they might find that the job is not as daunting as they feared.

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
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 you may opt out by clicking here

    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.

    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.

    By clicking Register you state you have read and agree to our Terms and Conditions