United States: The SEC OCIE Announces Increased Scrutiny Of Broker-Dealers' And Investment Advisers' Cybersecurity Programs

On September 15, 2015, the Securities and Exchange Commission's Office of Compliance Inspections and Examinations (OCIE) issued a National Exam Program Risk Alert (2015 Risk Alert) to provide broker-dealers and investment advisers with information on the focus areas of its upcoming round of cybersecurity examinations. OCIE is building on its previous cybersecurity examinations to increase scrutiny of firms' cybersecurity practices, policies, and procedures. While the primary objective of last year's initial cybersecurity initiative was gathering information on industry practices, this year OCIE will perform more testing to assess firms' implementation of these policies and procedures. Given the increased regulatory scrutiny, as well as the rapidly evolving cyber-threat landscape, firms are well-advised to assess their current level of cybersecurity preparedness and be prepared to show the appropriateness of, and compliance with their cybersecurity policies and procedures, with a particular focus on vendor management and preparation for incident response.

Background on OCIE's Cybersecurity Initiative

OCIE administers the SEC's examinations of registered entities, including approximately 4,500 broker-dealers and more than 10,000 investment advisers in the United States, to ensure compliance with the federal securities laws. As part of the examination process, OCIE typically submits requests to the examined firm for information, or requests information while on-site, and may then hold interviews with key personnel at the firm. On April 15, 2014, OCIE launched its inaugural Cybersecurity Examination Initiative as part of its effort to "assess cybersecurity preparedness in the securities industry." OCIE then sent questionnaires to, and conducted cybersecurity examinations of, 57 broker-dealers and 49 investment advisers. These initial examinations were designed to discern basic distinctions in the level of preparedness among the examined firms and focused on cybersecurity governance, network and information security policies and procedures, vendor management policies, and online customer access. After completing its initial cybersecurity examinations, OCIE released a Risk Alert summarizing its observations, including the percentage of broker-dealers and advisers that (i) experienced cyberattacks (88 percent and 74 percent, respectively); (ii) maintained written information securities policies (93 percent and 83 percent); (iii) conducted risk assessments (94 percent and 79 percent); and (iv) incorporated cybersecurity into vendor risk management (72 percent and 24 percent). Although the SEC did not provide any commentary when it published its observations (other than to say it will continue to focus on cybersecurity using risk-based examinations), the alert suggested that certain policies and practices are emerging as industry standards.

Section 30 of Regulation S-P: Privacy of Consumer Financial Information and Safeguarding Personal Information (17 C.F.R. §248.30), which requires brokers, dealers, investment advisers, and investment companies to adopt written policies and procedures that address administrative, technical, and physical safeguards for the protection of customer records and information.1

While the SEC has not enacted regulations imposing more specific cybersecurity requirements on broker-dealers and investment advisers, the SEC has scrutinized firms' cybersecurity policies and procedures under Regulation S-P which requires policies and procedures "reasonably designed" to protect against any threats to the security or integrity of customer information and to protect against unauthorized access to customer information.2 As such, the information included in the 2015 Risk Alert is particularly insightful into the cybersecurity policies and procedures likely to be viewed by the SEC as "reasonably designed" under Regulation S-P and thus, merits close review by firms.

Focus Areas of OCIE's 2015 Cybersecurity Examination Initiative

The latest Cybersecurity Examination Initiative announced in the 2015 Risk Alert is the result of the SEC's continued emphasis on cybersecurity preparedness in light of recent breaches and the continuing cybersecurity threats facing the financial industry.[3] The 2015 Risk Alert provides an overview of OCIE's key focus areas during the next round of examinations and includes in the appendix a sample request for information.

