United States: Cybersecurity 2018 – The Year In Preview: Financial Institutions And The SEC

Last Updated: December 21 2017
Article by Michael Licker

Editors' Note:  This is the eighth in a multi-part end-of-year series examining important trends in data privacy and cybersecurity during the coming year.  Previous installments include analyses  of  HIPAA  compliance emerging security threats federal enforcement trends state enforcement trends biometrics education, and  international law and cyberwar.  Up next:  cryptocurrency.

The U.S. Securities and Exchange Commission has made no secret about the gravity of the cybersecurity threat facing the investment community.  Since at least 2014, the SEC has made a point in emphasizing the cyber threat through enforcement actions, inspections and examinations, roundtables, and policy speeches.  While the change in administration brought new leadership to the Commission, that group has made clear at every possible opportunity that combatting the cyber threat will be a top SEC priority in 2018 and beyond.  For example, Enforcement Division co-director Steve Peikin, a former federal prosecutor and partner at Sullivan & Cromwell, referred to cyber attacks as the "greatest threat to our markets right now."  His co-director Stephanie Avakian, an SEC Enforcement veteran, similarly called the cyber threat "among the greatest risks facing investors and the securities industry."  The import of their message is clear – the investment community, and, in particular, SEC-regulated entities, should be on alert in the coming year.

Historically, the SEC has addressed the cyber threat through enforcement actions aimed at entities and individuals that threaten market integrity, either by failing to take necessary cyber precautions or engaging in cyber-related misconduct, and through regular cyber examinations of registered entities by the SEC's Office of Compliance Inspections and Examinations ("OCIE").

SEC Cyber-Enforcement

On the enforcement front, the Commission's Enforcement Division created a new Cyber Unit in September 2017.  This unit has a broad mandate to target all forms of cyber-related misconduct, including market manipulation schemes involving false information spread through electronic and social media, hacking to obtain material nonpublic information, violations involving distributed ledger technology and initial coin offerings (more on that to follow), misconduct involving the dark web, intrusions into retail brokerage accounts and cyber-related threats to trading platforms and other market infrastructure.  The Market Abuse Unit previously handled the SEC's cyber investigations, but the Commission deemed the threat important enough to create a separate unit (the Enforcement Division's first newly created unit since 2010).

Beyond press releases and policy statements, the Enforcement Division has offered some guidance on the Cyber Unit's focus in 2018.  Focus areas include: (1) cyber-related misconduct that is used to gain an unlawful market advantage, (2) the failure of registered entities to appropriately safeguard information or ensure system integrity, and (3) cyber-related disclosure failures by public companies.

The first area – cyber-related misconduct – has historically been the SEC's primary cyber enforcement focus area.   During the past year, SEC enforcement actions have targeted: (1) hacking to access material, nonpublic information in advance of a material announcement or event; (2) an account intrusion in order to conduct manipulative trading; and (3) disseminating false information electronically, including through EDGAR, in order to manipulate stock prices.

With respect to the second area – the failure of registered entities to appropriately safeguard information – the SEC has often handled such failures through the OCIE examination process.  Avakian has indicated that while the SEC will continue to do so in appropriate cases, it will consider enforcement action if warranted.  The final area identified by Avakian – the failure by a public company to make a cyber-related disclosure (i.e., disclosure of a cyber breach or other event in SEC reporting) – is a new area of enforcement for the SEC.  While the SEC will not look to second guess reasonable, good-faith disclosure decisions, it will take enforcement action if an appropriate case presents itself.  Regardless of whether the SEC ultimately takes enforcement action, the SEC's message to regulated entities going forward is clear – closely guard confidential information from cyber attack, and if an attack happens, determine whether some form of public disclosure is required.

More recently, on December 11, 2017, the Cyber Unit directly confronted a new and growing cyber risk, halting an initial coin offering by California-based Munchee Inc.  Munchee was seeking $15 million in capital for its blockchain-based food review service.  In selling digital tokens, the company and promoters emphasized that the tokens could increase in value, which the SEC concluded could cause investors to reasonably believe that they could generate a return on investment.  The SEC thus determined that the coin offering constituted an unregistered securities offering.  Further emphasizing the SEC's focus on this new technology, on the same day that the SEC announced the Munchee enforcement action, SEC Chairman Jay Clayton provided a statement on cryptocurrencies and initial coin offerings.  He offered warnings to both investors and market professionals.  This should serve as a clear signal that the SEC will not hesitate to conduct additional enforcement activity in this arena.

OCIE Cyber Exams

Outside of the Enforcement Division, OCIE continues to make cybersecurity a prominent aspect of its examinations of registered entities, including broker-dealers, investment advisers and investment companies.  OCIE conducted its first targeted cybersecurity sweep in 2014.  It followed up with a Cybersecurity 2 Initiative, the results of which were released in August 2017.

The exams focused on how written policies and procedures addressed: (1) governance and risk assessment; (2) access rights and controls; (3) data loss prevention; (4) vendor management; (5) training; and (6) incident response.   The good news is that registered entities have made vast improvements since 2014.  In particular, of the 75 firms examined, almost all of them had adopted written policies and procedures concerning the protection of customer and/or shareholder data.  The bad news is that many of these policies were either not sufficiently robust or not routinely followed.

OCIE identified a number of common deficiencies, including: (1) policies and procedures provided employees only with general guidance rather than specific examples of safeguards; (2) firms either did not adhere to the policies or the policies did not reflect their actual practices; and (3) firms did not adequately conduct system maintenance, such as the installation of software patches to protect against vulnerabilities.

OCIE also provided guidance on best practices for developing and implementing appropriately robust policies and procedures.  These best practices include: (1) maintaining an inventory of all data, information and vendors, including a classification of risks regarding each; (2) detailed cybersecurity-related instructions for penetration tests, security monitoring and system auditing, access rights and reporting; (3) maintenance of schedules and processes for testing data integrity and vulnerabilities; (4) established and enforced controls to access data and systems; (5) mandatory information security employee training; and (6) vetting and approval of procedures by senior management.

The weaknesses and best practices identified by OCIE should provide clear guidance to registered entities on how to implement effective cyber policies going forward.  Like the SEC's top officials, OCIE has made clear that cybersecurity is one of top compliance risks for financial firms, and, as a result, OCIE will continue to make it a key aspect of its annual examination process.

To view Foley Hoag's Security, Privacy and The Law Blog please click here

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.

Authors
Events from this Firm
16 Jan 2019, Webinar, Boston, United States

Who said there’s no looking back? It is crucial to consider key takeaways from the most important IP cases from 2018 when planning for 2019.

Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
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 (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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