United States: OCIE Observations From The Second Round Of Cybersecurity Examinations

On August 7, 2017, the Securities and Exchange Commission's ("SEC") Office of Compliance Inspections and Examinations ("OCIE") released a risk alert (the "Risk Alert") summarizing observations from the second round of cybersecurity sweep examinations on 75 SEC registered investment firms including broker-dealers, investment advisers, and investment companies.

OCIE announced its first cybersecurity sweep initiative in April 2014 and shortly thereafter conducted an initial sweep examination of 57 broker-dealers and 49 investment advisers. In September 2015, OCIE announced that a second round of examinations would focus on firms' written policies and procedures and assessing the implementation of those polices and procedures, specifically: (1) governance and risk assessment; (2) access rights and controls; (3) data loss prevention; (4) vendor management; (5) training; and (6) incident response. The second round initiative also included a different population of firms, and unlike the first round also included investment companies.

In both initiatives, OCIE announced the sweeps through risk alerts and in both instances OCIE attached to those risk alerts Appendices, which contained lists of questions and topics that registrants could expect to encounter in an SEC cybersecurity examination. The risk alerts announcing the first round and second round of sweep examinations should be considered essential reading. K&L Gates issued the following client alerts on the SEC's takeaways from the first round and the announcement of the second round, which may be found here and here.

SEC Observations

On the positive side, the Risk Alert noted a general improvement in cybersecurity preparedness since the first round. However, areas pertaining to oversight and compliance could still be improved to address existing vulnerabilities.

The Risk Alert included the following observations:

  • The vast majority of investment advisers and funds, and nearly all broker-dealers conducted periodic risk assessments to identify cybersecurity threats and vulnerabilities, in addition to potential business consequences of a cyber incident;
  • Despite the fact that nearly all broker-dealers and almost half of the advisers and funds conducted vulnerability scans and penetration tests on critical firm systems, firms did not appear to fully remediate some high-risk observations discovered by the tests and scans;
  • All firms had some tool or system to prevent, detect, and monitor personal identification information data loss;
  • Although all broker-dealers and nearly all advisers and funds had a regular system maintenance process in place (including the installation of software patches), a few of the firms had a significant number of security patches (including critical system updates) that had not yet been installed;
  • Nearly all firms had policies and procedures that addressed Regulation S-P and cyber-related business continuity plans, and most advisers and funds and nearly all broker-dealers had specific Regulation S-ID and cybersecurity policies;
  • While the majority of broker-dealers had plans for data breach incidents and notifying clients of material events, less than two-thirds of the advisers and funds had such plans;
  • All broker-dealers and a substantial number of advisers and funds either maintained a cybersecurity organizational chart and/or delineated cybersecurity roles and responsibilities within the firm;
  • The vast majority of broker-dealers and two-thirds of advisers and funds had authority to transfer customer/shareholder funds to third-party accounts;
  • While all of the advisers and funds maintained policies regarding the verification of customer identities to transfer funds, some broker-dealers appeared to have informal practices but did not memorialize their process into the firm's written supervisory procedures; and
  • All firms either conducted vendor risk assessments or had vendors provide the firm with a risk management and performance report, in addition to certification reports or security reviews.

OCIE specifically observed that a majority of firms' information protection policies and procedures appeared to have one or more of the following issues:

  1. Policies and procedures were not reasonably tailored to the firm's business;
  2. Firms either did not adhere to the policies and procedures of the policies did not reflect actual practices of the firm; and
  3. Firms that did not appear to adequately conduct system maintenance (i.e., firms were using outdated operating systems or failed to fully remediate discovered vulnerabilities) were also exposed to data breach vulnerabilities that could give rise to data privacy related issues arising under Regulation S-P.

During these examinations, OCIE staff observed six elements included in the policies and procedures of firms that OCIE believed had implemented robust controls. While not recommendations per se, the Risk Alert states that firms would benefit from considering such elements:

  1. Maintenance of an inventory of vendors, data, and information - Policies and procedures included a complete inventory of data and information, along with classifications of the risks, vulnerabilities, data, business consequences, and information regarding each service provider and vendor, if applicable.
  2. Detailed cybersecurity-related instructions regarding items such as penetration test, security monitoring and system auditing, access rights, and reporting - OCIE provided specific examples of how instructions were given with respect to penetration tests, security monitoring and system auditing, access rights and reporting.
  3. Maintenance of prescriptive schedules and processes for testing data integrity and vulnerabilities - Vulnerability scans of core IT infrastructure were required with prioritized action items for any identified concerns and patch management policies.
  4. Established and enforced controls to access systems and data - Certain firms included detailed "acceptable use" policies specifying employees' obligations when using firm networks and equipment and also required and enforced controls for mobile devices. Third-party vendors were required to provide periodic logs of their activity on firms' networks. Immediate termination of access for terminated employees and very prompt termination of access for employees that left voluntarily.
  5. Mandatory employee training - Information security training at on-boarding and periodically thereafter.
  6. Engaged senior management - Management involved in vetting and approving applicable policies and procedures.

