SEC Polices Cybersecurity on Wall Street

by Wilson Elser

As U.S. Securities and Exchange Commission (SEC) Chairwoman Mary Jo White recently emphasized at a Cybersecurity Roundtable sponsored by the Commission, the rise of cybersecurity threats poses an increasing risk to companies, individuals and the integrity of the U.S. capital markets. Therefore, the SEC is stepping up its efforts to police Wall Street's cybersecurity preparedness by conducting an in-depth examination of more than 50 registered broker-dealers and investment advisers. The SEC plans to use information gleaned from the examination of the securities industry to identify potential vulnerabilities, the industry's current efforts to address cyber risk, and areas for potential cooperation between the SEC and Wall Street to mitigate the threat of cyber risk to protect investors and the market.

Cybersecurity Initiative
In advance of the cyber readiness examinations, the SEC circulated a sample list of requests for information that provides securities firms with a blueprint for a wide range of cybersecurity issues they should be addressing, as summarized below.

Firms should have a solid grasp of their own information security assets that might be vulnerable. This requires a periodic inventory of computer systems, physical devices, hardware, software platforms, electronic data, connections and data flow. Firms should also conduct routine periodic audits to identify physical and cybersecurity risks. These risk assessments may be conducted by the firm or by a third party.

Firms should adopt cybersecurity governance policies and procedures. Firms should have in place a written information security policy. In addition, they should have a cybersecurity breach response and recovery plan in the event of an incident.

Firms should have dedicated employees responsible for detecting and monitoring cybersecurity threats. The SEC is interested in knowing whether the firm has employees who are primarily responsible for detecting and overseeing cybersecurity risk, including, but not limited to, a Chief Information Security Officer or equivalent position. This also includes employees who are responsible for monitoring the firm's computer network and physical environment to detect potential security incidents; using software to detect malicious code on the firm's network or mobile devices; monitoring the activity of third-party service providers with access to the firm's network; monitoring unauthorized access to the firm's network; and evaluating potentially fraudulent requests for transfer of funds and other customer assets.

The SEC wants to know whether firms maintain cyber liability insurance that covers losses and expenses arising from a cybersecurity incident.

Firms should implement specific practices and internal controls to protect their computer systems and information. This may include:

  • Training employees on information security risk and responsibilities
  • Restricting users and access to network resources on an as-needed basis solely to carry out the firm's business functions
  • Testing software and applications
  • Implementing a process for managing information and other IT assets
  • Implementing a process for ensuring regular system maintenance
  • Adopting a security policy that addresses mobile media
  • Maintaining controls to secure portable media against malware and data leakage
  • Maintaining protection against distributed denial of service (DDoS) attacks
  • Maintaining a written data destruction policy
  • Maintaining a written cybersecurity breach response plan
  • Testing to assess the effectiveness of a firm's breach response plan
  • Testing the functioning of computer backup systems
  • Using data encryption
  • Conducting periodic audits to determine whether a firm is complying with its own security policies.

Firms should address cybersecurity risks associated with customer online account access and requests for transfer of funds. For instance, the SEC is interested in whether a firm authenticates the identity of customers for online account access and transactions; a description of security measures used by the firm to protect customer PINs; and any information provided by a firm to customers regarding cybersecurity risks. In addition, the SEC has requested firms to provide copies of (1) procedures for verifying the authenticity of customer email requests for transfer of funds and (2) policies for addressing losses associated with hacking or unauthorized access to customer accounts.

Firms should evaluate cybersecurity risks associated with its vendors and business partners with access to a firm's networks, customer data and other sensitive information. Among other things, the SEC wants to know whether a firm addresses cybersecurity risk in its contracts with third-party vendors and business partners; if it provides these third parties with copies of any policies, procedures or training materials related to cybersecurity risk; and how a firm authenticates third parties that may have direct access to its computer network and devices.

Finally, the SEC wants firms to provide a description of cybersecurity incidents they have experienced since January 2013. This includes, but is not limited to, situations involving the detection of use of malware; a DDoS attack; a software or hardware malfunction that caused the impairment of a critical function; a breach caused by an unauthorized user's access to the firm's network; fraudulent requests for transfer of funds; attempted cyber extortion by persons threatening to impair access to or damage a firm's network; and employee misconduct resulting in the misappropriation of funds, securities or sensitive customer information. In connection with these and other cybersecurity incidents, the SEC has also requested firms to disclose the extent of losses incurred, the nature of the customer information that was accessed, the firm's services that were impacted, the date of the incident, the date of discovery and the firm's remediation efforts.

The SEC's growing interest in cyber risk is not limited to the securities industry. In fact, in 2011, the SEC promulgated CF Disclosure Guidance: Topic No. 2 – Cybersecurity (October 13, 2011) for all public companies. Recognizing that companies have growing exposure to cyber attacks that could compromise business operations, financial assets, intellectual property, customer data and other sensitive information, the SEC has encouraged companies to disclose any material cyber risks that could impact investors. The SEC's cybersecurity guidance notes that companies that fall prey to cyber attacks may suffer significant costs and adverse consequences, such as remediation costs, increased cybersecurity protection costs, lost revenue, litigation and reputational damage.

Therefore, the SEC advises companies to disclose material cyber risks, including, but not limited to:

  • The aspects of the company's business that give rise to material cyber risks and potential costs
  • Cyber risks posed by third parties to whom the company has outsourced functions
  • A description of past cyber incidents, including costs
  • A discussion of potential future cyber incidents
  • A description of any relevant insurance coverage the company may posses with respect to cyber liability.

The SEC’s disclosure guidance was intended to bring greater awareness and transparency to actual or potential cybersecurity risk that might be considered material to investors. However, the SEC has acknowledged that this guidance alone might not be sufficient to address investor concerns. The SEC's new blueprint of cybersecurity issues for the securities industry might be a valuable tool for all companies to consider as they continue to assess and address their unique cyber risks.


Written by:

Wilson Elser

Wilson Elser on:

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