OCIE Publishes Risk Alert Summarizing Observations from Recent Cybersecurity Examinations

by Bryan Cave
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On August 7, 2017, the SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert summarizing its observations from cybersecurity preparedness examinations conducted of 75 broker-dealers, investment advisers and investment companies.1 These exams are part of OCIE’s Cybersecurity 2 Initiative. The examinations focused on six particular areas: (1) governance and risk assessment; (2) access rights and controls; (3) data loss prevention; (4) vendor management; (5) training; and (6) incident response.2

Previously, OCIE reviewed firms’ policies, procedures, and oversight mechanisms related to cybersecurity issues. OCIE’s current findings reflect an overall improvement in firms’ cybersecurity preparedness. However, while many firms have adopted robust policies and procedures, those firms often need to do a better job of implementing, following, and testing the effectiveness of those policies and procedures.

OCIE first noted several things firms are doing well:

  • Conducting periodic risk assessments;
  • Conducting penetration tests and vulnerability scans (but firms must address what they uncover!);
  • Deploying tools to prevent, detect, and monitor data loss;
  • Implementing processes for ensuring regular system maintenance and application of software patches or updates;
  • Adopting business continuity and response plans in response to breach;
  • Conducting vendor risk assessments and applying cybersecurity procedures to vendors; and
  • Creating data breach organizational charts delegating data breach response responsibilities.

Despite maintaining robust policies and procedures, the majority of the firms examined came up short when it came to preparedness for responding to a data breach. In particular, less than two-thirds of the advisers and investment companies examined had a defined plan for responding to a data breach and notifying clients. Bryan Cave has an extremely robust data breach team and is well positioned to assist firms in formulating a response plan, as well as to assist in responding to an actual breach: Data Privacy and Security Team, as well as a Data Breach Hotline (1-844-827-3224).

The OCIE also identified other areas firms need to improve on:

  • Cybersecurity policies are too generic to be useful or are simply not being followed;
  • Firms require training but are not verifying or documenting completion;
  • Risk assessments are stale; and
  • Firms fail to respond to identified risks or vulnerabilities.

While there is no one measure of a firm’s preparedness plan or its effectiveness, firms who typically have the most effective plans are those that routinely test their systems and procedures. For example, hiring vendors to attempt intrusions into your system can be extremely effective in identifying potential weaknesses. Similarly, control on employee access rights and the tracking of employees’ use of system access can provide safeguards against unauthorized dissemination of information. As with most issues in this industry, training is critical. Training directed at compliance with existing policies and procedures, as well as industry rules, is extremely important. However, there is also a need for more subtle training related to identification of potential threats and how to respond to those threats, such as phishing attempts – “If you are not sure – don’t click!”.

While not willing to recommend any particular approach, OCIE identifies several characteristics of effective cybersecurity programs:3

  • Current data “map” identifying what data the firm maintains and where, the individuals with access to the data and all vendors with any responsibilities with respect to the data;
  • Detailed cybersecurity-related instructions related to system testing, monitoring and auditing, as well as limitations on data access and reporting lines;
  • Specific schedules for performing updates and testing;
  • Established and enforced controls on data and systems access;
  • Mandatory employee training - not just at employee on-boarding but also periodically thereafter; and
  • Engaged senior management.

At a minimum, we recommend that firms review the effectiveness of their security solutions with penetration tests, track access rights of employees, implement formal patch management and security update policies,4 impose mandatory training, and establish data access controls for mobile devices and encrypt communications over remote and mobile devices.

Both the SEC and FINRA identified cybersecurity as an exam priority over the past several years, and we anticipate that it will continue to be on those annual lists for the foreseeable future.


1. The examinations were conducted between September 2015 and June 2016 and generally covered the review period October 1, 2014 through September 30, 2015.

2. We reported February 2015 on Phase 1 of OCIE’s cybersecurity preparedness initiative. https://www.bryancave.com/images/content/2/3/v2/2312/SecLitBulletin2-4-15.pdf See also “OCIE Cybersecurity Initiative” (April 15, 2014): https://www.sec.gov/ocie/announcement/Cybersecurity-Risk-Alert--Appendix---4.15.14.pdf.

3. Additionally, the SEC refers firms to other sources: IM Guidance Update: Cybersecurity Guidance (April 2015), In re Morgan Stanley Smith Barney LLC, Exchange Act Release No. 78021, Advisers Act Release No. 4415 (June 8, 2016), In re R.T. Jones Capital Equities Management Inc., Advisers Act Release No. 4204 (September 22, 2015), and In re Craig Scott Capital LLC, Exchange Act Release No. 77595 (April 12, 2016).

4. The recent “WannaCry” ransomware attack highlights the necessity of ensuring security patches or updates are timely installed. Two months before the WannaCry ransomware attack, Microsoft released a “critical” patch that addressed the bug in the Windows operating software that facilitated the spread of the malware. Notwithstanding the availability of a fix before the malware spread, the WannaCry attack impacted hundreds of thousands of computers throughout the world.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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