K&L Takeaways

For some years, OCIE has repeated the refrain that policies and procedures should be reasonably tailored, applied to the business, enforced, and periodically tested. The Risk Alert continues that trend by providing specific and detailed examples of how firms could implement and apply their cybersecurity policies and procedures. Among those recommendations is an emphasis that firms take steps to remediate discovered vulnerabilities.

OCIE points out in the Risk Alert that its views are those of the staff, that they do not constitute legal advice, and that the Commission itself has expressed no view on the contents of the Risk Alert. Further, Regulation S-P Rule 30(a)—which defines the standard of care for handling customer records and information—is a principles-based rule that does not contain specific technological requirements, but rather requires registrants to have policies and procedures "reasonably designed" to insure the security and confidentiality of customer records and information, to protect against anticipated threats, and to protect against unauthorized access. While those factors might lead registrants to conclude that OCIE's recommendations are not required, firms should act with caution. To the extent that OCIE clarifies its expectations through risk alerts, those expectations may become the standards against which the OCIE will judge a registrant's cybersecurity efforts, either in an examination or investigation. Registrants should consider carefully how closely their policies and procedures adhere to the guidance from OCIE, and whether departures from such guidance are defensible under the reasonable design standard.

OCIE, in conducting its cybersecurity examinations, will expect that firms be familiar with and have considered its guidance. We also have observed that OCIE has looked favorably on firms that incorporate guidance from specific industry standards, such as the National Institute of Standards and Technology or the International Organization for Standardization in their compliance policies and procedures. Such standards will not be applicable to every firm, but knowledge about such standards can prove helpful in tailoring and applying appropriate policies and procedures. Any implementation of such standards should be handled in concert with a professional third-party consultant.

Additionally, beyond the SEC's cybersecurity regime, firms should be aware that they may be subject to requirements of other regulatory bodies. Specifically, some firms may be subject to requirements imposed by the Federal Trade Commission and the Financial Industry Regulatory Authority. Certain states also impose cybersecurity requirements. Such regulatory requirements may be above and beyond those of the SEC's.


1. See 17 C.F.R. Part 248, Subpart A—Regulation S–P: Privacy of Consumer Financial Information and Safeguarding Personal Information. See also Disposal of Consumer Report Information, Securities Exchange Act of 1934 ("Exchange Act") Release No. 50781, Investment Advisers Act of 1940 ("Advisers Act") Release No. 2332, Investment Company Act of 1940 ("Investment Company Act") Release No. 26685 (December 2, 2004), 69 Fed. Reg. 71321 (December 8, 2004) and Privacy of Consumer Financial Information (Regulation SP), Exchange Act Release No. 42974, Investment Company Act Release No. 4543, Advisers Act Release No. 1883 (June 22, 2000), 65 Fed. Reg. 40334 (June 29, 2000).

2. See Identity Theft Red Flags Rules, Exchange Act Release No. 69359, Advisers Act Release No. 3582, Investment Company Act Release No. 30456 (April 10, 2013), 78 Fed. Reg. 23637 (April 19, 2013). See 17 C.F.R. Part 248, Subpart C—Regulation S-ID: Identity Theft Red Flags.

3. OCIE also recommended that firms consider guidance from the SEC's Division of Investment Management and the cybersecurity issues discussed in Commission orders in settled enforcement proceedings. See, e.g., IM Guidance Update: Cybersecurity Guidance (April 2015), In re Morgan Stanley Smith Barney LLC, Exchange Act Release No. 78021, Advisers Act Release No. 4415 (June 8, 2016), In re R.T. Jones Capital Equities Management Inc., Advisers Act Release No. 4204 (September 22, 2015), and In re Craig Scott Capital LLC, Exchange Act Release No. 77595 (April 12, 2016).

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.

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.

In association with
Related Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
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.


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.


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.


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.


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.


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.


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.