Commencing March 1, 2016, all commodity pool operators, commodity trading advisors, futures commission merchants, retail foreign exchange dealers, investment brokers, major swap participants and swap dealers that are National Futures Association (NFA) member firms (together the Covered Parties) must have a cybersecurity program in place. This requirement goes into effect pursuant to the NFA’s Interpretative Notice to NFA Compliance Rules 2-9, 2-36 and 2-49, entitled Information Systems Security Programs (hereinafter the Notice), that was approved by the Commodity Futures Trading Commission (CFTC) in October 2015. NFA Compliance Rules 2-9, 2-36 and 2-49, in relevant part, require each Covered Party to diligently supervise, as appropriate, either its business or its employees and agents in connection with any activities done on behalf of the Covered Party. According to the Notice, “Members should have supervisory practices in place reasonably designed to diligently supervise the risks of unauthorized access to or attack of their information technology systems, and to respond appropriately should unauthorized access or attack occur.” The Notice provides guidance to all Covered Parties on the new requirement to adopt and implement a cybersecurity program, referred to in the Notice as an information systems security program (cybersecurity program), and recommendations on how to do so.
NFA Requirements for the Cybersecurity Program
Each Covered Party must establish, implement and enforce a written cybersecurity program by March 1, 2016. While many firms may already have a cybersecurity program in place, firms that do not will now be required to have a cybersecurity program.
The Notice establishes a flexible principles-based approach to the requirements for a cybersecurity program, rather than a “one size fits all” approach, noting that Covered Parties’ businesses are all of different types and sizes, and have operations involving different levels of complexity. Accordingly, the NFA intends to give member firms sufficient flexibility in determining how best to diligently supervise information security risks and to design and implement a cybersecurity program that is appropriate for that firm. The Notice also acknowledges that a Covered Party might be part of a larger holding company structure and subject to privacy and security safeguards that apply to the entire enterprise, and clarifies that such firms could meet their supervisory responsibilities under relevant rules through their participation in an enterprise-wide cybersecurity program. In addition, the Notice identifies the following five key areas of focus for firms establishing a cybersecurity program:
Written Program and Governance. Each Covered Party is required to adopt and implement a written program that establishes an appropriate governance framework, and manages and responds to information security risks.1 Prior to implementation, the firm’s cybersecurity program must be approved in writing by the firm’s chief executive officer, chief technology officer or another executive-level official of the firm. In addition, if applicable to a firm’s structure and governance, the firm’s senior management should periodically report to and update its board of directors, a committee of the board or a similar governing body about the cybersecurity program to enable it to monitor the firm’s information security efforts.
Security and Risk Analysis. According to the Notice, each Covered Party has a supervisory obligation to assess and prioritize the risks associated with the use of its information technology systems and to include appropriate personnel in making the assessment. In addition, firms should conduct a security and risk analysis as part of the development of their cybersecurity programs that identifies significant internal and external threats and vulnerabilities to at-risk data that is collected, maintained and disseminated. The Notice also states that firms should maintain an inventory of critical information technology hardware with network connectivity, data transmission or data storage capability and an inventory of critical software with applicable versions.
Deployment of Protective Measures Against Identified Threats and Vulnerabilities. The cybersecurity program must be reasonably designed to provide appropriate safeguards based on the specific characteristics of the firm and any substantial threats identified in its security and risk analysis. Also, the cybersecurity program should document and implement the corresponding safeguards the firm has deployed to address such threats as well as measures to detect potential threats. The Notice acknowledges that such safeguards will vary widely among firms depending on, among other factors, a firm’s size, business, technology and electronic interconnectivity with other entities.
Incident Response Plan. A Covered Party should create an incident response plan that establishes procedures for responding to an actual security incident, mitigating its consequences and communicating with appropriate regulators and stakeholders about the incident. Firms should also consider establishing an incident response team to be responsible for investigating an incident, assessing its damage and coordinating the internal and external response. The Notice recommends that the firm’s response plan address common types of potential incidents, including a plan to communicate internally with an appropriate escalation procedure and externally with customers/counterparties, regulators and law enforcement. It also suggests that each Covered Party consider providing details of any detected threats to industry-specific information sharing platforms such as the Financial Services Information Sharing and Analysis Center (FS-ISAC).
