The SEC Recently Issued A Cybersecurity Risk Alert For Financial Industry
The Securities and Exchange Commission (SEC) recently issued a cybersecurity risk alert that reminds the financial industry that it still has work to do. The risk alert specifically summarizes the Office of Compliance Inspections and Examinations’ observations from the latest round of examinations of registered broker‐dealers, investment advisers, and investment companies.
The SEC first launched its Cybersecurity Examination Initiative in 2015. The latest report discusses the compliance issues raised in the agency’s second round of examinations, which involved 75 firms. This time around, the SEC focused on testing whether cybersecurity policies and procedures were implemented and followed.
As expected, the OCIE’s latest cybersecurity risk alert acknowledged that regulated entities have prioritized cybersecurity. It specifically noted that nearly all the firms examined maintained cybersecurity-related written policies and procedures addressing the protection of customer/shareholder records and information.
In addition, nearly all broker-dealers, and the vast majority of advisers and funds conducted periodic risk assessments of critical systems to identify cybersecurity threats, vulnerabilities, and the potential business consequences of a cyber incident. The OCIE also acknowledged that firms have improved their policies and procedures for conducting vendor risk assessments or requiring risk management from vendors; ensuring regular system maintenance; maintaining cybersecurity organizational charts; obtaining authority from customers/shareholders to transfer funds to third party accounts.
Of course, there is always room for improvement. The SEC’s latest risk alert specifically noted two areas that need improvement. The risk alert first highlighted that most of the firms’ information protection policies and procedures “appeared to have issues.” According to the OCIE, the policies and procedures were often not reasonably tailored to the firm. For instance, they “provided employees only with general guidance, identified limited examples of safeguards for employees to consider, were very narrowly scoped, or were vague, as they did not articulate procedures for implementing the policies.”
The OCIE also found that “firms did not appear to adhere to or enforce policies and procedures, or the policies and procedures did not reflect the firms’ actual practices.” Examples cited in the risk alert included policies that:
Required annual customer protection reviews; however, in practice, they were conducted less frequently.
Required ongoing reviews to determine whether supplemental security protocols were appropriate; however, such reviews were performed only annually, or not at all.
Created contradictory or confusing instructions for employees, such as policies regarding remote customer access that appeared to be inconsistent with those for investor fund transfers, making it unclear to employees whether certain activity was permissible.
Required all employees to complete cybersecurity awareness training; however, firms did not appear to ensure this occurred and take action concerning employees who did not complete the required training.
In addition to issues related to firms’ cybersecurity policies and procedures, the risk alert also highlighted that OCIE staff observed Regulation S-P-related issues among firms that did not appear to adequately conduct system maintenance, such as the installation of software patches to address security vulnerabilities and other operational safeguards to protect customer records and information. Examples cited in the risk alert included using outdated operating systems that were no longer supported by security patches and failing to quickly and adequately address high-risk findings from penetration tests or vulnerability scans.
Message for the Financial Industry
As highlighted in the SEC’s latest cybersecurity risk alert, cybersecurity remains a significant compliance risk for financial firms. Because the agency continues to find weaknesses in firm’s policies and procedures, the financial industry should expect the agency to continue to make cybersecurity a top examination and enforcement priority.
Do you have any feedback, thoughts, reactions or comments concerning this topic? Feel free to leave a comment below for Fernando M. Pinguelo. If you have any questions about this post, please contact me or the Scarinci Hollenbeck attorney with whom you work. To learn more about data privacy and security, visit eWhiteHouse Watch – Where Technology, Politics, and Privacy Collide (http://ewhwblog.com).
Utility-Scale Battery Storage Projects: A Legal Roadmap for Developers, Property Owners and Other Stakeholders
Utility-scale battery energy storage systems (BESS) are becoming an increasingly important component of the electric grid throughout New Jersey, New York, and Pennsylvania. As renewable generation expands, electricity demand increases and grid operators seek greater flexibility, battery storage can help balance supply and demand while providing additional capacity and reliability. For developers, battery storage presents […]
Navigating Disputes: Hire a Partnership Dispute Lawyer
A falling out between partners can be disastrous for any business. In many cases, the partnership will not survive. If you are in an unworkable situation with your partners, it may be time to consult a partnership dispute lawyer experienced in handling partnership breakups and dissolutions before the situation deteriorates any further. It is easy […]
Section 363 Sales in Bankruptcy: What Businesses, Lenders, and Buyers Need to Know
When a company enters Chapter 11 bankruptcy, many assume the process will culminate in a lengthy reorganization plan. However, distressed businesses are increasingly being sold through a different mechanism — a sale under Section 363 of the United States Bankruptcy Code. A Section 363 sale allows a company, as a debtor-in-possession in bankruptcy, to sell […]
Zoning Laws Explained: What You Need to Know Before Buying Property
Before buying property, it is critical to determine whether local zoning laws may affect your plans. If you plan to redevelop the property, you will want to confirm that local zoning regulations permit development as intended. If acquiring property that is already developed, you must verify that the use is permitted in the underlying zoning […]
Special Needs Trusts in New Jersey: Planning for Your Loved One’s Future
For parents of a child with a disability, estate planning raises concerns that go well beyond deciding who will inherit their assets. Parents may spend years making sure their child has the right care, services, and support. Eventually, they must also confront a difficult question: Who will take over when they can no longer do […]
What Every Real Estate Investor Should Know Before Buying a Rental Property
Before buying a New Jersey rental property, an investor should verify realistic operating numbers, the property’s legal and regulatory status, lead-based paint and flood compliance, the existing leases and tenant protections, and the right ownership structure. A rental property is more than a piece of real estate; it is an operating business subject to legal, […]
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Sign up to get the latest from our attorneys!
Explore What Matters Most to You.
Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.
Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.
Let`s get in touch!
Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!