According to the 2015 Risk Alert, the key areas that OCIE will focus on during its next round of examinations are:

  • Cybersecurity Governance and Risk Assessment: Examiners may assess how registrants delegate responsibility for cybersecurity within the organization; whether firms are periodically evaluating cybersecurity risks through risk assessments, vulnerability scans, and penetrations tests; whether firms are tailoring their processes and controls to their business; and the level of communication to, and involvement of, senior managers and the board on cybersecurity preparedness.
  • Access Rights to and Controls of Systems and Information: Examiners may assess whether and how firms implement "basic controls" to prevent unauthorized access to systems and information, such as management of user credentials, use of multifactor authentication, encryption of portable devices, remote tracking and wiping of portable devices, network segmentation, and security of customers' online accounts.
  • Data Loss Prevention: Examiners may review firms' policies and procedures on data mapping and classification, as well as information on the systems and utilities used to prevent, detect, and monitor data loss, particularly customer data. OCIE is particularly interested in assessing how firms monitor the volume of data transferred outside the firm by employees or through third parties, such as by email or uploads.
  • Vendor Management: Since many high-profile data breaches resulted from attacks on third-party vendors, examiners plan to assess firms' vendor management policies and procedures, such as those addressing due diligence, contract terms to mitigate cybersecurity risks, risk assessments or audit reports required of vendors, and procedures for supervising, monitoring, and tracking vendors.
  • Training: According to the 2015 Risk Alert, the lack of proper employee and vendor training puts a firm's data at risk, but with proper training, "employees and vendors can be the firm's first line of defense, such as by alerting firm IT professionals to suspicious activity and understanding and following firm protocols with respect to technology." Therefore, examiners plan to assess firms' training of employees and vendors regarding information security and risks, including the training methods, dates, topics, participants, and any written materials provided.
  • Incident Response: Although OCIE recognizes that firms generally acknowledge the risks of cyberattacks and potential breaches, OCIE plans to assess how prepared firms are to respond to a security incident. Accordingly, examiners plan to assess firms' incident response plans, whether and how firms conduct tabletop exercises to test incident response plans, and information related to security incidents experienced by the firm, such as the date of the incident, discover process, escalation, and any remediation efforts taken.

In addition, "[a]s part of OCIE's efforts to promote compliance and to share with the industry where it sees cybersecurity-related risks," OCIE included in the appendix to the 2015 Risk Alert a five-page sample request for information that may be used in the examinations. The sample request consists of 34 multipart questions, organized under each of the above six focus areas that seek information about a range of cybersecurity policies and procedures, controls, and practices. Importantly, OCIE has moved beyond merely requesting cybersecurity-related policies and procedures, as was primarily the case during last year's examinations, and now plans to request information demonstrating that the firms have, in fact, effectively implemented their cybersecurity policies and procedures. For example, last year's sample request sought policies and procedures relating to controls of employee access rights, whereas this year, the sample request seeks documentation evidencing firms' tracking and approval of employee access rights, as well as information on employee terminations and reassignments in order for OCIE to test the accuracy of firms' documentation. The sample requests seek a broad swath of detailed information that, without advance preparation, will take firms substantial time to gather. Even though only a small fraction of registered firms may ultimately be examined as part of the Cybersecurity Initiative, firms should take heed and proactively assess their cybersecurity programs, as OCIE is also likely to focus on cybersecurity during annual inspections and examinations. Moreover, as recent enforcement actions make clear, every firm is only one breach away from potential scrutiny by the SEC Division of Enforcement, FINRA, and other regulators.


Despite the lack of specific regulatory requirements, firms are expected to have appropriate administrative, technical, and physical safeguards for the protection of their computer systems and customer information.

Policies and Procedures: As a starting point, firms should determine whether they have policies and procedures covering the areas identified in the sample request, including, for example, basic written information security policies; policies for collecting, storing, and disposing of customer information; and policies relating to employee access controls. Any missing policies and procedures should be tailored to the firm's business and implemented, or the firm should be prepared to explain why such policies and procedures are unnecessary. Importantly, the sample request indicates that OCIE will be particularly focused on firms' preparedness in responding to security incidents. Therefore, firms should develop (or review and update) an incident response plan as a guide for the incident response team to quickly and effectively identify what occurred, contain it, communicate with affected individuals, and implement remediation measures to prevent the incident from happening again. The incident plan should be practiced periodically through table-top exercises using mock-breach scenarios and updated to include playbooks for incidents posing the greatest risk to the organization and its clients. Firms should document all such measures taken.