Employee Training. The cybersecurity program should provide for initial and ongoing training on the program and cybersecurity issues for employees.
Assessing and Curtailing Risks Posed by Key Third-Party Service Providers
The Notice also recommends that firms establish policies and procedures for assessing and limiting risks posed by any third-party service providers that have access to its systems, that operate outsourced systems for the firm or that provide cloud-based services. The Notice highlights the importance of conducting diligence on critical service providers. Based on the conclusions of a firm’s assessments, it should enter into arrangements with only those third parties that have sufficient security standards. In addition, firms should include appropriate measures in agreements with these providers to protect customer and firm confidential data. The NFA also advises adopting procedures that place safety controls on the service providers and their access to the firm’s information systems.
Ongoing Compliance Review and Recordkeeping
At least once every 12 months, a firm should monitor and review its cybersecurity program and assess the efficacy of the safeguards it has adopted, either using the firm’s in-house staff, to the extent they have appropriate knowledge, or engaging an independent third-party information security specialist. The Notice also provides that penetration testing of the firm’s systems may be appropriate, depending on the firm. In addition, pursuant to NFA Compliance Rule 2-10, a firm is required to maintain records concerning the adoption and implementation of, and compliance with, its cybersecurity program.
Other Regulatory Guidance and Resources
In developing the Notice, the NFA staff took into account guidance issued by other self-regulatory organizations and government agencies, including the Financial Industry Regulatory Authority (FINRA), the Department of Justice (DOJ) and the Division of Investment Management of the Securities and Exchange Commission (SEC). There is overlap, for example, between the NFA’s requirements and guidance proffered in the Notice and the guidance included in the Risk Alert issued on September 15, 2015, by the SEC’s Office of Compliance Inspections and Examinations (OCIE), which highlights the SEC’s cybersecurity exam initiative.
Additional NFA Guidance
On February 2, 2016, the NFA held a workshop on various cybersecurity concerns and the Notice, an audio recording of which was made available to all members on the NFA website together with corresponding PowerPoint slides. During the workshop, the NFA highlighted several key points about the cybersecurity programs that firms are expected to establish:
A Covered Party should maintain an inventory of the types of at-risk data it holds, and identify who has access to such data.
NFA staff recommended keeping records and materials related to employee training on cybersecurity issues and the adopted program, including training materials and sign-in sheets of employees in attendance.
NFA staff noted that employee training would be critical to a successful program.
NFA staff clarified that the cybersecurity program does not have to be a stand-alone document; instead, it may be part of a compliance manual or other set of documents. However, it still must comply with the Notice, and the Covered Party should be able to identify the cybersecurity program from within any such set of documents.
NFA staff recommended that Covered Parties join certain industry groups that share information regarding cybersecurity threats and risks.
A Covered Party should, over time, incorporate into the written cybersecurity program any lessons learned relating to its program and to cybersecurity more broadly.
As discussed above, by March 1, each Covered Party should have considered, designed and adopted a cybersecurity program, in writing, that complies with the Notice and is tailored to that Covered Party’s organizational circumstances and specific cybersecurity risks and threats. Firms that have not yet established and implemented a cybersecurity program that satisfies the NFA guidance and requirements, or adapted an existing program to address NFA guidance and requirements, should do so promptly. The NFA staff noted, in both the Notice and the cybersecurity workshop, that it would take an incremental approach to enforcement. According to the NFA staff, a Covered Party would likely be asked during an audit of its cybersecurity program to demonstrate compliance with its program; particularly with respect to the employee-training requirement and the firm’s efforts to keep current with developing cybersecurity risks and threats. Furthermore, the NFA staff indicated that the NFA will continue to help Covered Parties with their cybersecurity programs and, in the future, to provide additional guidance on cybersecurity-related matters.
1 The Notice also references sources that may be helpful to firms when developing a cybersecurity program, including, among others, the cybersecurity best practices and standards promulgated by the SANS Institute and/or the Open Web Application Security Project and/or the Information Systems Audit and Control Association’s Control Objectives for Information and Related Technology (COBIT) 5 and/or the National Institute of Standards and Technology (NIST)’s Cybersecurity Framework. The Notice clarifies that firms are not required to use these sources in preparing their programs.