The SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert about recent ransomware attacks and offered some best practices for smaller firms for dealing with ransomware incidents. Based on a recent review of 75 registrants, the OCIE staff recommends that firms perform a cyber-risk assessment, conduct penetration and vulnerability tests, and ensure software maintenance including adequate software patches. The OCIE staff stressed the importance of developing a “rapid response capability.” OCIE found widespread deficiencies among advisers during its review: 57% did not conduct penetration and vulnerability testing and 26% did not conduct periodic risk assessments of critical systems.
OUR TAKE: Cybersecurity has become one of the most significant compliance issues facing investment management firms. CCOs and their bosses must take action to address outside threats. We recommend reviewing the SEC’s 2014 guidance.
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.