Cybersecurity 2018 – The Year in Preview: Financial Institutions and the SEC

by Foley Hoag LLP - Privacy & Data Security
Contact

Foley Hoag LLP - Privacy & Data Security

Editors’ Note:  This is the eighth in a multi-part end-of-year series examining important trends in data privacy and cybersecurity during the coming year.  Previous installments include analyses of HIPAA complianceemerging security threatsfederal enforcement trendsstate enforcement trendsbiometricseducation, and international law and cyberwar.  Up next:  cryptocurrency.

The U.S. Securities and Exchange Commission has made no secret about the gravity of the cybersecurity threat facing the investment community.  Since at least 2014, the SEC has made a point in emphasizing the cyber threat through enforcement actions, inspections and examinations, roundtables, and policy speeches.  While the change in administration brought new leadership to the Commission, that group has made clear at every possible opportunity that combatting the cyber threat will be a top SEC priority in 2018 and beyond.  For example, Enforcement Division co-director Steve Peikin, a former federal prosecutor and partner at Sullivan & Cromwell, referred to cyber attacks as the “greatest threat to our markets right now.”  His co-director Stephanie Avakian, an SEC Enforcement veteran, similarly called the cyber threat “among the greatest risks facing investors and the securities industry.”  The import of their message is clear – the investment community, and, in particular, SEC-regulated entities, should be on alert in the coming year.

Historically, the SEC has addressed the cyber threat through enforcement actions aimed at entities and individuals that threaten market integrity, either by failing to take necessary cyber precautions or engaging in cyber-related misconduct, and through regular cyber examinations of registered entities by the SEC’s Office of Compliance Inspections and Examinations (“OCIE”).

SEC Cyber-Enforcement

On the enforcement front, the Commission’s Enforcement Division created a new Cyber Unit in September 2017.  This unit has a broad mandate to target all forms of cyber-related misconduct, including market manipulation schemes involving false information spread through electronic and social media, hacking to obtain material nonpublic information, violations involving distributed ledger technology and initial coin offerings (more on that to follow), misconduct involving the dark web, intrusions into retail brokerage accounts and cyber-related threats to trading platforms and other market infrastructure.  The Market Abuse Unit previously handed the SEC’s cyber investigations, but the Commission deemed the threat important enough to create a separate unit (the Enforcement Division’s first newly created unit since 2010).

Beyond press releases and policy statements, the Enforcement Division has offered some guidance on the Cyber Unit’s focus in 2018.  Focus areas include: (1) cyber-related misconduct that is used to gain an unlawful market advantage, (2) the failure of registered entities to appropriately safeguard information or ensure system integrity, and (3) cyber-related disclosure failures by public companies.

The first area – cyber-related misconduct – has historically been the SEC’s primary cyber enforcement focus area.   During the past year, SEC enforcement actions have targeted: (1) hacking to access material, nonpublic information in advance of a material announcement or event; (2) an account intrusion in order to conduct manipulative trading; and (3) disseminating false information electronically, including through EDGAR, in order to manipulate stock prices.

With respect to the second area – the failure of registered entities to appropriately safeguard information – the SEC has often handled such failures through the OCIE examination process.  Avakian has indicated that while the SEC will continue to do so in appropriate cases, it will consider enforcement action if warranted.  The final area identified by Avakian – the failure by a public company to make a cyber-related disclosure (i.e., disclosure of a cyber breach or other event in SEC reporting) – is a new area of enforcement for the SEC.  While the SEC will not look to second guess reasonable, good-faith disclosure decisions, it will take enforcement action if an appropriate case presents itself.  Regardless of whether the SEC ultimately takes enforcement action, the SEC’s message to regulated entities going forward is clear – closely guard confidential information from cyber attack, and if an attack happens, determine whether some form of public disclosure is required.

More recently, on December 11, 2017, the Cyber Unit directly confronted a new and growing cyber risk, halting an initial coin offering by California-based Munchee Inc.  Munchee was seeking $15 million in capital for its blockchain-based food review service.  In selling digital tokens, the company and promoters emphasized that the tokens could increase in value, which the SEC concluded could cause investors to reasonably believe that they could generate a return on investment.  The SEC thus determined that the coin offering constituted an unregistered securities offering.  Further emphasizing the SEC’s focus on this new technology, on the same day that the SEC announced the Munchee enforcement action, SEC Chairman Jay Clayton provided a statement on cryptocurrencies and initial coin offerings.  He offered warnings to both investors and market professionals.  This should serve as a clear signal that the SEC will not hesitate to conduct additional enforcement activity in this arena.

OCIE Cyber Exams

Outside of the Enforcement Division, OCIE continues to make cybersecurity a prominent aspect of its examinations of registered entities, including broker-dealers, investment advisers and investment companies.  OCIE conducted its first targeted cybersecurity sweep in 2014.  It followed up with a Cybersecurity 2 Initiative, the results of which were released in August 2017.

The exams focused on how written policies and procedures addressed: (1) governance and risk assessment; (2) access rights and controls; (3) data loss prevention; (4) vendor management; (5) training; and (6) incident response.   The good news is that registered entities have made vast improvements since 2014.  In particular, of the 75 firms examined, almost all of them had adopted written policies and procedures concerning the protection of customer and/or shareholder data.  The bad news is that many of these policies were either not sufficiently robust or not routinely followed.

OCIE identified a number of common deficiencies, including: (1) policies and procedures provided employees only with general guidance rather than specific examples of safeguards; (2) firms either did not adhere to the policies or the policies did not reflect their actual practices; and (3) firms did not adequately conduct system maintenance, such as the installation of software patches to protect against vulnerabilities.

OCIE also provided guidance on best practices for developing and implementing appropriately robust policies and procedures.  These best practices include: (1) maintaining an inventory of all data, information and vendors, including a classification of risks regarding each; (2) detailed cybersecurity-related instructions for penetration tests, security monitoring and system auditing, access rights and reporting; (3) maintenance of schedules and processes for testing data integrity and vulnerabilities; (4) established and enforced controls to access data and systems; (5) mandatory information security employee training; and (6) vetting and approval of procedures by senior management.

The weaknesses and best practices identified by OCIE should provide clear guidance to registered entities on how to implement effective cyber policies going forward.  Like the SEC’s top officials, OCIE has made clear that cybersecurity is one of top compliance risks for financial firms, and, as a result, OCIE will continue to make it a key aspect of its annual examination process.

Written by:

Foley Hoag LLP - Privacy & Data Security
Contact
more
less

Foley Hoag LLP - Privacy & Data Security on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.