SEC’s Office of Compliance Inspections and Examinations has published a Risk
Alert calling out advisers and broker-dealers for their failures to protect personal
information. Based on deficiencies
identified over the last 2 years, the SEC found failures related to privacy
notices, policies and procedures, and physical safeguards. The SEC faulted registrants for failing to
deliver initial and annual privacy notices or for delivering notices that did
not accurately reflect policies and procedures.
The SEC found firms that completely failed to adopt policies and
procedures by simply restating the Safeguards Rule. Other firms either adopted weak policies and procedures
or failed to properly implement them. Some
common deficiencies included unsecure laptops, unencrypted emails, inadequate
training, insufficient control of third-party vendors, inadequate incident
response plans, and shared login credentials.
OCIE states that the Risk Alert is intended “to assist advisers and
broker-dealers in providing compliant privacy and opt-out notices, and in
adopting and implementing effective policies and procedures for safeguarding
customer records and information.”
Compli-pros should ensure the annual testing program includes the privacy notice process and the implementation of policies and procedures to avoid the highlighted issues. It may make sense to combine the testing with the required cybersecurity assessment.
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.
FINRA fined 12 firms a total of $14.4 Million (including individual fines of $4 Million, $3.5 Million and $2 Million) for failing to retain electronic records in the proper format. FINRA charges that, over extended time periods, the firms failed to maintain required broker-dealer and customer records in “write once, read many” (aka WORM) format as required by Rule 17a-4(f)(2)(ii)(a) (BD records must be preserved “exclusively in a non-rewriteable, non-erasable format”). FINRA asserts that retaining records in WORM format protects such records from cyber-crimes. FINRA maintains that the failures affected hundreds of millions of records “spanning multiple systems and categories.” FINRA’s Enforcement Chief empasized “FINRA’s focus on ensuring that firms maintain accurate, complete and adequately protected electronic records.”
OUR TAKE: These are significant fines for IT breakdowns in the absence of further allegations of customer harm or a specific hacking incident. Operations professionals should work with their IT teams and compli-pros to ensure that records retention follows regulatory requirements.
A broker-dealer agreed to pay a $650,000 fine because an OSJ’s cloud server vendor failed to protect customer information. FINRA asserts that foreign hackers penetrated the cloud-based servers and had access to customers’ nonpublic personal information. FINRA faults the firm for failing to monitor or test the third party vendor’s information security. FINRA also alleges that the BD failed to adopt reasonable data security policies that included specific firewall policies and related testing. FINRA cites violations of Rule 30 of Regulation S-P, which requires the protection of customer records and information.
OUR TAKE: Firms must go the extra mile to protect customer information and not just rely on hiring a third party. FINRA will hold BDs strictly liable for data breaches, even those occurring at the vendor.