The SEC’s Office of Compliance Inspections and Examinations (OCIE) has published a report of cybersecurity best practices. The report advises registrants to assess their cybersecurity practices in seven key areas: governance and risk management, access rights and controls, data loss prevention, mobile security, incident response, vendor management, and training. Citing industry best practices, OCIE advises firms to conduct risk assessments; adopt, implement and test policies and procedures; restrict access; inventory the location of data; conduct vulnerability scanning; implement patches; encrypt networks; create an incident response plan; and supervising vendors. OCIE recommends following statements from the Cyber Infrastructure Security Agency as well as the National Institute of Standards and Technology. OCIE identifies cybersecurity as “a key risk for security market participants” and a “key priority” for exams.
Cybersecurity transcends merely hiring a random IT firm to conduct a penetration test. OCIE requires an entire firm governance and compliance infrastructure. Our firm, in conjunction with Align Cybersecurity, includes a cybersecurity assessment and remediation plan in our compliance outsourcing service.
FINRA has issued a report on cybersecurity best practices to assist firms in the development of their cybersecurity programs. FINRA notes that it continues to see “problematic cybersecurity practices” during examinations and that firms identify cybersecurity as a “primary operational risk.” The report focuses on strengthening cybersecurity controls in branch offices, ways to limit phishing attacks, how to mitigate insider threats, the elements of an effective penetration testing program, and adequate controls for mobile devices. The report also includes an appendix that lists core cybersecurity controls for small firms including patch maintenance, access management, vulnerability scanning, and email protection.
The 19-page report does a good job describing every cybersecurity nightmare scenario, which may be instructive for those C-suite executives still in denial. The best part of the report is the small firm appendix that focuses on key issues.
The SEC has issued and investigative report that advises public companies to enhance internal accounting controls to prevent losses from cyber-related frauds. The SEC report describes frauds at 9 issuers that involved spoofing emails and false vendor invoices that resulted in significant losses when internal employees transferred funds to the wrongdoers. One of the companies made 14 wire payments, resulting in a loss of over $45 Million. Another paid 8 invoices totaling $1.5 Million. Although the SEC did not bring enforcement actions against these registrants, the SEC alleges that the companies violated their obligations to implement internal accounting controls sufficient to ensure transactions are only permitted with management’s authorization. In particular, the SEC advises companies to review and enhance their payment authorization and verification procedures and employee training. SEC Chairman Jay Clayton warned: “Cyber frauds are a pervasive, significant, and growing threat to all companies, including our public companies.”
OUR TAKE:You’ve been warned. The SEC gave these 9 companies a pass, but we don’t expect the same treatment for future violators who should now take action to prevent spoofing and email cyber-frauds.
A large BD/IA agreed to pay a $1 Million fine and retain an independent compliance consultant as a result of a third-party intrusion into its customer system. Outside hackers impersonated independent consultant registered representatives and tricked internal IT personnel to change passwords over the phone. Although there was no unauthorized transfer of funds, the impersonators were able to access personally identifiable information of over 5000 customers. The SEC charges the firm with violating the Safeguards Rule and with failing to implement an effective Identity Theft Prevention Program. The SEC faults the firm for allowing outside contractors to use their own equipment, which often had security and encryption problems, and with failures to follow remote session termination procedures.
OUR TAKE: This is the nightmare scenario for retail BD/IAs. The desire to make life easier for the producing reps creates IT vulnerabilities exploited by bad actors. Our recommendation is to retain an outside firm that can conduct an honest vulnerability assessment.
OUR TAKE: When it comes to cybersecurity incidents, time is not on your side. Because of the potential harm to clients and investors, it is better to provide immediate disclosure that will be followed up with additional information rather than waiting and thereby compounding the potential harm. Hacked firms must move quickly to investigate, assess, and remediate the harm to minimize damages.
OUR TAKE: The state regulators have taken a primary role in enforcing data protection safeguards. Make sure your compliance procedures have the necessary policies and procedures that include governance, incident response, vulnerability assessment, and vendor management.
The SEC has issued cybersecurity guidance that directs public companies to adopt effective disclosure controls and procedures and overhaul their disclosure about incidents and threats. The SEC believes that public companies should adopt and implement cybersecurity risk management policies and procedures that ensure timely disclosure, internal reporting, processing of risks and incidents, and prevention of insider trading. The SEC also admonishes public companies to review all public disclosures including the materiality of incidents and security, risk factors, MD&A disclosure, business description, legal proceedings, financial statements, and board risk oversight. Firms should also consider disclosing past incidents “in order to place discussions of these risks in the appropriate context.” The SEC believes that “the importance of data management and technology to business is analogous to the importance of electricity and other forms of power in the past century.” The SEC said that it will be reviewing cybersecurity disclosures.
OUR TAKE: We expect institutional investors will add similar cybersecurity inquiries into their Operational Due Diligence processes before choosing an investment firm. So, even if you do not work for a public company, you should consider implementing the SEC’s recommendations.
The SEC obtained an emergency asset freeze against a fraudulent internet-based initial coin offering. According to the SEC, the Canadian respondents promised outlandish returns and made other significant misrepresentations as part of a scheme that raised over $15 Million from thousands of investors through offerings of a crypto-currency advertised on various social media sites. The SEC asserts that the offering of virtual tokens constituted an illegal offering of securities and that it was made available to U.S. investors through the internet. The SEC announced that this case is the first filed by its new Cyber Unit, which was created in September to focus on “misconduct involving distributed ledger technology and initial coin offerings, the spread of false information through electronic and social media, hacking and threats to trading platforms.”
OUR TAKE: Perhaps most significant is the SEC asserting (without much precedent or support) that an initial coin offering is an offering of securities subject to the securities laws. This view may lead to broader regulatory oversight of cryptocurrency offerings. Also, we expect that this first action by the Cyber Unit won’t be its last.
OUR TAKE: We suspect that this Cyber Unit will ultimately morph into its own office (See OCIE, Whistleblowers). If you have been on vacation in the woods for the last 3 years and have not yet retained a third party firm to test your cybersecurity readiness, we recommend moving quickly to catch up to the rest of the industry.