Personnel: Also critical to an effective cybersecurity program are well-defined roles and responsibilities of employees for cybersecurity-related matters, including establishing an incident response team and designating a chief information security officer or equivalent position. Firms must recognize, however, that cybersecurity isn't just an "IT" issue; it's an enterprise-wide issue. Senior managers and the board should take an active role in the firm's cybersecurity, and employees should receive periodic training on information security risks, particularly since many security incidents are the result of employee error. Employee training should continually evolve to address the current threats to the firm, such as the latest phishing campaigns, and all training should be documented by the firm.

Technology: As the SEC gains a broader understanding of the technology that firms use as part of their cybersecurity programs, firms can expect more probing inquiries into the appropriateness of the systems and tools utilized for cybersecurity. OCIE described in the 2015 Risk Alert what it views as "basic controls," such as multifactor authentication for employee and customer access, updating system access rights, patch management, and change controls for system configurations. However, because there is no one-size-fits-all solution to cybersecurity, firms should be able to demonstrate the use of a risk-based approach to prioritize implementation of appropriate technology built on a defense in depth strategy, which means layering security mechanisms such that the impact of a failure in any one security mechanism is minimized. To do this, firms must know where sensitive data resides (through data mapping and data classification) and confine it to a segmented environment so that advanced security technology can be effectively deployed.

Third-Party Service Providers: In light of several recent high-profile breaches that resulted from attacks on third-party providers, firms should develop vendor risk management policies and procedures designed to identify, mitigate, and monitor risks associated with providing third parties with access to the firm's network and data. OCIE expects firms to conduct due diligence during vendor selection, include appropriate contractual terms addressing the security risks (such as requiring vendors to use appropriate safeguards, provide notice of an incident, provide periodic proof of security compliance, and indemnify the firm if an incident occurs), and utilize controls designed to monitor and appropriately limit vendor access.

Ongoing Diligence: Cybersecurity preparedness requires ongoing diligence, as the threat landscape and firms' attack surfaces continuously evolve. Although OCIE's stated purpose for sharing its focus areas and the attached sample request was to "encourage" firms "reflect" upon their own cybersecurity practices, policies, and procedures, the message is clear that registered broker-dealers and investment advisers are expected to periodically conduct self-evaluations by performing risks assessments, vulnerability scans, and penetrations tests. Whether they perform them internally or with the assistance of an outside security consultant, firms should use OCIE's sample request as a road map to assess the cybersecurity issues that the SEC views as most critical. For any security gaps identified, firms should document the remediation measures taken or, if necessary, create a written plan and timeline to implement the remediation measures in the future.


1. See, e.g., Exchange Act Release No. 4204, Admin. Proc. No. 3-16827 (Sept. 22, 2015) (finding that an investment advisor violated Regulation S-P in connection with a breach of a third-party hosted web server exposing 100,000 individuals' information because the firm failed to have adequate policies and procedures, such as conducting risk assessments, using a firewall and encryption to protect client data on the server, and failing to have an incident response plan). FINRA also has jurisdiction to bring actions against broker-dealers under Regulation S-P. See, e.g., D.A. Davidson & Co., FINRA Letter of Acceptance, Waiver and Consent, No. 2008015299 (April 9, 2010) (announcing $375,000 settlement for inadequate security that allowed intruder to obtain client's personal information).

2. Firms must also consider Regulation S-ID, the Identity Theft Red Flags Rules, which require covered entities to develop and implement a written program to "detect, prevent, and mitigate identity theft in connection with the opening of a covered account or any existing covered account." 17 C.F.R. § 248.201(d).

3. Other financial regulators have also recently addressed cybersecurity issues. For example, in May of this year, the SEC's Division of Investment Management, which regulates investment advisers and investment companies, issued guidance on measures to consider in addressing cybersecurity. In February 2015, FINRA issued a report outlining cybersecurity principles and practices it expects broker-dealers to consider.

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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