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).
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